Terex (TEX) Q4 2019 Earnings Call Transcript

Terex (TEX -1.22%)
Q4 2019 Earnings Call
Feb 14, 2020, 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 Q4 2019 earnings call. [Operator instructions] I would now like to hand the conference over to Mr. Randy Wilson, director of investor relations.

Please go ahead.

Randy Wilson -- Director of Investor Relations

Good morning everyone. And thank you for participating in today's fourth-quarter 2019 financial results conference call. Participating on today's call are John Garrison, chairman and chief executive officer; and John Duffy Sheehan, senior vice president and chief financial officer. Following the prepared remarks, we will conduct a question-and-answer session.

We have released our fourth-quarter 2019 results, a copy 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 it's 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 investor relations website, under Events and Presentations.

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 will 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. For Terex, operating within a Zero Harm environmental, health and safety culture is an absolute way of life. I am proud of our team's dedication, commitment and focus on a zero-harm safety culture.

The global team made great progress during the year, reducing our recordable injuries by 39%, a significant accomplishment. But we realize we can and will continue to make further progress in our Zero Harm culture. The fourth quarter completed a year where we faced considerable market-driven and operational headwinds, principally within our AWP segment. Our Q4 results reflect the headwinds of the challenging global industrial equipment market.

And our operating results were generally in line with our expectations on lower revenue. AWP's fourth-quarter revenue was down 21% from Q4 2018. This demonstrates the cautious customer sentiment and our largest markets in North America and Europe. AWP's revenue decline, coupled with the need to produce below retail demand to reduce inventories, adversely impacted operating margins.

Our MP team continued to execute well, maintaining 12% operating margins despite Q4 revenues being down 10% in the quarter. Driving parts and service growth is one key element of our execute to win initiative. Despite the challenging global equipment markets, our parts and services teams drove 7% sales growth on a currency-neutral basis. Over time, continued growth from this initiative will help reduce our cyclicality.

Given the environment in which we are operating, we have maintained our absolute focus on our disciplined capital allocation strategy. We generated positive free cash flow in the fourth quarter, and generated $86 million of positive free cash flow during 2019. Combined with the $106 million of cash proceeds from dispositions, Terex ended 2019 with a strong balance sheet including over $1.1 billion of liquidity. Our global team continues to be committed to generating cash and improving our working capital efficiency.

Turning to Slide 4. Terex remains committed to its goal of establishing a corporate culture based on process discipline and accountability that will consistently deliver high performance in all phases of the business cycle. Turning to Slide 5. Now let me share some 2019 highlights that continue to move Terex forward.

We essentially completed the focus element of our strategy by finalizing two significant portfolio actions in our former cranes segment. The remaining businesses in our portfolio have industry-leading competitive positions. They have also demonstrated their ability to consistently outearn their cost of capital over the course of multiple cycles. At the start of this year, we moved the tower and rough terrain crane businesses to the material processing segment.

These moves complete the transformation of Terex into a two segment organization. We have brought online new manufacturing capabilities including our Campsie facility in Northern Ireland and expanded our Hosur, India MP facility, allowing Terex to be even more responsive to global demand. Our new utilities facility will consolidate multiple production buildings into one state-of-the-art, world-class manufacturing engineering facility. Commercial excellence begins and ends with the customer.

We completed our global rollout of sales force, increasing process discipline throughout the entire sales process. Technology is a critical part of our global parts and services business. To deliver industry-leading customer service, we are providing our distribution partners easy-to-use digital tools that help them to service their customers more efficiently, maximizing their opportunity to win business. This is allowing Terex to build a competitive advantage and accelerate parts growth.

Strategic sourcing finished 2019 with strong momentum, as the team continues to implement waves 1 and 2 and launching a new round of strategic projects. With our high-quality portfolio of specialized equipment businesses, our strong financial position and the investments in our facilities and systems, we are well positioned to perform throughout the cycles. Looking ahead to 2020. We recognize that we must drive improvement in our operational excellence so that we can consistently deliver on our commitments to our team members, customers and shareholders.

At Terex, we are driving toward a Zero Harm safety culture. We are doing this with open communication, reporting and putting our team members first. Terex is also committed to a responsible environmental stewardship through energy and water conservation efforts in our facilities, and by developing innovative products that reduce emissions. Turning to innovation.

We are continuing to invest in innovative products to serve our specialized markets. A few examples are: the Terex Ecotec shredder, expands our offering in recycling markets; also the Terex Advance mixer truck, reflects improved performance, value and entry into new markets. In addition to expanding our product offerings, we are investing in our manufacturing capabilities which leads to future growth. The new utilities manufacturing facility in South Dakota remains on schedule and within budget.

Another important facility for Terex's future global growth is our Changzhou, China facility which will undergo an expansion in 2020 to accommodate the market growth in China for aerial products. In addition, MP and utility product lines will be added. We are localizing manufacturing to take advantage of increasing adoption of these products. Our parts and services team is focused on growth by delivering a best-in-class experience for our customers.

These investments enable improved manufacturing productivity, industry-leading customer offerings and growth. As we communicated during our Q3 earnings call, we expect the global industrial markets to remain challenging in 2020. We expect sales to be down 8% to 11% from 2019 to a midpoint of $3.9 billion. The lower anticipated sales will result in lower production levels which will have an adverse effect on operating margins.

Based upon this current outlook for 2020, and we are anticipating full-year earnings of $1.85 to $2.35 per share. We will continue to enhance shareholder value by executing our disciplined capital allocation strategy which includes dividend increases in each of the last four years. With that, let me turn it over to Duffy.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Thanks John. Turning to Page 8. Let me begin by reviewing our Q4 segment highlights. AWP sales of $500 million contracted by 21% compared to last year driven by continued challenging markets in North America and Europe.

During the fourth quarter, we saw a 55% increase in China sales, where the aerial market continues to grow through increased product adoption. Overall, lower sales and significantly reduced production levels challenged AWP's operating margins in the quarter. As we discussed last quarter, to align customer demand and to manage inventory we have been significantly reducing production. During Q4, we reduced production levels 45% compared to Q4 2018.

This resulted in lower manufacturing absorption and lower material cost savings.  AWP fourth-quarter bookings of $755 million were 22% lower than Q4 2018, but the book-to-bill ratio did improve sequentially. Backlog at year-end was $753 million, down 31% from the prior year. However, AWP's year-end 2019 backlog is not fully comparable to the prior year, as not all 2020 advanced purchase orders from our national account customers were completed by December 31, 2019. Additionally, national account customers placed a smaller percentage of their planned 2020 capex on advanced purchase orders.

When adjusted for these year-over-year customer ordering patterns, our backlog supports our AWP revenue guidance. Materials processing closed out the year with another solid quarter, achieving 12% operating margin despite challenging markets. Sales were $321 million, down 10% from the fourth-quarter 2018 driven by cautious customer sentiment, delaying capital purchases of crushing and screening products, material handlers and environmental equipment. Operating margins decreased off the levels we experienced during the first three quarters of the year, but were still double digits as the MP team has been aggressively managing all elements of cost in a challenging market environment.

Backlog of $295 million was 42% lower than last year. However, MP's year-end 2018 backlog was an anomaly. In the fourth quarter of 2018, dealers ordered a much higher percentage of their 2019 full-year equipment requirements due to extended lead time. As we enter 2020, dealer ordering patterns have returned to historically normalized levels as lead times are shorter.

Within corporate and other, we saw lower rough terrain and tower crane sales. Operating margins for tower cranes were modestly impacted by the lower sales, but rough terrain's operating margins performed in line with expectation. Turning to Slide 9 to review our Q4 consolidated results. Total sales decreased by approximately 16%.

MP's operating margin and lower corporate expenses partially offset the volume and lower production headwinds that impacted AWP margin, leading to an overall contraction of operating margin. Restructuring-related charges and, to a lesser extent, investment in our execute to win priority areas where the primary differences between our as reported and as adjusted operating profit. Our full-year 2019 tax rate came in lower than we had previously anticipated, as a result of a more favorable jurisdictional mix of sales and pre-tax income, combined with favorable adjustments between our tax provisions and tax returns. These adjustments resulted in our recording a tax benefit in Q4 of $8.8 million to adjust our full-year 2019 tax rate to approximately 16%.

On an adjusted basis, we generated quarterly earnings per share of $0.36. Turning to Slide 10 to review our full-year consolidated results. Overall, of 2019 was a challenging year for Terex. Net sales for the year contracted 3.6% to approximately $4.4 billion.

This revenue decline was attributable to AWP, whose sales declined almost 8% for the year. AWP's revenue declines were greatest in North America and Western Europe as concerns over the global market for industrial equipment caused rental customers to reduce their capital equipment purchases. Partially offsetting AWP's revenue decline, MP's revenue increased almost 4%, in line with our expectations from the beginning of the year to nearly $1.4 billion. AWP's lower sales and significantly reduced production levels challenged total company operating margins for the year.

MP had a strong 2019, with a full-year adjusted operating margin over 14%, up 130 basis points from 2018. Turning to Slide 11. Our 2020 guidance is based on our two segment operating model, AWP and MP. The rough terrain and tower crane businesses are reflected in MP.

To assist your modeling of our business, we have recast our segment results for the full-years 2018 and 2019 including 2019 by quarter. These analyses are included in the appendices to our Q4 earnings presentation and posted to our investor relations website. Today's guidance includes all currently anticipated expenses as we simplify our financial reporting to the investment community and have completed investments in our transformation program. In 2020, we currently expect our operating margins to decrease by approximately 150 basis points to between 6.3% and 7.3% on approximately 8% to 11% lower sales.

Reduced operating leverage on the lower sales volumes, both in our AWP and MP segments, are partially offset by ongoing operational improvement. With respect to the coronavirus, while we are not currently anticipating any material impact on our full-year results, we do expect to have lower sales and earnings from our AWP China facility in the first half of the year which will be made up in the second half. We expect 2020 earnings between $1.85 and $2.35 per share. This EPS guidance assumes a full-year 2020 expected tax rate of 19%, but excludes any benefit associated with our existing share repurchase authorization.

This guidance also assumes extension of our existing 301 tariff exclusion for machines and components that are reported into the U.S. from China. From a quarterly perspective, we expect a normal historical sales pattern. However, on a year-over-year basis, revenue in the first half of the year will be down approximately 15% and flat in the second half of the year.

We expect our EPS to be generated roughly 5% in Q1, 45% in Q2 and 25% each in Q3 and Q4. The abnormally low level of profitability in Q1 is driven by AWP revenues being down 25% year over year combined with unabsorbed overhead on production below retail demand; and finally, the impact of the coronavirus on our China operation. For the full year, we are estimating free cash flow of approximately $140 million reflecting a strong year of positive cash generation. We expect to improve first quarter year-over-year cash flow performance.

However, we do expect Q1 cash flow to be negative, consistent with historical pattern. We also estimate capital expenditures will be approximately $100 million. This level of capex reflects continued investment in initiatives designed to drive long-term earnings growth and shareholder return. Turning to our segment guidance.

We expect precaution being exhibited by our Genie rental customers during 2019 to continue into 2020, resulting in AWP sales being down 7% to 10% and operating margin of 6% to 7%. We expect materials processing revenues including our towers and rough terrain cranes businesses, to be down 8% to 11% which will result in MP's operating margins being approximately 12% to 13%. While we continue to monitor developments associated with the U.K.'s exit from the European Union, we do not anticipate any material impact to Terex in 2020 associated with the Brexit process. We are guiding for our corporate expenses to be approximately $80 million during 2020, up $10 million from 2019.

The increase is due to planning for 2020 incentive compensation at target payout and lower gains on sales of financing receivables. Overall, we have been managing our corporate cost structure aggressively, and we'll continue to do so in 2020. Turning to Slide 12 to review our disciplined capital allocation strategy. Since we introduced our disciplined capital allocation strategy at our Analyst Day in 2016, we have made tremendous progress in strengthening our balance sheet, reducing our cost of capital and reducing our debt by over $500 million.

As a result, our 2019 year-end net leverage which is net debt divided by adjusted EBITDA, was less than 1.6 times nearly a full turn better than our targeted 2.5 times through the cycle. Additionally, we reduced our pension obligation by more than $300 million over this period. During the last three years, we have made substantial investments in Terex. In fact, we have invested almost $0.25 billion into our businesses over the last three years which is significantly higher than our annual maintenance capex of $45 million.

These investments demonstrate our commitment to long-term growth. We are excited by the portfolio of businesses we have, each of which outearns their cost of capital. We have deployed the proceeds from the sales of businesses to return capital to shareholders. First, we have approximately 34% fewer shares now than were outstanding at our 2016 Analyst Day.

Second, we have increased our quarterly dividend by 71% to $0.12 per share. As I have said consistently, the Terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy. With that, I'll turn it back to you John.

John Garrison -- Chairman and Chief Executive Officer

Thank you Duffy. I'll review our segments, starting with AWP. The North American and European markets for aerial work platforms are challenging. However, the North American utilities market remains strong.

Our North American rental customers continue to be cautious in their capital expenditure decisions. They are prudently managing their fleet utilization. As we move into the latter half of the year and into 2021, we expect the replacement cycle in North America and Europe to increase. Finally, the ongoing adoption of aerial work platforms in China is fueling growth.

To improve margins, the AWP team is fully committed to executing their strategic sourcing plan including transitioning significant volume to new suppliers. We are seeing savings rates consistent with our expectations. However, the lower production levels have impacted the total value of savings realized to date. In the aerials market, the Genie brand is synonymous with technological leadership and innovation.

In 2020, we will continue to add more fuel efficient, hybrid products and fill out the extra capacity line which will be on display at CONEXPO. The XC line is important for Genie as the new ANSI standards governing load levels are currently due to take effect in March. The utilities team will transition to their new manufacturing and engineering facility during the summer. This new facility will improve efficiency and increase capacity which together with new products and services, will enable Terex utilities to continue to grow.

For example, the Terex utilities TL-80, pictured on the slide, is a new product serving the transmission line distribution market. The electric grid requires significant continued investment to support the electrification and innovation that is occurring around the world. We invite you to visit us at our CONEXPO at our Terex booths to see our exciting new product and service offerings. Turning to MP on Slide 14.

materials processing is a high-performing segment that consistently delivers strong results and meets its commitment. MP is well positioned heading into 2020 with their new product offerings. The MP team continues to innovate. The Evoquip Colt screen, pictured here, will launch in Q1 2020.

It delivers higher capacity, telematics and value to our customers. The MP team continues to expand its penetration into emerging markets for environmental and mobile crushing and screening equipment. MP's innovation was recognized in Q4 2019, with three separate industry awards. OMNI by Terex is a new, first-of-its-kind innovation that improves efficiency and reduces the risk of injury on crushing and screening sites.

OMNI and all of MP's industry-leading innovation will be on display at CONEXPO. I expect our MP team to continue to execute at a high level and deliver on its plans again this year. To wrap up our prepared remarks, in a challenging global environment, our global Terex team continues to focus on meeting commitments to our customers and shareholders. Despite the near-term market conditions, we will continue to invest in innovative products and services to win and grow in the marketplace.

We will continue to invest in the initiatives that improve our operating and commercial capabilities. We will also continue to follow our disciplined capital allocation strategy and create additional value for our shareholders. And finally, we are confident in achieving our 2020 objectives. With that, let me turn it back to Randy.

Randy Wilson -- Director of Investor Relations

Thanks, John. As a reminder during the question and answer session we ask you to limit your questions to one in a follow up to ensure we have time to get to everyone. With that, I'd like to open up for questions. Operator? 

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Jerry Revich with Goldman Sachs.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi. Good morning everyone.

John Garrison -- Chairman and Chief Executive Officer

Good morning Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

Can you expand more on your outlook for the second quarter, for earnings to hit the level, let's call it, $0.95 at the midpoint of guidance? I think essentially, you'd be within 100 basis points of your Aerials margins in second quarter of '19. Can you just fact-check that for me and just step through the moving pieces in terms of why the second quarter this year is expected to be disproportionately significant compared to prior years? 

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. Thanks, Jerry. I'll take that question. And when you look at the dispersion of our EPS guidance for the year, it reflects that -- the challenging Q1 we'll have with our expectation that AWP revenue would be down year over year by 25% in Q1.

And that we would have almost 25% lower production on a global basis for AWP also in the first quarter, and then the impact of the coronavirus. In the second quarter, it is, as you certainly know, our seasonally adjusted best quarter of the year. And both the -- for both the Aerials business as well as our utilities business. And so we are expecting a strong Q2.

Production will be coming more in line with retail demand in the second quarter after a down Q1. And so we are expecting both our Aerials and utilities businesses to perform which would drive strong operating performance for Terex as a whole.

Jerry Revich -- Goldman Sachs -- Analyst

And John, maybe expand on that point. So how sure you expecting production to be up sequentially in the second quarter versus the first quarter compared to normal seasonality to get that big margin ramp that you're looking for? Just correct me if I'm wrong, but you're embedding about, I don't know, 800, 900 basis points sequential improvement in AWP 2Q versus 1Q? So if you wouldn't mind just building our comfort level around that. That would be helpful. 

John Garrison -- Chairman and Chief Executive Officer

Yeah. No problem at all. I don't disagree with the range in which you're estimating the margin improvement in AWP from Q1 to Q2, and that would be on the production would increase. As I said a few moments ago, production down year over year in Q1 by 24%, 25%, and production from Q2 of '19 to Q2 of '20 would be down in the 10-ish percent range which would be in line with where revenue was.

So that would be -- you'd see a sequential improvement by 10%. 10% to 15%, actually.

Jerry Revich -- Goldman Sachs -- Analyst

So we're done with destock as of Q1, essentially? 

John Garrison -- Chairman and Chief Executive Officer

The biggest portion of it. That is absolutely correct.

Jerry Revich -- Goldman Sachs -- Analyst

OK. Thank you.

Randy Wilson -- Director of Investor Relations

Thank you Jerry.

Operator

Next question comes from Ann Duignan with JP Morgan.

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

Hi. Good morning. 

John Garrison -- Chairman and Chief Executive Officer

Good morning Ann.

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

Good morning. I'm a little concerned about the backlog and the outlook for materials processing. I mean, as we look in the United States and in Europe, I mean, the fundamentals are not that bad, particularly in the U.S. for infrastructure investment is booming.

Can you just talk about your outlook for materials processing, leaving out the cranes businesses? And what's going on regionally with that business? What are you seeing out there? Is there any -- should we be worried that you're losing market share somewhere? 

John Garrison -- Chairman and Chief Executive Officer

Thanks Ann. Thanks for the question about MP. We're excited about our MP business. It's been a very strong consistent performer and has done well over the course of the last couple of years.

And we think it will continue to do well. But the global macroeconomic environment is impacting demand, but different dynamics Ann, driving for each business. As we look at backlog, we had a historically high backlog going into 2019. And historically, the business did not operate at that level of backlog.

Normally, it's a much shorter cycle of book to business type of business. So if you look going into '19, our backlog was almost 50% higher than it had been in the previous three years. So I would say the backlog -- obviously, we'd like to have higher backlog. But I would say the backlog now is along a more normal pattern, historical pattern.

When we went into '19, when it was tight, we did strongly encourage our dealer network around the world to get their orders in for the full-year demand. And with our lead times being shorter this year, there's not that need for the dealers to place that level of demand this early in the year. So that is a key dynamic that is impacting the overall backlog. And if we look at the businesses, as you asked, Ann, so if you look at crushing and screening, in North America, the retail utilization rate of the dealers' rental equipment is stable.

They're seeing good utilization, but there's a hesitancy, a caution on the customers to convert the rental to ownership which is delaying the restocking of the network. So overall, the market is still good. Utilization is still good. There's just -- customers are being generally cautious on the crushing and screening side.

Now material handlers. Ann, our Fuchs business, team's executed well. But with scrap steel prices coming down pretty significantly, specifically in North America, but really around the world, that has impacted the Fuchs business. Now they've done a good job expanding their distribution channels, expanding the offering they're coming into.

But scrap steel prices still drive the Fuchs. So if I look at the businesses within MP, the Fuchs business from a backlog standpoint is actually off the most. Offsetting that is our environmental businesses. Kieran and the team have done a good job bringing some new products to the marketplace.

So we're continuing to see growth, really globally, across our environmental portfolio like our Ecotec brands. When we look at the concrete mixer business, again, for us, that's principally a regional North American business, U.S. North American business. That was relatively stable, and we're looking at it to be relatively stable year over year.

And then the pick and carrybusiness that was in the MP throughout all of last year operates well down in Australia. Again, relatively stable, up a little bit, down a little bit. So that's how I'd characterize it, is customers are being -- they're being cautious, but the markets are still strong. But dealers, customers are cautious in seeing how the year is going to play out.

And I'm confident that the team will capitalize on the opportunities in the markets as we head into 2020. And I'm not concerned at all about any share erosion associated with the backlog or the revenue outlook.

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

OK. That's helpful color. Did you quantify the impact of coronavirus on your Q1 EPS or can you?

John Garrison -- Chairman and Chief Executive Officer

So let me -- if you don't mind, Duffy, before you quantify, just a broader comment on the coronavirus. I want to say, first, our priority is to our team members, and we have been fortunate that none of our team members have been reported with the virus. We do have a world-class manufacturing facility for our AWP segment in Changzhou. Due to the virus, we did delay opening of the plant, like most companies in China.

Our plant did open this week on February 11, but the ramp has been slowed because the only key members that are allowed to come back to the plant are the team members that did not travel out of the city during the lunar New Year holiday. So it's going to be a slow ramp because they have to self-quarantine for 14 days. So we're working that with our AWP team. We're working that with our suppliers.

And as Duffy said in the guidance, we have incorporated the impact of the coronavirus. We believe in our Q1 and Q2 performance and our guidance does assume that we will make up the Q1 and Q2 shortcoming as we move through Q3 and Q4. Duff, do you want to add anything there? 

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

No. I would say that from a revenue perspective, since the situation is still evolving, we -- for purposes of guidance anyway, at the moment, there is a, say, $25 million to $30 million revenue impact built into the guidance for Q1, a negative $25 million to $30 million revenue impact and a $5 million to $10 million OP impact that's been built into that.

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

OK. That's very helpful. Thank you. I appreciate that.

I'll get back in line.

John Garrison -- Chairman and Chief Executive Officer

Thank you Ann.

Operator

Next question comes from Jamie Cook with Credit Suisse.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning.

John Garrison -- Chairman and Chief Executive Officer

Good morning Jamie.

Jamie Cook -- Credit Suisse -- Analyst

Just another question on Aerials. I understand the...

Can you hear me?

John Garrison -- Chairman and Chief Executive Officer

Yes. We can Jamie.

Jamie Cook -- Credit Suisse -- Analyst

Sorry, just another question on the Aerial business for the first quarter, understanding we're down 25%. I'm assuming we're losing money again in the first quarter, if there's any way you could sort of handicap how much we lose in the first quarter? And then we're underproducing again in the first quarter. Is that just the coronavirus? Because the sales assumption doesn't seem too materially different from what we said before. And then just my last question.

Did I miss what you guys said on supply chain benefits in the -- in what's implied in the guidance and the cadence of that for the year? Thank you.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

So let me start.

John Garrison -- Chairman and Chief Executive Officer

Yeeah, if you would.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Is that when you look at our aerial work platforms segment, the aerial work platforms business did have positive operating margin in Q4 2019 and we'll have positive operating margin in Q1 2020. So the segment isn't losing money. The revenue is certainly ahead the market environment resulting in 25% lower revenue is certainly a headwind. And our bringing inventory levels down, and therefore, producing significantly below retail demand has been challenging the profitability of the business.

And once we get ourselves past both of those impacts, we do expect the margins to improve. Do you want to go to supply chain? 

John Garrison -- Chairman and Chief Executive Officer

Yeah. So Jamie, and I think your last question was around supply chain and specific to strategic sourcing. Is that your question, Jamie? 

Jamie Cook -- Credit Suisse -- Analyst

Yeah, that was my question. The supply chain assumption in the 2020 guidance.

John Garrison -- Chairman and Chief Executive Officer

Yes. So thank you. So in our 2020 guidance, we're anticipating a full-year impact of about $50 million. As I said in my opening comments, we're experiencing good savings rates on what we're doing, but the lower production volumes is taking longer to consume the raw and whip inventory in the pipeline.

So we've built that in. I will say the teams are really doing a good job. We literally changed thousands of parts over the course of '19, and we were able to do that with limited to no disruption to our manufacturing facility. So the teams who've internalized these processes, developing the SSI capability is critical to us, and we're going to continue to drive improvements in strategic sourcing.

And I think you see that clearly show up as we go through the year, and the incremental or decremental margins we'll enjoy. And I will say that the largest percentage of savings that we're seeing in strategic sourcing is associated with our AWP segment.

Jamie Cook -- Credit Suisse -- Analyst

OK. Thanks. I appreciate the color.

John Garrison -- Chairman and Chief Executive Officer

Thank you Jamie.

Operator

Next question comes from David Raso with Evercore ISI.

David Raso -- Evercore ISI -- Analyst

Hi. Good morning.

John Garrison -- Chairman and Chief Executive Officer

Good morning David.

David Raso -- Evercore ISI -- Analyst

My question is on the cash flow guidance. When you adjust for the lower capex year over year but also absorb the extra $25 million for the retirement obligation, it implies the free cash flow you think is going to grow $60 million, $70 million, and that's despite EBIT being down $95 million, G&A is going to be down about $6 million, $7 million. Just trying to get comfortable with why do we expect such a strong working capital performance throughout the year, especially if it's very concentrated in the first part of the year and then production ramps back up? Just trying to gain comfort with that. 

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. So David, I'll take that. And in the down revenue environment, the headwind market environment that we anticipate for 2020 and that will result in a shrinking of the balance sheet, so that we do expect that accounts receivable will be a source of cash as we bring our inventory levels down and don't restock them that the level of accounts payable will also result in a source of cash. So it's really about the dynamics associated with the reductions in the inventories, the collection of the receivables that result in working capital being a source of cash.

So I can assure you that our team is absolutely focused on the working capital generation and free cash flow generation, and that I acknowledge that our free cash flow generation has got to improve. And John and I have been all over our teams on that subject and you will see us achieve the $140 million free cash flow performance in 2020.

David Raso -- Evercore ISI -- Analyst

I appreciate that. I mean, I'm just -- last year, we spoke to being very committed to the free cash flow and it's still proved elusive. And I'm just trying to understand, has anything changed with how people are being compensated? Anything -- John, how you're thinking about being willing to give up sales to make sure that the cash flow is there? I'm just trying to understand why should we believe the guidance this year when last year, in a big under production year, where you would have thought it would generate some decent working capital inflows, it didn't materialized.

John Garrison -- Chairman and Chief Executive Officer

Right. Thanks David. So yes, for the management team, net working capital is part of our incentive compensation plan, it was significantly below target in 2019. Obviously, we want to drive to that target in 2020.

So from a compensation standpoint, I can assure you that the management team is focused on driving the net working capital. And one of the things, David, is we're being very disciplined on production. And even in the fourth quarter, the revenue was down a little bit more than we had forecasted. And so we're still trying to ensure that we're producing below retail demand to bring our inventories in line, and we're going to be very disciplined.

I think it's important in these types of businesses in these markets to be very disciplined on your production because it doesn't help anybody to overproduce and build inventory and put yourself in a position where you may have to do some things on pricing that you don't want to do. So we're going to attack inventory, we're going to attack our production schedules and we're going to adjust our production schedules based on the revenue level to drive that net working capital, as Duffy said, into free cash flow for the year. And as you mentioned, we're continuing to spend -- we have sizable investments, great organic growth. Our capex remains elevated.

We think that's in the best long-term interest of our shareholders. So it has intense focus. It is part of our incentive compensation plan, highly disappointed in our performance this year, and it was reflective in the MIB payments of our leadership team. And we've got to turn that around in 2020.

David Raso -- Evercore ISI -- Analyst

Well lastly, related to that. Let's say, if you did do the free cash flow of $140 million, the dividend is probably only, call it, $35 million. The excess $105 million roughly, how should we expect the use of that if you do hit those free cash flow targets? 

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. So we'll follow our disciplined capital allocation strategy, David, and that will include returning capital to shareholders. During this market headwind portion of the economic cycle, we have been preserving liquidity through the downturn. We ended 2019 with $1.1 billion of liquidity on the balance sheet between our cash on the balance sheet and available revolving credit facility borrowings.

We think that's a good place to be, net debt-to-EBITDA 1.6 times. So we will continue to consider what the right level of liquidity is, and to make sure that we are following the disciplined capital allocation strategy including the efficient return of capital to shareholders.

David Raso -- Evercore ISI -- Analyst

So just making it clear here. I mean, it's the start of the year. So probably the easier time to ask. But any commitment from management on where that would be utilized? Again, if everything played out as you thought, that excess $105 million, are you comfortable with the leverage? I mean, obviously, EBITDA will be down a bit this year, so the leverage naturally goes up if you maintain at the debt level.

But would you look at this as a share repo opportunity or are you more sensitive to keeping the leverage down as the EBITDA drops? 

John Garrison -- Chairman and Chief Executive Officer

David, we had a through-cycle EBITDA target, net debt-to-EBITDA target of two and a half. We like the position we're going into the year. We have an outstanding share repurchase authorization outstanding that the board has approved, and we will be opportunistic in the market against that outstanding share repurchase authorization. But we will manage our liquidity to ensure that we don't create any liquidity issues for ourselves.

But we like the position we're in now David, going into a softer year.

David Raso -- Evercore ISI -- Analyst

I appreciate the time. Thank you. 

John Garrison -- Chairman and Chief Executive Officer

Thanks David.

Operator

Next question comes from Mig Dobre with Baird.

Mig Dobre -- Baird -- Analyst

Good morning everyone.

John Garrison -- Chairman and Chief Executive Officer

Good morning. 

Mig Dobre -- Baird -- Analyst

Good morning. I want to dig in a little more on AWP, just to understand the moving pieces there. So can you talk a little bit about the Utility business in 2019? So on that $2.7 billion of revenue, how much of that was associated with the Utility business? And can you maybe give us a little clarity as to how you're thinking about that portion of the business as far as the 2020 guidance for the segment is concerned? 

John Garrison -- Chairman and Chief Executive Officer

Yeah. Thanks, Mig. Yes, utilities is part of our AWP segment. It's a really solid business.

And what's different about the utilities business is it doesn't experience the same seasonality and cyclicality of our Aerials business. So it's a little bit more constant as we go through the course of the year. As we've said, it was about $400 million. So you can plan between $400 million and $450 million of revenue, reasonably split equally across the quarter.

Q1 is a little lower. Q2 picks up, but relatively consistent across the year. And as we've said, generating 9% to 10% level operating margins. Q3 is going to be a bit challenging for the team this year.

We're -- we've anticipated that in our guide as we move from our manufacturing facilities into our state-of-the-art facility. That will occur in Q3. So as we move -- as we get into the new facility, we expect two things to occur. One, increase capacity to take advantage of a growing market.

The electrical grid market is a good space to be. There's a lot of infrastructure investment required for that. And we think that's going to give us increased capacity. Because right now, we are capacity constrained and have lead times that are extended in our utilities business.

And then, we also believe it's going to improve and drive efficiency for us as we go forward. But if you think about $400 million to $450 million, reasonably spread across the year, 9% to 10% operating margin. That's a good way to think about that business in 2020.

Mig Dobre -- Baird -- Analyst

So it's fair to say that this business is -- you expect it to be up some in 2020? 

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Slightly, yes.

Mig Dobre -- Baird -- Analyst

Slight. OK. So then if I look at the low end of your guidance, I mean, that implies your AWP business to be below $2 billion in revenue. Can you frame this number for us, historically? Because there's been so much noise in the segment with stuff kind of going in and coming out, where would that revenue be versus, say, 2016 coming out of the industrial recession? And how should we think about that level of revenue versus all the modeling that you've done historically as far as replacement demand is concerned? Are we back to replacement demand levels? Really help us out with a framework here. 

John Garrison -- Chairman and Chief Executive Officer

Right. So let me -- I don't have '16 in front of me, so we'll have to get back to you on that, Mig. Sorry, about that. We'll have that for the next time.

But let me frame the replacement cycle commentary. As we go into 2020, is, again, I think customers are being highly disciplined in their capex plans. I was at ARA this week and talked to multiple customers across the customer spectrum. They're being disciplined.

They do say as we move in the back half of 2020 and into 2021, the replacement cycle in the Aerials business should begin to kick in. They're already talking about it as they look at their longer range of capital plans. And that's a result of the products that were purchased seven to eight years ago because, in general, the equipment maintains its first life in the rental channel for seven to eight years. So the replacement cycle was a topic of conversation with customers just even this week, and we do think as we move into the 2021 time period that the replacement cycle in the Aerial business will kick in going forward and help to build demand as we move from 2020 into 2021.

Obviously, it's only February of 2020, but long -- looking longer term or intermediate term, we clearly would expect the replacement cycle to kick in, in North America and also in Europe. Europe is on a very similar cycle to North America.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah, Mig. As John said a moment ago, we don't have 2016 with us here in the room. So apologies for that. I would say that the aerials or Genie portion of our business in the guidance we've provided today, with the information John gave you, is still above revenue of $2 billion and is in the same area that it was in 2017.

So I would say it's up versus 2016 because obviously '16 was lower. 

John Garrison -- Chairman and Chief Executive Officer

Right.

Mig Dobre -- Baird -- Analyst

All right. That's helpful. Thank you.

John Garrison -- Chairman and Chief Executive Officer

Absolutely.

Operator

Next question comes from Stephen Volkmann with Jefferies.

John Garrison -- Chairman and Chief Executive Officer

Hey Stephen.

Stephen Volkmann -- Jefferies -- Analyst

Good morning guys. I just had a quick follow-up on this utilities thing as well. So once we consolidate these plants into the new one, do we still think about this as a 9% to 10% EBIT business John? 

John Garrison -- Chairman and Chief Executive Officer

We're challenging the team to do better than that, Stephen. And if I look at production efficiency, the number that we've kind of put out there is around 20% improvement in production efficiency associated with the move to the new facility. Now we'll take time to ramp. It's not going to occur on day 1, but I would be disappointed if we didn't see an improvement of around 20% in our production efficiency within the plant.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. I mean, I think it would be fair to say the business case certainly did anticipate growth in the top line for the business as the utilities business continues to take market share. And then, secondly, that the manufacturing efficiency drives stronger gross margin.

John Garrison -- Chairman and Chief Executive Officer

That's correct.

Stephen Volkmann -- Jefferies -- Analyst

OK. And then I think in the past, you've said that there might be some other things you could do in that facility as well. So is there any sort of positive benefit anywhere else in the company? 

John Garrison -- Chairman and Chief Executive Officer

No. This facility is a special purpose facility for our utilities product lines for both our installs and what we manufacture on the boom side. So we're not currently anticipating using that facility for any other product lines. What we are doing is we have 19 service centers in our utilities business.

And those 19 service centers are working very closely with our Aerial customers, and we've seen a very nice growth in parts and service revenue associated with the service centers, focusing more on the aerial customers. And so having the utilities business underneath AWP as a segment has helped to drive some of that synergy, and we did see growth in that -- in '19 and would anticipate that to continue in '20 and beyond. That was more of the synergy, not necessarily manufacturing synergy in the Watertown plant.

Stephen Volkmann -- Jefferies -- Analyst

Got it. Got it. OK, thanks. And then finally, does capex go back to kind of maintenance after this is done or is there more to do? 

John Garrison -- Chairman and Chief Executive Officer

Stephen, we're not going to -- I don't think it goes all the way back to $40 million of maintenance capex as we continue to look at the opportunities for organic growth in our business, the opportunities to invest in some of our systems and processes. So we think it's going to come down from $100 million, but I don't want to put out there that it's going to go all the way down to maintenance capital levels in 2021.

Stephen Volkmann -- Jefferies -- Analyst

OK. Thank you guys. Appreciate it.

John Garrison -- Chairman and Chief Executive Officer

Thank you Stephen.

Operator

Next question comes from Steven Fisher with UBS.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning. Just wondering within the MP segment, what degree of revenue decline do you assume for the rough terrains and towers for 2020? I'm not sure if that was included in the answer to Ann's question. And then how are the decrementals you assumed in the crane component of materials processing versus the legacy materials processing component? 

John Garrison -- Chairman and Chief Executive Officer

Yes. So I would say really no difference with the RTs and the towers in terms of the top level revenue guide. So somewhere in that 10% down range is what we're assuming for that business. And from a margin standpoint, pretty consistent with actually a little lower, actually call that 9% to 10%.

We did have a good guide in 2019, but 9% to 10% operating margins associated with the crane business and down at the same revenue proportion as the overall segment. I think that's a reasonable assessment.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. That's correct.

Steven Fisher -- UBS -- Analyst

OK. That's helpful. Then just over on the AWP side, thinking about the order patterns for the year. I think you mentioned that some of the annual purchase orders didn't get finalized in Q1.

Really, just kind of thinking about how the order pattern is now set up for both the rest of the first half and into the second half? I'm curious how does CONEXPO fit into the ordering plans for the year? Is it too early for the customers to kind of be definitive about the second half at this point? So maybe if you can just kind of walk us through the order pattern you expect here for the rest of the year? 

John Garrison -- Chairman and Chief Executive Officer

Yeah. So thank you. And specific to AWP and the backlog dynamics, really, what impacted this year was timing of negotiations with the national accounts. And the other dynamic was the percentage of their full-year capex that they were willing to put on advanced purchase orders.

So as I've said, the national accounts being very disciplined with their plans. Our lead times, industry lead times were much shorter. So our national account negotiations flowed into January and into early February. Those negotiations now are principally complete.

And you can argue that it's a bit more of a more normal pattern. And if you go back to '16, '17, then it was as we ended '18 going into '19. So that's where we stand now. In terms of CONEXPO, from an Aerials perspective, CONEXPO was not as big a selling show as perhaps cranes and some other MP businesses.

As I said, I was just at ARA this week, you do sell a little bit at ARA. I think it will be too early in the year, given that it's the second week of March that CONEXPO would have a significant impact on AWP customers. We would expect MP to see some pickup with some of the dealers and customers. So that's how I'd look at CONEXPO.

I would put it in a shameless plug for everyone to come visit us at CONEXPO. We've got some incredibly new exciting innovative products across our portfolio of product lines that demonstrate the technology that we're investing, the telematics that we're investing in and positioning the business for longer-term growth. So I hope that answers your question in terms of the flow. But CONEXPO is not going to be a big, big selling show for our AWP segment. 

Steven Fisher -- UBS -- Analyst

I guess, just wondering if we should be anticipating any particularly big Q1 swing in orders year over year or is it more starting to neutralize? 

John Garrison -- Chairman and Chief Executive Officer

I'd say it's -- given the demand is -- I'd use the word more neutralized. Obviously, where we're going to record some that flowed into the first quarter, but it's still going to be difficult comps year over year until we get to the back half of the year.

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

That's right.

Steven Fisher -- UBS -- Analyst

Got it. Thanks a lot.

Operator

At this time, I will turn the call back over to Mr. Wilson.

Randy Wilson -- Director of Investor Relations

Thank you operator. This concludes our Q&A session. I will now turn it over to John Garrison for concluding remarks. John? 

John Garrison -- Chairman and Chief Executive Officer

First of all, I want to thank you for your interest in Terex. And I would encourage you -- I know many of you do attend CONEXPO. We will be there. We would love to host you at CONEXPO, and show you the exciting things that we have across the portfolio of Terex that we're going to be demonstrating and showing to our customers.

So again, thank you for your interest. I'd love to see at CONEXPO. And if you have any questions, please follow up with Randy and John.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Randy Wilson -- Director of Investor Relations

John Garrison -- Chairman and Chief Executive Officer

Duffy Sheehan -- Senior Vice President and Chief Financial Officer

Jerry Revich -- Goldman Sachs -- Analyst

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

Jamie Cook -- Credit Suisse -- Analyst

David Raso -- Evercore ISI -- Analyst

Mig Dobre -- Baird -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Steven Fisher -- UBS -- Analyst

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