Terex (TEX) John L. Garrison on Q4 2015 Results - Earnings Call Transcript

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Terex Corp. (NYSE:TEX)

Q4 2015 Earnings Call

February 17, 2016 8:30 am ET

Executives

Thomas Gelston - Vice President-Investor Relations

John L. Garrison - President, Chief Executive Officer & Director

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Analysts

Ted Grace - Susquehanna Financial Group LLLP

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

David Raso - Evercore ISI

Andrew M. Casey - Wells Fargo Securities LLC

Ann P. Duignan - JPMorgan Securities LLC

Nicole DeBlase - Morgan Stanley & Co. LLC

Robert Wertheimer - Barclays Capital, Inc.

Mig Dobre - Robert W. Baird & Co., Inc. (Broker)

Jerry Revich - Goldman Sachs & Co.

Joe J. O'Dea - Vertical Research Partners LLC

Brian L. Chan - Bank of America Merrill Lynch

Eli Lustgarten - Longbow Research LLC

Chad Dillard - Deutsche Bank Securities, Inc.

Kwame Webb - Morningstar, Inc. (Research)

Emily McLaughlin - RBC Capital Markets LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Terex Corporation Fourth Quarter 2015 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the conference over to Mr. Tom Gelston. Please go ahead, sir.

Thomas Gelston - Vice President-Investor Relations

Thank you, Paula, and good morning, everyone, and thank you for joining us for today's fourth quarter 2015 financial results conference call. Participating on today's call are John Garrison, President and Chief Executive Officer; and Kevin Bradley, Senior Vice President and Chief Financial Officer.

Following prepared remarks, we will conduct a question-and-answer session. Last evening, we released our fourth quarter 2015 results, a copy of which is available on our website at terex.com. Today's call is being webcast and is accompanied by a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call, and is also available on our website.

All per-share amounts in the presentation are on a fully diluted basis. And as usual, we will post the replay of this call on the Terex website under Audio Archives in the Investor Relations section.

Now, let me direct your attention to slide 2, which is our forward-looking statement and explanation of non-GAAP financial measures. We encourage you to read this, as well as other items in our disclosure, 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 you, John.

John L. Garrison - President, Chief Executive Officer & Director

Thanks, Tom, and good morning, everyone. Given this is my first earnings call with Terex, I wanted to start by saying how pleased I am to be leading Terex in these dynamic, exciting and challenging times. Kevin and I will cover three topics today before we take your questions.

First, I will offer my initial insights on my first hundred days at Terex. Next, we will review our results for the fourth quarter of 2015, the full year 2015, and provide our perspectives on 2016. Finally, I will provide an update on our announced plan of merger of equals with Konecranes and comment on the Zoomlion non-binding acquisition proposal.

It certainly has been an exciting and informative first hundred days. We recently completed our annual Terex senior leadership meeting, the theme of which was proud past, better future. Yes, there have been some rough patches, but what's important is that the team recognizes we need to improve our overall execution. With that recognition, there's a lot to be proud of at Terex. We have outstanding businesses and brands that are leaders in their respective industries, we have innovative industry-leading products and services that provide our customers a competitive advantage, we have dedicated and hard working team members, and we have a strong value system in a Terex way, which, quite honestly, is one of the areas that attracted me to Terex.

The team has good reason to be proud of its past. But to create a better future, we have to improve our execution. The team is focused on implementing an execute-to-win business system. This is a system that we will use to critically evaluate our strategy, our operations and our talent development to ensure that we consistently achieve our commitments to our customers, shareholders and team members.

Without question, we need to improve our return on invested capital, our margins and our cash flow generation, especially in the trough of the business cycle. An integral part of our strategy will be to continually invest in development of new products and services. To win in a competitive environment, we need to have products and services that provide our customers a compelling, competitive advantage. We'll also work on all elements of our cost structure to ensure we can fund our new product development, while maintaining acceptable rates of return, returns above our cost of capital.

I'd like to now turn to slide 4 and discuss our overall performance. We intensified our focus on cash flow generation in the quarter and delivered strong cash flow performance. We see cash flow generation as one of the key metrics going forward. Sales declined 11.8% in the fourth quarter, 6.2% of the decline relates to a stronger dollar versus other currencies, especially the euro. Earnings for the quarter were $0.50 per share on an adjusted basis. Full year earnings were $1.84 per share on an adjusted basis.

We ended the year with free cash flow of $290 million, well above our target of $200 million to $250 million established in early 2015. This was good performance by our team under tough conditions. Demand declined in the quarter as customers became more cautious in their outlook. Compared to a year ago, we ended the quarter with lower order book and backlog in our Aerial Work Platforms, Material Handling & Port Solutions, and Crane businesses, but with increases in Construction and Materials Processing.

Turning to slide 5, global markets were challenging in the quarter, and we anticipate they will remain so in 2016. We expect global macroeconomic uncertainty to continue with headwinds from countries that are commodity-dependent, along with persistent challenges from low oil and gas prices, as well as from foreign exchange volatility.

Our largest market remains North America, which declined 4% for the quarter on a year-over-year basis. Although markets in North America were mixed by segment, adjusting for the divesture of our ASV business in late 2014, we were essentially flat. We saw significant declines in demand in Latin America, Middle East and Africa due to economic and geopolitical uncertainty, along with low oil and commodity prices.

In Asia and Oceania, we did see a year-over-year increase in fourth quarter demand due to large crane deliveries in China, as well as the increasing AWP sales in the region.

Demand for our products in Europe continues to be flat, reflecting an uncertain business environment and slow economic growth. Outside of North America, FX negatively impacted net sales by approximately 8%.

Kevin?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Thanks, John, and good morning, everyone. I'll be reviewing results for the fourth quarter on a quarterly and full-year basis. Let's turn to page 6, which shows the comparative quarterly income statement. Sales for the quarter decreased 11.8% as compared to the prior year. As John pointed out earlier, currency movements, particularly the U.S. dollar to the euro, continued to have significant impact in our year-over-year comparison.

Over half of the decline in sales, or approximately $120 million, was driven by currency. Operating margin for the quarter was 3.2% compared to 3.9% in the prior year. On an as-adjusted basis, operating margin was 5.8%, a decline of 80 basis points from 6.6% in 2014. Decremental margins for the overall company were reasonable at 12.8%.

Adjustments for the quarter fell into three main categories, the first being transaction-related costs associated with the announced merger with Konecranes, which totaled $5.9 million in the quarter. The second category is restructuring and related activities, which accounted for $4 million in the quarter. The third category included impairment charges related to certain goodwill and intangible assets within our MHPS segment in the amount of $34.7 million.

Adjusted earnings per share of $0.50 compares to $0.72 per share in the fourth quarter of 2014, driven primarily by lower operating earnings in four of our five segments, with AWP being the exception. We finished the year strong with $247 million in free cash flow in the quarter.

Turning to page 7, net sales for the full year decreased $765 million or 10.5%, with approximately 75% of the decline driven by currency. As-adjusted income from operations decreased from $481 million to $410 million reflecting the decline in volume. Decremental margins for the overall company were 9.3%.

Adjusted earnings per share for the full year was $1.84 compared to $2.35 in 2014. The lower operating profit was partially offset by improvements in our capital structure in the form of lower interest expense, as well as a lower share count. 2015 full year free cash flow generation was $290 million.

With that, let me turn it back to John.

John L. Garrison - President, Chief Executive Officer & Director

Thanks, Kevin. Now, I'd like to take a few minutes to provide a quick review of each segment starting with Aerial Work Platforms on slide 8. Aerial Work Platforms is an outstanding business. Genie is a market leader that this summer will celebrate 50 years of driving innovation in the industry. The team improved operating profit compared to the same quarter in 2014, offsetting pricing, currency and volume pressure, with material cost and manufacturing productivity improvements. The demand environment remains challenging, which is reflected in the reduction in backlog. Our North American rental customers are cautious about their CapEx requirements for the first half of 2016.

In addition, North American rental companies are lowering their replacement demand for equipment. AWP equipment is replaced, on average, after seven years to eight years. The financial crisis reduced AWP's sales in 2009 and 2010. In line with the replacement cycle, we expect to see this to have some dampening effect on demand for new equipment in 2016 and 2017.

AWP continues with its new-product development program with the successful launch of the SX-150, a 150-foot telescopic boom, several new articulated booms, and a new 6,000 lbs and 12,000 lbs telehandler as we continue to expand our product offering. The segment also continued its globalization efforts with revenue growth in Western Europe and Asia as it expanded its product offering. Overall, it was a good performance in a tough market.

Turning to slide 9 for an overview of our Crane business. While backlog was stable with the third quarter, it was down by about 20% when compared with the prior year. Uncertainty in the global oil and gas market continues to be the biggest pressure on demand. The North American crane market, and rough terrain cranes in particular, remains weak. The strongest performer in this segment continues to be our Utilities division, although we have seen recently some softening for this product category.

On the product side, our newly launched Explorer series five-axle, all-terrain crane is being well received and gaining market acceptance. Our Crane team must continue to work hard to improve our margins in this challenging market with new-product development, manufacturing productivity improvements and G&A reductions.

Turning to slide 10, our Material Handling & Port Solutions business sales in the quarter were down 24% compared with the prior year. During Q4 2014, we delivered on a large port automation contract and significant gantry crane orders, which were not replicated in 2015. This made for a tough year-over-year comparison. As we head into 2016, we expect mobile harbor cranes to remain stable after a strong finish to 2015, and improvement in our gantry crane business.

For the Material Handling business, industrial capacity remains sluggish, which is negatively impacting MH sales. On the product development front, we marked a successful EU and U.S. launch of our new modular Demag rope hoist that complements our V girder design, both of which you can see here on the picture on the slide.

Turning to slide 11, the Materials Processing business continues to perform steadily in terms of demand, with a book-to-bill ratio of 95% in the fourth quarter and slightly improved backlog versus the prior year. We have invested in new products to expand our portfolio and to aggregate Washing Systems and recycling. The integration of these products and acquisitions has been accretive to our results.

The North American market is the principal driver for improved performance. However, low commodity prices and weakness in the mining sector remain global headwinds for this business.

Now, turning to slide 12, Construction, which lost $9 million in the quarter, is clearly our most challenged segment. These losses were generated by our compact construction business, which continues to experience weak demand in Europe. Our concrete business, however, is doing well, growing its backlog, sales and improving margins for both the quarter and the full year.

Given our performance in this segment over the last several years, we are conducting a thorough strategic review to determine what course of action will best deliver consistent returns that exceed our cost of capital. Within the next 90 days, we plan to discuss this in greater detail, along with the actions we are taking.

Turning to slide 13, let's review our current expectations for 2016. Our customers remain cautious in the current global market environment. They are adjusting to the challenges of global commodity price declines, volatile currency markets, slower growth in China and overall geopolitical uncertainty.

In this environment, our focus will be on what we can control and what we can afford. In that spirit, we're aligning our cost structure and production volumes with market reality. We are moving forward, implementing a G&A expense reduction program throughout the company.

We are analyzing our global manufacturing, distribution and office footprint, we're also evaluating businesses that have not delivered an appropriate return and initiating actions to improve margins or make strategic portfolio decisions. Detailed action plans are being developed in all these areas, and we will be in a position to share these plans within the next 90 days.

We will not, however, sacrifice in areas of new product development or team member development. Both are critical to our long-term success, and we need to invest in these areas through the cycle. As a global company, it is critical to remain competitive in difficult markets. It will also better position us to capture the upside when the markets improve.

Now, Kevin will outline our 2016 expectations.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

On slide 14, we outline our expectations by segment. Four of the five business segments are expected to remain under top line pressure in 2016, with Materials Processing being the one exception. The largest impact on earnings will be from AWP, which is expected to post operating margins in the range of 10% to 11% on sales that will be 15% below 2015 levels. The Cranes segment faced a similar top line trend, down around 15% with operating margins in the 3% to 4% range. The MHPS segment expects to remain flat with prior year with an operating margin of roughly 2% to 2.5%.

On slide 15, you can see what the segment estimates mean in terms of overall company expectations. Net sales were expected to decline approximately 10%. Overall margin is expected to decline slightly to a range of 5.25% to 6.25%. Reducing our cost structure is an important part of this plan. These assumptions yield an EPS range of $1.30 to $1.60 per share. Given the lower AWP and Cranes backlog for Q1 delivery and that most of the additional benefits from cost reduction activities will occur in the second half of 2016, expectations are for a lower start to this year when compared to 2015.

Lastly, we expect another healthy year of free cash flow in the target range of $200 million to $250 million. John?

John L. Garrison - President, Chief Executive Officer & Director

Thanks, Kevin. Lastly, as you all know, this past summer, Terex announced the merger with Konecranes. As you also know, Terex recently confirmed that it received an unsolicited non-binding acquisition proposal from Zoomlion Heavy Industry to acquire all of the outstanding shares of Terex for $30 per share in cash. The Zoomlion proposal is conditioned on, among other things, receipt of U.S. and Chinese regulatory approval and Zoomlion shareholder approval.

At this time, the Terex board of directors has not changed its recommendation on the proposed combination with Konecranes. The teams are making progress in the antitrust filings in the U.S. and the EU, as well as the required securities filings in the U.S. and Finland. The merger with Konecranes remains subject to both Terex and Konecranes shareholder approvals, antitrust regulatory approvals and other closing conditions.

However, consistent with our fiduciary duties, the Terex management and board of directors, working with our legal and financial advisors, are in discussions with Zoomlion and are carefully reviewing the Zoomlion proposal to determine the course of action that is in the best interest of our shareholders. This process will take time, and we will have no further comment on the Zoomlion proposal until the discussions and analysis are complete.

And before we open it up to questions, I'd like to summarize by saying these are exciting times at Terex. We have some outstanding businesses and brands. Yes, our global markets are challenging, and we will confront that reality by executing to win. We will focus on the things that we can control, taking the appropriate actions with our production volumes and cost structures to improve our returns on capital throughout the cycle and by listening to our customers and investing in new products and services that provide our customers a competitive advantage.

Finally, I will say, the dedicated Terex team is focused on meeting our commitments. Back over to you, Tom.

Thomas Gelston - Vice President-Investor Relations

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

Question-and-Answer Session

Operator

The floor is now open for your questions. Your first question comes from Ted Grace of Susquehanna.

Ted Grace - Susquehanna Financial Group LLLP

Good morning, gentlemen.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Ted.

Ted Grace - Susquehanna Financial Group LLLP

So, the first thing I just want to ask – and I know you said you wanted to have more comments, I want to be fully appreciative of that. But just in terms of – could you talk to which inning you're in from the standpoint of evaluating the Zoomlion offer? It's obviously, arguably, the single most important factor people are looking at given the stock is at $20, the offer is $30 in cash.

And so, from the standpoint of kind of like the timeline that you're using to evaluate Zoomlion relative to the timeline you've outlined for Konecranes' closure, can you just help us kind of understand those two timelines and how they're kind of converging?

John L. Garrison - President, Chief Executive Officer & Director

Yeah. Thanks, Ted, and I am a former baseball player, but I don't want to use a baseball innings analogy. We are working very closely with our advisors, legal and financial, to evaluate the Zoomlion proposal. As that work continues and once the analysis is complete, we will be making public statements on the analysis and the direction. But until such time, and I think you're going to appreciate this Ted, and until that work is done, we really cannot have any further comments on the Zoomlion proposal.

Ted Grace - Susquehanna Financial Group LLLP

Yeah. That's fair enough. The – so, I guess the thing I was next hoping to run through is the guidance. If you look at the revenue guidance down 10%, obviously, there are six – or, no, there are five segments in that margin. But could you walk through, either you or Kevin, kind of how you would book end kind of key ranges on Aerial sales and Cranes and MHPS? I'm guessing, from a revenue perspective, those will be the most important. You've given some pretty specific guidance, down 15% or so, in the case of some of those.

And then, similarly, Kevin, I think you made a comment that restructuring cost will be a key part to reaching these numbers. Can you walk through kind of the game plan on the restructuring side, how we should think about COGS versus SG&A? And any color you can share there would be great, and I'll get back in the queue.

John L. Garrison - President, Chief Executive Officer & Director

Yeah. I'll kick it off and then turn it over to Kevin. In terms of the markets, as we said, on the AWP side, we're seeing down approximately 15%. That's principally on the headwind side really being driven by the North American rental market. And North American rental customers are, in fact, being cautious in their demands. We do believe we're entering into that replacement cycle impact. Offsetting that, on the AWP side, is that we are experiencing some growth in Europe and Asia, but clearly not at the level that the impact has in North America.

Likewise, in Cranes, the Cranes business is – the oil and gas impact or low oil prices of our Cranes business, especially in North America, has been profound. On the rough terrain cranes side of the business, our backlog is at levels that we experienced in 2009. So, the rough terrain cranes business is under pressure both in North America, the U.S. and Canada. It's under pressure in the Middle East, again, all associated with oil and gas. But we're also seeing they're not big markets for us, but we're seeing significant declines in places like Brazil, Australia, Russia, those other markets. So, the Cranes business on the headwind side, the mobile crane side, rough terrain cranes have been impacted.

On the positive side, we are seeing some reasonably solid volume in our tower cranes business that's helping to offset. So, those are the two principal drivers in the AWP and the Cranes of what's impacting the volume side.

And then, clearly, our job is – given that volume environment is to take the appropriate actions to drive to margin rates that are acceptable in this part of the trough. And so, that's what the team is focused on, our $202 million plan plus increased activities that we need to take to ensure that as we go through the trough that these businesses can yield reasonable rates of return in the market dynamics.

Kevin, do you want to add to that?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. Just maybe a quick comment on MHPS. We do have a new product. John mentioned the rope hoist. We do expect some traction from that. What's really happening to offset it is really a lack of industrial expansion on our customer side in this economy. So, that's why we're calling for flat in MHPS.

On the MP side, we've got an increase of about 5%. But really, the core crushing and screening component of that business is still under some pressure. So, a lot of that increase is coming from acquisitions that we made throughout the year in 2015, allowing for some financial upside on the top line.

Ted Grace - Susquehanna Financial Group LLLP

Okay. Maybe just – I'll go back in queue after this. But down 10% overall, is it plus or minus margin 250 basis points either way? I mean, just – could you frame kind of how you're thinking about the downside scenario versus the upside scenario in the context of down 10%?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. I'd say – I wouldn't want to give you a specific bracket around that. Certainly, we're not going to call it exactly a 10%. But where we're obviously keeping close attention to is the AWP side, right? It's got the most leverage on the income and has the most influence. Right now, we feel pretty good about 15% as the range there. But as the – as 2Q begins to come into full view, that's the one that we're watching.

Ted Grace - Susquehanna Financial Group LLLP

Okay. Well, best of luck this quarter, guys.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Thanks, Ted.

Operator

Your next question comes from Jamie Cook of Credit Suisse.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Hi. Good morning.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Jamie.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

I guess, just a couple of questions. One – sorry, back to the Aerial Work Platforms side, can you discuss what you expect this year just in terms of seasonality? Or how do we think about the cadence of orders or sales relative to history? And could you speak to just the competitive environment with one of your competitors still sitting on some excess inventory?

And then, my second question relates just to Cranes. The 3% to 4% margin, I think, would be heroic and down 15% sales here. So, can you just, again, provide a little more color, how much of that is sort of restructuring?

John L. Garrison - President, Chief Executive Officer & Director

Okay. On the AWP side, in terms of the seasonality, I think, we expect to see, I'd call it, a historical seasonal trend. The reduction in backlog at AWP really was associated with the large North American rental companies' pre-buys being lower on a year-over-year basis. So, I think we expect to see, on the AWP side, the historical trend.

In terms of the market dynamics, I don't want to necessarily comment about competitors' inventory levels. We are seeing surprising headwinds in the marketplace. And so, sometimes, pricing headwinds are the result of demand-supply imbalance. So, we're focused on what we believe the appropriate level of demand is. I will say that in these challenging times, from an operational perspective, one of the things that we have to focus on or tighten up is our overall pricing. And so, we'd look at our delegation of authority to control pricing to offset some of these pricing headwinds that we're seeing in the marketplace, especially in the AWP side.

On the Cranes side, there's two elements there that – one is the utility segment, which is incorporated in our Cranes business. That's a business we had a good year in 2015. We saw a little softness in the second half of the year, but that business, from a margin rate perspective, does well. The Cranes' activities, in terms of the initiatives in taking costs out of the business, will be important for us to generate the 3% to 4% operating margin that we've listed on the range. So, there are execution focus and challenges on our Cranes segment to deliver that 3% to 4% operating margin.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

All right. Thank you. I'll get back in queue.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

And, Jaime, I will just add to that. From my opening remarks, I think John is right, it's typically – typical seasonal pattern with the one exception being really we look at the specific backlog deliverable in Q1 for both AWP and Cranes. It does look like it's going to be softer than a typical seasonal pattern we might suggest.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's helpful. Thank you.

Operator

Your next question comes from David Raso of Evercore ISI.

David Raso - Evercore ISI

Hi. Thank you. You mentioned the potential of some portfolio changes, but I'm curious of the relationship right now with Konecranes, the Zoomlion offer. How has the decision-making process of those portfolio decisions impacted by what's going on with Kone and Zoomlion especially when it comes to timing?

John L. Garrison - President, Chief Executive Officer & Director

Right. Thanks, David. In terms of – our decision-making at this point in time is that we're going to make the best – the right decisions to the best interest of the business. And so, we're looking at all three scenarios. And if the decision is right under all three scenarios, then we'll make that decision and we'll implement that decision going forward.

So, we are factoring in – there are three scenarios that we have to look at. There are some decisions that frankly, I think, are appropriate under all three scenarios and those are the decisions that we will make, and those are the actions that we'll take and implement.

David Raso - Evercore ISI

Is there some consultation now taking place among the three parties, two parties, whatever the dynamics maybe related to those decisions?

John L. Garrison - President, Chief Executive Officer & Director

On terms of the Konecranes and ourselves, we do have an active process on the integration with Konecranes. And so, we do exchange information with both sides there, taking some actions to deal with the market reality. We are taking some actions to deal with the market reality, as well as discussions with Zoomlion and we do talk about our portfolio.

David Raso - Evercore ISI

And one clarification, I mean, for Kevin or Tom. To be clear, this guidance by business segments are not apples-to-apples. It's pro forma for some of the re-classes that took place, is that correct?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

That's correct, David. For example, in MP, the Fuchs business is in there in the forward-looking, but not obviously in 2015.

John L. Garrison - President, Chief Executive Officer & Director

In the recorded 2015, but the guidance – the change in sales, what it account for is as if it was in the 2015 numbers. So, the 2016 is an apples-to-apples comparison.

David Raso - Evercore ISI

No, no, just to be clear though, if you say Aerial is down 15%, it's not versus 15% the year-ago reported sales, it's year-ago with part of that crane service business?

John L. Garrison - President, Chief Executive Officer & Director

Yes, yes.

David Raso - Evercore ISI

Okay. Thank you very much.

John L. Garrison - President, Chief Executive Officer & Director

A relatively small piece there, though, David.

David Raso - Evercore ISI

Correct, correct. Thank you.

Operator

Your next question comes from Vishal Shah of Deutsche Bank. Again, your next question comes from Vishal Shah of Deutsche Bank.

Thomas Gelston - Vice President-Investor Relations

Vishal, are you there?

Operator

Okay. Your next question comes from Andy Casey of Wells Fargo.

Andrew M. Casey - Wells Fargo Securities LLC

Thanks. Good morning, everybody.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Andy.

Andrew M. Casey - Wells Fargo Securities LLC

I just wanted to dig in a little bit on the 2016 guide. You mentioned that it's going to start lower than 2015. Can you give us a little more detail about the spread within 2016?

John L. Garrison - President, Chief Executive Officer & Director

Go ahead, Kevin.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. Andy, we're not going to give quarterly guidance other than what we mentioned, which is really the Q1 pressure. Other than that, it's basically a typical seasonal pattern.

Andrew M. Casey - Wells Fargo Securities LLC

Okay. Thanks, Kevin. And then, within AWP forecast, if I go through the numbers, it seems to include low to mid-50% decremental margins. And I'm trying to understand how that may or may not be conservative, especially given the business had some early 2015 margin issues. Can you kind of walk through a little bit of detail behind that, the margin assumption?

John L. Garrison - President, Chief Executive Officer & Director

Yeah. One second.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

We're not – yeah, we're not seeing those same decrementals, Andy. I'm looking at the decrementals more in the 20% to 25% range. So, I'm not following your math on the 50% decrementals.

Andrew M. Casey - Wells Fargo Securities LLC

Okay. I'll follow up with Tom offline.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Okay.

Andrew M. Casey - Wells Fargo Securities LLC

Thanks.

Operator

Your next question comes from Ann Duignan of JPMorgan.

Ann P. Duignan - JPMorgan Securities LLC

Hi. Good morning, guys.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Ann.

Ann P. Duignan - JPMorgan Securities LLC

Good morning. Just one clarification on the MP guidance above 5%. Can you tell us how much of that is organic and how much is acquisitions? What would you be guiding to if it were organic?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. The organic piece would be down, Ann, so the increase is really all acquisition related. I'll see if I can get you a rough range on that on the organic side.

Ann P. Duignan - JPMorgan Securities LLC

Okay. That would be helpful just to understand. And then, can you talk a little bit about controlling what you can control? Your inventory stood at about 104 days versus 92 days a year ago. Can you just talk about your inventories by segment on what you can control there going into 2016?

John L. Garrison - President, Chief Executive Officer & Director

Yeah. I'll take that and then turn it over to Kevin. Ann, focusing on working capital and working capital improvement in a seasonal cyclical business is something that we have to focus on. And frankly, I think we acknowledge that we have to improve. We did have a growth in inventory, specifically a growth in our AWP segment. In that case, Kevin and the team made a strategic decision to build some inventory to put on the water for our European sales, so that made sense. We did see lower customer advances in our MH and PS sector principally driven by the port side. But also, we are seeing some favorability.

We did see improvements in our AR balance, partially as a result of lower revenue, but also improved collections efficiencies with our shared service centers. Likewise, on the AP side, we've seen some improvement on the AP side, as we've negotiated better terms with our suppliers. This is an area of focus for the team. We've instituted a biweekly cash call, net working capital call with all business segments that I lead. And we literally go down through their sales and inventory planning process, their receivables, their payables, raw WIP and finished goods inventory. And we understand where we are, so that we can get that laser focus on reducing the amount of working capital that's tied up in our business.

So that's a new process that we've implemented here in the last couple of weeks. It will take some time for it to gain traction, but the team is focused on driving improvement in net working capital. So to the point, Ann, that we've actually changed our incentive compensation system and there's an element now associated with net working capital improvement.

Ann P. Duignan - JPMorgan Securities LLC

Good. Great. That's good color. I appreciate that. And just one quick follow-up. Is there any sense that orders are being delayed maybe on some of the larger equipment ahead of the bauma equipment show or not really this year?

John L. Garrison - President, Chief Executive Officer & Director

I'd say, based on my conversations with my folks, I'd put it in the not really camp, Ann. We haven't had any – there will be always be some orders announced at the big shows, but those are in work long before the show. So I can't tell you that my team is saying they're seeing a delay in orders associated with the upcoming bauma show. If that changes, we'll let you know, but that's where we currently stand.

Ann P. Duignan - JPMorgan Securities LLC

Okay. Great. I'll get back in the line. Thank you.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. Ann, I just wanted to get back to you though on your first question. It's actually split both the core, the organic crushing and screening; and the acquisitions contributing about half. So it's split between the two in terms of the 5% growth. I had that wrong; I apologize.

Ann P. Duignan - JPMorgan Securities LLC

Okay. I'm not sure I follow. Organic then how much?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

About half of the increase coming from the core historic crushing and screening, and then about half from acquisitions on that...

Ann P. Duignan - JPMorgan Securities LLC

Okay.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

...on that 5% increase we're carrying.

Ann P. Duignan - JPMorgan Securities LLC

Okay. Thank you. I appreciate that.

Operator

Your next question comes from Nicole DeBlase of Morgan Stanley.

Nicole DeBlase - Morgan Stanley & Co. LLC

Yeah. Thanks. Good morning.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Nicole.

Nicole DeBlase - Morgan Stanley & Co. LLC

And so, my first question is just kind of a nitpicky one on the re-segmentation that you guys are doing. So I completely understand what you're doing with the sales. But are there any major puts and takes on margin from that re-segmentation or not really much change?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. So, the biggest one would be you'll see some compression in MP margin from moving our Fuchs business over. That business is in the, rough area, about $150 million with margins that were slightly negative in 2015 are expected to be flat to maybe slightly up in 2016. So that's probably the most significant of the restructuring. As John mentioned, the portion of North American services that's going into Matt's business isn't extremely material, and that's pretty much the total.

Nicole DeBlase - Morgan Stanley & Co. LLC

Okay. Thanks. That's helpful. And then, the second question is just around cost savings. I think, under the previous management team, you guys were targeting $202 million of run rate cost savings in three years. I'm just curious, how you feel about that prior cost saving program, if that's still in the table? And if it's not, what you're doing a little bit more specifically with SG&A, manufacturing costs, et cetera, in 2016? And also, I guess, what you've embedded in guidance from a restructuring payback perspective?

John L. Garrison - President, Chief Executive Officer & Director

Yes, Nicole. On the $202 million improvement program, by no stretch of the imagination are we walking away from that. That is a focus area for us. As you know, the team increased the objective last year to about $100 million. We actually came out of the year, I'd say, in the $115 million range. So, actually, some good improvement. We're tracking to the remaining $87 million to deliver in this year. Again, from a management operating review process, there's 50 of those projects that we review on our monthly operating calls. They're green or red. And if they're red, the team explains what they're doing to get them back to being green.

So, overall, we're tracking those. The challenge that we have is the market changed from the time we put those in place. And so we need to be a little bit more adroit at modifying our cost structure as a result of those changes, so that we can focus on acceptable margins throughout the business cycle. So the $202 million program is – remains a focus. The team executed well in 2015. We have to execute well in 2016 to ensure that we deliver on those commitments.

And then, on top of that, we're also looking at some incremental G&A activities. Those activities have started in United States, where you have a little bit greater labor flexibility. They will be implemented globally in accordance with the regional labor laws as we go forward to adjust some of our G&A expenditures given the volume levels that we're now anticipating as compared to when the $202 million plan was put in place.

Nicole DeBlase - Morgan Stanley & Co. LLC

Okay. Thanks. I'll pass it on.

Operator

Your next question comes from Rob Wertheimer of Barclays.

Robert Wertheimer - Barclays Capital, Inc.

Thanks, and good morning.

John L. Garrison - President, Chief Executive Officer & Director

Hi, Rob.

Robert Wertheimer - Barclays Capital, Inc.

One quick question. On those biweekly, I think you said – anyway, the working capital reports that you're doing, are you seeing anything sort of structural in the aging of inventory or other accounts that makes you worry that you have any stuck assets, or is it more just process in flow that you're trying to work down?

John L. Garrison - President, Chief Executive Officer & Director

I think it's more process in flow. I'm sorry, I've not been made aware of any issues and I'm looking at Kevin and he's going, no. So, it's really process in flow, driving your fundamental underlying business processes to utilize less assets in the business; principally it surrounds our S&OP or sales and operations planning process, and really focusing a lot of discipline in that process to take out, frankly, assets in the system that we don't need.

It involves – now, it does take time because in some case it does require lean implementation or improving our lean implementation, reducing cycle times and things of that nature. But those are the types of things that we focus on in these reviews. So I'd say it's flow and process, not any stuck inventory.

Robert Wertheimer - Barclays Capital, Inc.

Perfect.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

I'll just add to that. Another objective in addition to getting lower working capital is getting a more consistent level of working capital. Again, back to process, right, we do have kind of – we tend to have a little bit of heroics in end of month, end of quarter. Bottom line, we're trying to get sustainable and usable cash off the balance sheet, which means we got to have disciplined process that apply throughout the quarter and throughout the year. So, that's another focus of the monthly rigor.

Robert Wertheimer - Barclays Capital, Inc.

I'll stop there. See you tomorrow, guys. Thanks.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Thanks, Rob.

Operator

Your next question comes from Mig Dobre of Robert Baird.

Mig Dobre - Robert W. Baird & Co., Inc. (Broker)

Yes. Good morning. Guys, if we can go back to inventories relatively flattish year-over-year here. And obviously, your outlook for next year is down 10% on the top line. How do you see inventories coming out of 2016? And any color as to where maybe the biggest potential drawdown in inventory would be by segment level?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah. We're not forecasting inventory. And just kind of full disclosure, flattish, but on a currency-neutral basis, not a positive for 2016. So, we got work to do in inventory. I think we see the opportunity for reduction candidly being broad-based, not specific to any one business. I think it'll come out of – we're looking for it to come out of all of them because the process opportunity really exists across Terex.

Mig Dobre - Robert W. Baird & Co., Inc. (Broker)

I see. And then, maybe this is just clarification. I'm trying to understand the guidance, once again, given the moving pieces. When I'm looking at your Crane guidance down 15%, is this number a core number or does this also include the $130 million of service business that's moving out of Cranes?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

That does include the service business coming out of Cranes and into Steve's world.

Mig Dobre - Robert W. Baird & Co., Inc. (Broker)

Okay. So, core would be more like down 7% or 8% or something like that, right?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

I think it would still be double digit. I can confirm that – let me confirm that math for you.

Thomas Gelston - Vice President-Investor Relations

That growth percentage or in this case the decline of around 15% is as if the 2015 number had those businesses out of it, such that the 2016 reporting numbers, that would be the comparable for 2015. Now, when you look at what we reported as reported, it wouldn't tie to that. But what we wanted to do is give you something that you could look and model 2016 on the current structure basis.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Thanks, Tom.

Mig Dobre - Robert W. Baird & Co., Inc. (Broker)

Okay. Thank you.

Operator

Your next question comes from Jerry Revich of Goldman Sachs.

Jerry Revich - Goldman Sachs & Co.

Hi. Good morning.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Jerry.

Jerry Revich - Goldman Sachs & Co.

John, can you talk about your plan to improve the distribution for the Construction business and just flesh out for us the steps that you're taking? It looks like the move of Fuchs to Materials Processing is a step in that direction. I'm wondering if you could just flesh out for us the opportunity from aligning the distribution there and the broader plan for the rest of the businesses...

John L. Garrison - President, Chief Executive Officer & Director

Right. In terms of...

Jerry Revich - Goldman Sachs & Co.

Within Construction?

John L. Garrison - President, Chief Executive Officer & Director

Thanks, Jerry. In terms of moving Fuchs into the MP section, I think that business actually, in terms of the other businesses, sales and marketing distribution, distribution channel management, the opportunity to leverage in the environmental side, move away from just solely dependent on scrap and scrap metal. So I think we're looking for Kieran and his team to drive some improvements in distribution around the Fuchs business, given their existing distribution channel and that their business is a third-party distribution channel management business.

So we're looking for Kieran and his team to take that Fuchs business to a different level if you will. It will take some time getting the distribution up and in place, but we think there's some real synergy opportunities there and that's why that business was moved into Kieran into the MP segment.

In terms of Construction overall, clearly, this is a segment that has been under – has underperformed for quite some period of time. The company has taken action in the Construction business, and we've exited certain businesses, our skid steer business, trucks, road building. And so, we're analyzing the existing pieces of that business that remain and we're asking ourselves a fundamental question, can those businesses sustain long-term rates of return on capital greater than our cost of capital?

If they can, we'll keep them and improve them. And if they can't, they may be able to return something to a third party other than Terex. And so, those are the strategic analysis that I'm doing. And again, it's going to take a little bit of time as we look at it. There's a lot going on right now at Terex. But that's the analysis that we're doing on the Construction side.

In the Construction business portfolio, there are some businesses like the concrete business that frankly is performing quite well. And that's a business where the team has worked hard, come back, invested in our products and have got a competitive product in the marketplace now. And they're building backlog, building sales, and driving some margin improvements.

So, it's not universal. When I say construction, there are businesses within the Construction segment that we need to analyze and make decisions on them. That's what we intend to do.

Jerry Revich - Goldman Sachs & Co.

Okay. Thank you. And then, in Europe, can you just update us on where your sales are in Aerials and Cranes versus prior cycle highs. And you touched on tower crane demand picking up. Can you just calibrate us what's the magnitude of the pickup that you expect in Europe for your Crane and Aerials business embedded in your guidance?

John L. Garrison - President, Chief Executive Officer & Director

Yeah. We do see for Aerials sustained strength in Europe. Modest but sustained, certainly, relative to what we're seeing in the U.S. On the Cranes side, we are getting a little bit better traction, especially on our larger ACs and our crawler cranes, and we're expecting some of that to continue. Some of that is in Europe. It's probably all I have in terms of Europe.

John L. Garrison - President, Chief Executive Officer & Director

Right. And then just in terms of the other side on the globalization efforts that AWP is under taking, and about 40% of their EMER machines were produced in EMER in 2015. With the ramp-up in production of our Z-60 and S-60 in our production facility in Italy, we expect to see that grow to about 46%, 47% range, so an increase year-over-year. I think that's important. It gets us closer to the customer from a services support standpoint, and also helps to ameliorate some of the currency pressure that we're seeing. So, that's a strategy that Matt and the team have been on, and it's one that they need to continue to execute as we go forward.

Jerry Revich - Goldman Sachs & Co.

Okay. Thank you.

Operator

Your next question comes from Joe O'Dea of Vertical Research Partners.

Joe J. O'Dea - Vertical Research Partners LLC

Hi. Good morning.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Joe.

Joe J. O'Dea - Vertical Research Partners LLC

Just on AWP orders, a pretty tough comp in the quarter and, in absolute, still a pretty good level. So just trying to get a sense in 1Q, whether or not you're seeing some incremental softness from 4Q levels or – just because we can normally see some shifts from 4Q to 1Q, but how you think that plays out over the remainder of this quarter.

John L. Garrison - President, Chief Executive Officer & Director

I think I'd answer in this way. The biggest part of that backlog is preorders associated with the rental companies. And we do see some movement historically – right, guys – from Q4 to Q1. But I think the cautious outlook that the large rental companies have gone out with in terms of their CapEx requirements, I don't think we're anticipating a big shift from Q4 to Q1 in this environment. So, that's how that we're looking at the AWP side. And again, that's principally being driven by the North American rental market. And the large customers, our team's in daily contact with them and we think we're tight with in terms of what their needs and expectations are, and they're being cautious, kind of a wait-and-see attitude for 2016. And we think that really explains the backlog, and also explains why we're not expecting to see a dramatic increase like, I believe, we did a year ago or two years ago that shifted from Q4 to Q1.

Joe J. O'Dea - Vertical Research Partners LLC

Thank you. And then just on the restructuring front, it sounds like more details to come, but as you consider some of the options you have, are you able to give any sort of magnitude around the additional savings that you could wind up achieving in 2016?

John L. Garrison - President, Chief Executive Officer & Director

Joe, good question, but we need some more time to work on that and to ensure that we have detailed actionable plans that we can execute to. And as I get comfortable that we've got those detailed actionable plans that we can execute to, we'll indicate what the savings are and then also what the restructuring charges associated with that are. But unfortunately, right now, I'm not prepared to discuss the details.

Joe J. O'Dea - Vertical Research Partners LLC

Okay. Thanks a lot.

Operator

Your next question comes from Brian Chan of Bank of America Merrill Lynch.

Brian L. Chan - Bank of America Merrill Lynch

Hi, guys. Thanks for taking my call here.

John L. Garrison - President, Chief Executive Officer & Director

Hi, Brian.

Brian L. Chan - Bank of America Merrill Lynch

A lot of the questions were already answered. But just had a quick question, with the changing operating earnings expected for 2016 and 2017, it seems like mostly from the AWP segment. Is there any adjustment taking for the $1.5 billion worth of share repurchase after the Konecranes merger, on both the $500 million and the $1 billion afterwards?

John L. Garrison - President, Chief Executive Officer & Director

We haven't looked at that. I can say as part of the Konecranes integration efforts, we have teams looking at the purchasing and purchasing synergies. But to that level of detail, I can't say we've looked at, Brian.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Yeah, Brian...

Brian L. Chan - Bank of America Merrill Lynch

I'd, sorry, go ahead.

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

...any share repurchase will be based on where the business is performing at that time. But at this point, as John said, no change in expectations.

Brian L. Chan - Bank of America Merrill Lynch

Okay.

John L. Garrison - President, Chief Executive Officer & Director

I'm sorry. I misunderstood. Did you say share repurchase program?

Brian L. Chan - Bank of America Merrill Lynch

Yeah, the share repurchase program, right.

John L. Garrison - President, Chief Executive Officer & Director

No change in terms of any of our previous announcements as it pertains to the share repurchase program. Sorry about that. I misunderstood.

Brian L. Chan - Bank of America Merrill Lynch

No worries. And is there any type of like – so if you do the $500 million immediately and the $1 billion afterwards, are you going to base that on some type of leverage guidance or liquidity, or if you can help us think through what those decisions will be based off of, that'd be very helpful.

John L. Garrison - President, Chief Executive Officer & Director

Right. So, obviously, those decisions, as we previously indicated, will be based on market conditions and market dynamics; and obviously, our covenant and leverage ratio. So as we get to that point in time, that's how we will make the determination of quantity and when.

Brian L. Chan - Bank of America Merrill Lynch

Okay. Great. Thanks a lot, guys. Appreciate it.

Operator

Your next question comes from Eli Lustgarten of Longbow.

Eli Lustgarten - Longbow Research LLC

Good morning, everyone. Just one quick clarification, the guidance excludes foreign currency impact and there's no pension accounting changes at all?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

That's correct. We don't expect currency to move us outside of the range up or down in 2016. And there's no material expectation around change in pension.

Eli Lustgarten - Longbow Research LLC

Okay. And can we talk a little bit about how you're handling your dealer network at this particular point? You've got product changes, you've got two negotiations of merger or acquisition or so. What's going on with the dealers? How are they responding to it and how are you handling them as you go through this period of uncertainty?

John L. Garrison - President, Chief Executive Officer & Director

Right. And so, one of the things that we're laser focused on is focused on customers and dealers. And what's going on in terms of the potential merger does not impact them. And so, part of our opportunity and challenge is to keep the management team of the segments laser focused on their customers, the end customers and distribution channel partners. If they've got any questions or concerns, we address and answer those questions and concerns.

But fundamentally, those aspects of the business are not being impacted by the Konecranes merger or the potential Zoomlion situation. So the focus is on execute the business today, address any concerns that they have, but really it's about execution.

Eli Lustgarten - Longbow Research LLC

All right. Thank you.

Operator

Your next question comes from Vishal Shah of Deutsche Bank.

Chad Dillard - Deutsche Bank Securities, Inc.

Hi. This is Chad Dillard on for Vishal.

John L. Garrison - President, Chief Executive Officer & Director

Hi, Chad.

Chad Dillard - Deutsche Bank Securities, Inc.

Hi. How are you? So, can you just walk us through the moving parts behind the MHPS outlook of flat? How do you think about the Materials Handling part versus the Port Solutions? And then also, if I look at your 4Q revenues, they're a little bit lower than expected considering that you typically get a seasonal bump from the service business. So how should we think about the year-over-year comps as we move through 2016?

John L. Garrison - President, Chief Executive Officer & Director

In terms of the MH & PS segment, in terms of Port Solutions, we came off a strong year on mobile harbor cranes, as I indicated in my comments. And we expect that to remain basically at that level, not any significant growth.

On the gantry crane side, we expect a similar type of performance, a slight growth. And that's actually pretty good performance because overall container traffic right now on the Port Solutions or the port side of the business isn't growing at the rate that we thought it was. So those are the two principal drivers on the Port Solutions side.

On the Material Handling side, what's really driving a flattish type of demand on the Material Handling side is really around factory capacity utilization, both in North America and Europe. And factory capacity utilization is relatively low/modest right now. And it's causing manufacturers to delaying acquisition and purchases for equipment. So, those are the kind of driving forces behind.

The offset to those is really driving new product and new product development. And things like our V-girder and our new chain hoist give the customer the opportunity and the need to change what they currently have. And so, that's what product development in that segment, both on the Port side and the Material Handling side, is important for us as we go forward. But those are the dynamics, if you will, in the overall marketplace and the reason our guidance is what it is.

Chad Dillard - Deutsche Bank Securities, Inc.

Okay. That's helpful. And then just jumping over to Aerial Work Platforms. What are your pricing assumptions for 2016, and then how do we think about that netting out with material savings?

John L. Garrison - President, Chief Executive Officer & Director

I don't want to put a specific percentage on, but we have had pricing headwinds in certain markets in North America, it's been a headwind, and then was also experienced what I call the currency headwinds in other markets. So, it is a headwind and that's part of the challenge that we have, is to offset the headwinds in that segment going forward. And the team did a good job with the material price and manufacturing productivity, as I indicated in my initial comments, and we're going to have to continue that performance to offset the headwinds that we're seeing in the AWP segment.

Chad Dillard - Deutsche Bank Securities, Inc.

Okay. Thanks. I'll jump back in queue.

Operator

Your next question comes from Kwame Webb of Morningstar.

Kwame Webb - Morningstar, Inc. (Research)

Good morning, everyone. I just wanted to follow up on your R&D commentary. So number one, could you explicitly give us an idea of what will be up or down? And then also, I was fascinated by the emphasis on increasing research and spending in terms of development of service lines. So, I'd like a little bit more thought on that, and also what that might mean for reworking distribution and dealer relationships down the road, if you were to maximize the value of an increased service offering.

John L. Garrison - President, Chief Executive Officer & Director

So, thank you for the question. I'm a – I have a fundamental belief that you need to invest in your products and your services to be competitive in a competitive marketplace. And even in seasonal and cyclical businesses, it's hard to time a cycle. And so, you've got to have product plans that are focused on meeting the needs of customers and providing them with a compelling advantage. And so, as we go through difficult times, we will look to cut other areas other than our research and development.

In 2015, we spent about $119 million on engineering and R&D. Expect to be in the same basic range this year. Obviously, I don't want to give segment-specific information, I think that's competitive-sensitive. But the philosophy is very important, which is you must continue to invest in products and services, what – because we're capital goods, we sell it once and we maintain it and service either through distribution or ourselves for 7 years to 10 years to 15 years to 20 years. And so, that's the area in our strategy, in our strategy development that we'll focus on. I'm a firm believer in organic growth first through investment in research and development, and driving the organic growth in that area.

So, that's why there's an emphasis on we're in difficult, challenging times, our margins are under pressure, our job is to find ways to fund our R&D and not cut that to drive to incremental margin improvement. That needs to maintain at a certain level. Frankly, I'd like to increase it over time, this isn't the time to do it, but I'd like to increase it over time, and I'd like to be more efficient in other areas to fund that R&D growth. And that's what we're going to focus pretty rigorously on with our teams.

Kwame Webb - Morningstar, Inc. (Research)

And just as a quick follow-up, will any of those sort of new service or R&D offerings require any sort of rework of either third-party distribution, direct distribution, dealer relationships, to really maximize them?

John L. Garrison - President, Chief Executive Officer & Director

No, no, not really. I mean, you adjust your distribution based on certain geographical areas, and so the distribution model is specific to a business and business segment and to a region. And your R&D efforts may impact the distribution channel on the margin, if you will, but fundamentally, you're looking at what products and what services need to be delivered to that customer. In some cases, in some of our business, it's factory direct on the service side. In other cases, it's through an independent distribution channel. And so, as we look at the offering, we'll consider, is it direct or is it through a third-party distribution partner?

Kwame Webb - Morningstar, Inc. (Research)

Great. Thank you.

John L. Garrison - President, Chief Executive Officer & Director

And I think the models are different for our different segments. And we have to have the ability to operate in different segments because the businesses, on a global basis, are, in fact, different.

Kwame Webb - Morningstar, Inc. (Research)

Great. Thanks.

Operator

Your final question comes from Emily McLaughlin of RBC Capital Markets.

Emily McLaughlin - RBC Capital Markets LLC

Hey, guys. Good morning.

John L. Garrison - President, Chief Executive Officer & Director

Good morning, Emily.

Emily McLaughlin - RBC Capital Markets LLC

From the AWP side, you provided a lot of detail on what you're thinking with the national rental customers. I was wondering if you could give us some detail about what you're seeing from the independents or if it's more of the same.

John L. Garrison - President, Chief Executive Officer & Director

On the independents in terms of what we're seeing, I think it's more aligned with what our historical – it ebbs and flows a little bit quarter-to-quarter, but in terms of the independents, we're not seeing a substantial change in terms of percentage of sales through the independents versus the major rental companies.

Emily McLaughlin - RBC Capital Markets LLC

Okay. And then just a housekeeping question on your tax rate. I think you guys in the past have messaged that you're going to try to lower this each year. So, I was wondering what the puts and takes were around 2016's guidance.

John L. Garrison - President, Chief Executive Officer & Director

Kevin?

Kevin P. Bradley - Chief Financial Officer & Senior Vice President

Right. So, the tax rate, as you guys know, we've been investing in our global trading platform. We are getting a pickup from that both commercially, operationally and in tax line. Our issue in terms of not being able to really lower dramatically, our tax rate has been – a lot of that has been offset by losses not benefited, which actually were up in 2015. So, now, as John mentioned, we're putting together plans in terms of additional cost-out. Some of that is going to be specifically directed at countries where we've got this compounded issue of losses not benefited affecting our effective tax rate. So, that's an area that we've got to improve on.

Emily McLaughlin - RBC Capital Markets LLC

Okay. Great. Thank you for that.

Operator

That concludes the question-and-answer session of today's conference. I would now like to turn the floor back over to management for any closing remark.

Thomas Gelston - Vice President-Investor Relations

Thanks, everyone. We appreciate your time and interest in Terex today. If there are further follow-up questions, please reach out to myself. My contact information is available on the website or any press release, or other members of – John or Kevin Bradley. So, with that, I will say goodbye and we'll talk soon.

Operator

Thank you. This concludes your conference. You may now disconnect.

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