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OPERATOR: Good afternoon. I will be your conference operator today.
At this time, I would like to welcome everyone to the Terex
Corporation first quarter 2008 earnings release conference 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.
(OPERATOR INSTRUCTIONS) Now.
I would now like to turn the call over to Ron DeFeo, CEO.
RON DEFEO, CEO, TEREX CORPORATION: Thank you. Good morning, ladies
and gentlemen, and thank you for your interest in the Terex
Corporation today. On the call and available for your questions will
be Steve Filipov, Rick Nichols, Bob Isaman, and Tim Ford, our Group
Presidents. With me participating in the call is Tom Riordan, the
Terex President and COO; and Phil Widman, our Chief Financial
Officer.
A little housekeeping to accommodate our audiences in earlier time
zones or anyone unable to listen in. There will be a replay of this
teleconference. That will be available shortly after the conclusion
of this call. If can be accessed until the 1, of May at 5:00 p.m.
Eastern daylight time. To access the replay, call 800-642-1687 and
for International participants, 706-645-9291 with a conference I.D.
number of 42839012. Obviously you can also access our information
through our website.
So, let me get started. The first quarter performance we feel is
another positive step in what we expect to be a milestone year for
Terex on our way to the 12 by 12 in 10 goal. We have many
accomplishments to be proud of but also numerous opportunities to
address along the way. We're still a freshman in high school but I do
expect to graduate later this year to be a sophomore. Hopefully in
today's call, you can see that while there's some cross currents that
need to be addressed, we can and we will respond to these cross
currents as we achieve our near term goals. The first quarter
illustrates some of what I mean. Earnings per share. They were up 46%
and net sales increased a bit over 17%. Reflecting upon the revenue,
we did benefit by approximately 8 percentage points on net sales in
the first quarter relating to acquisitions and currency. Meaning that
our net sales were up 9% on an organic basis. This organic growth
rate alone will get us to about the $12 billion level in 2010 but of
course, we would expect to be making some acquisitions during this
period plus I'm hopeful that we can do better than this 9% organic
growth rate. All is not doom and gloom in our markets and I hope you
get that sense from our press release.
In the quarter, we had an operating margin of 10.8% up from the 10%
level of last year. This is probably the most challenging part of our
goal as achieving the 12% operating margin requires dealing with some
of the challenging cost environment that's in front of us. But in
fact, some of the same reasons why infrastructure spending globally
is so strong and the 70% of our business which is outside the United
States is so strong, also causes our input costs to rise. So, don't
fret. It is an issue but it is not -- it is not something that cannot
be overcome. To deal with this, we need to aggressively explain to
our customers the cost increase story and get price increases
appropriately. While we will be doing this, it does make for some
choppy forecasting which, as Phil will explain, is why we have
increased our average guidance but not pushed the full-year up
outside the higher end of the range we previously provided. It is
simply too soon to provide that certain of a view of how the timing
of the pricing and cost increase developments will play out in the
back half of the year. However, we also have the opportunity at Terex
to fix some of our underperforming businesses from a margin
perspective and we are doing this. In fact, we think some of the
moves we can make to help both our road building and construction
businesses simultaneously will begin showing benefits in 2009 and
2010. And this will be in the area of shared manufacturing assets.
Lastly, we have some really strong businesses that we expect will
stay this way and in fact, balance out our business portfolio. Look
at the strength in cranes with a growth of 26% year over year in the
quarter. Materials processing and mining with a growth of over 42%. I
know some had thought the area work platform business was teetering
on the brink but the first quarter actually illustrated growth in
both North America and International. For our construction business,
there's definite softening of certain countries in Western Europe and
the housing market in the U.S. remains quite weak. However, we
continue to view the current market place more as an opportunity than
as a near-term risk.
As our construction business has relatively low market shares that we
feel we can grow as we build out capability today for the future. All
in all, Terex remains strong and is getting stronger. We welcome ASV
into the Terex family of businesses as well as the bridge inspection
equipment Company of Hydra that is being added to our road building
operations. Superior high wall miners has already shown great
prospects for us as well, focused on coal which, as you know, is a
strong area of future growth.
Now, I would like to turn it over to Phil Widman who will cover the
corporate performance and then our president Tom Riordan will
highlight some of the noteworthy operating activities then, of
course, we'll take your questions. Phil?
PHIL WIDMAN, SVP, CFO, TEREX CORPORATION: Thanks, Ron. Good morning,
everyone. Before I begin, let me remind you that we will discuss
expectations of future events and performance of the Company on
today's call. And that such expectations are subject to uncertainties
related to macro economic factors, interest rates, governmental
actions and other factors. A fuller description of the factors that
affect future expectations is included in the press release and our
other public filings. I encourage you to read them.
Net sales reached a record for the first quarter at $2.4 billion, up
9% excluding translation impact of foreign currency fluctuations and
acquisitions. While our income from operations of $256 million
increased 28%. Net income increased to $1.59 per share from $1.09 in
the prior year period. You will recall that in 2007 we had an $0.08
per share negative impact related to the early extinguishment of
senior subnotes. Cash used in operating activities was somewhat
higher than last year but fairly typical for this time of year.
Return on invested capital which we now measure on an after tax basis
was 27.3% for the trailing four quarter period. The net sales
increase in the first quarter was driven mainly by materials
processing and mining and crane segments.
As worldwide infrastructure and commodity needs continue to provide
significant demand for our products. We also had overall net sales
growth in the iron work platform segment although a little different
than our geographic expectations. Excluding acquisitions and the
impact of currency, the remaining two segments were relatively flat
over the comparable prior year period. Income from operations
increased to $256 million and operating margin of 10.8% compared to
$201 million with operating margin of 10% in the prior year. Volume
growth in our more profitable segments, the positive impact of prior
pricing adjustments and the trend toward higher capacity crane and
mining products contributed positively to the result. However, we're
also dealing with commodity cost increases, efficiency challenges and
the negative impact on the quarter of the inventory valuation and
amortization effects of the recent acquisitions in some of our
businesses.
SG&A expenses increased in relation to net sales volume and on an
absolute basis. Representing our investment to improve our business
processes and capitalize on developing market opportunities. You'll
note that our crane and materials processing and mining segments
where we expect sustained strength in end markets contributed 60% on
the operating profit in the period while we still maintained
excellent AWP results. The effective tax rate in the first quarter
was 33.8% compared to 37.5% in the prior year period. The effect of
recently reduced statutory rates in several European countries had a
positive effect relative to the prior year as well as the fact that
the first quarter of 2007 rate included a discreet charge for the
repatriation of national cash.
Return on invested capital reached 27.3% again on an after tax basis
for the trailing 12-month period as we benefited from the excellent
trailing profitability. Our 2008 target excluding the impact of ASV
is 25.6%. The impact of the ASV acquisition will tend to dampen this
metric in the short term somewhat. We used $190 million in cash from
operating activities. $25 million more than 2007 period due in part
to a decrease in customer advances as we completed commissioning and
delivery of large crane and mining products. As well as a decrease in
receivable discounting. As is typical, our working capital increases
in the first quarter in anticipation of increased volume in the
midyear period. The level of working capital that trailing annualized
net sales reached 24.9%. 0.8% of a percent which relates to the
inclusion of recent acquisitions and 0.5 of a point to the
difficulties caused by the major flooding in Australia during the
quarter. This compares to 21.5% in the prior year period.
Our challenge with inventory is to improve processes throughout the
supply chain. Specifically, logistics and planning. We continue to
maintain our focus in this area. Debt less cash and cash equivalents
increased $522 million in the quarter to $769 million. Representing
23.3% of total capitalization, mainly due to the completion of
acquisitions, share repurchases of $52 million and the operating cash
activities mentioned earlier. We will continue to pursue
opportunistic acquisitions and invest internally for profitable
growth while executing our share repurchase program. With regard to
backlog levels, we continue to experience significant overall growth.
Up to $4.8 billion from $3.4 billion in the prior year. Again, this
represents orders that are deliverable in the next 12 months.
You will note this quarter we have not included approximately $210
million in potential backlog related to rough terrain, crane products
until we finalize pricing for 2009 deliveries. This is expected to be
resolved in the third quarter. Given our strong first quarter
performance, and assessment on the challenges and opportunities in
some of our end markets, the anticipated steel cost pressures and our
response to these factors, we're increasing our full year 2008
guidance to a net sales level of 10.5 billion to $10.9 billion and
earnings of $6.85 to $7.15 per share. The EPS midpoint would
represent a 20% increase over 2007 levels. With that, I'll turn it
over to Tom.
TOM RIORDAN, PRESIDENT, COO, TEREX CORPORATION: Thanks, Phil. Good
morning, everyone. I will cover our current views of end markets and
business conditions, review how some of our businesses -- how our
different businesses are performing then ramp up with an overview of
some of our key initiatives and challenges. The markets continue to
be reasonably strong on average as most regions continue to improve
their infrastructure which drives demand for our products. There are
clear differences in the relative strength of various geographies. We
believe we're reasonably well-positioned for the current economic
environment. The area work platform market continues to be somewhat
bifurcated. North America is still a solid but flat market. The U.K.
has slowed down based on recent customer consolidation and most of
Europe continues to be very strong along with the Middle East and
Latin America.
We're pleased with the performance of our AWP business in the
quarter. North America was up mid single digits, EMEA, which is
Europe, Middle East, and Africa was up high teens and Latin America
was up solid double digits with Asia Pacific down for us based on
recent severe weather in Australia that Phil mentioned along with
some localized Asian market softness. We expect Asia Pacific to
rebound fairly quickly. Our margins were good at 18%. We made very
good progress in continuing to build our global sales and service
infrastructure. As part of that, we recently announced our plans to
build a new plant in Shenzhou, China. This is very much in line with
our intent of having production capability located to serve regional
markets along with taking advantage of lower cost sourcing and
assembly capability for our global markets. Our AWP backlog and lower
trends continue to be very much in line with our expectations but the
North American market up slightly and the European market down
somewhat.
Moving on to the global construction equipment market, we see it
continues to be quite varied. North America continues to be depressed
but stable. Eastern Europe continues to be strong. Softness in the
U.K. and southern Europe and stable in the rest of western Europe
along with the Middle East, Africa and Asia all continuing to be very
strong. Our construction equipment business had a tough quarter.
While our net sales were up nearly 10%, this increase was driven by
exchange rates and by the ASV acquisition which is doing very well.
Cost pressures from steel and fabricated parts had an impact this
quarter along with some operational issues. Overall, our order rates
are solid, our backlog is up significantly from a year ago and we
expect good midterm performance from this group. Our first mini
excavator was recently produced and sold in Shenzhou, China.
Large infrastructure projects around the globe are driving the demand
for our cranes. The larger capacity cranes are continuing to see
unprecedented orders which is the core of our product offering. Our
cranes business had a very good quarter with significant increase in
backlog and a 300 basis point improvement in operating margins. We
continue to work on supply constraints diligently including our own
bottlenecks. We would hope to announce new plant capacity expansion
plans in the near future. The general environment for mining and
processing markets continues to be very strong. Basic material
industries are investing heavily to upgrade and expand their
capacities which is driving our product demand. We expect to see
these trends continuing for the foreseeable future.
Our material processing and mining business had a terrific quarter
with net sales up over 40% and profitability up nearly 50%. Similar
to our cranes business, we continue to stretch our suppliers in our
own capacities and are making good progress to relieve these
constraints. The recent severe rains in Australia also affected our
mining business which we expect to make up in the coming quarters. In
addition to the plant for India for material processing previously
announced, we hope to announce additional new capacity expansion
plans for both of these businesses in the near future. Backlogs has
continued to increase and we see very strong quoting and bid activity
particularly in mining.
The road building utility business continues to struggle although we
have continued to cut costs and overhead, fundamental sales and
overtrends in the U.S. remain soft. I mentioned in the fourth quarter
call that I expected to see improved margins in this segment in 2008.
With the steel cost increases we're seeing and the competitive
environment, we're likely to see very moderate improvement of
profitability this year.
Let me come back to the current steel cost situation. With recent
significant increases in iron ORE, coking coal, scrap steel, energy
and other costs associated with the manufacturer's steel, we're
heavily engaged in managing both availability and cost of steel and
related components. We have a number of fixed price contracts that we
expect our steel supply partners will continue to honor. Many of
these raw steel supply agreements with expire at the end of the
second quarter although many fabrication component supply agreements
continue past that. As price increase requests continue to come
through our supply chain, we're seeing strong cost pressures in
Europe and moderate pressures elsewhere. Our focused supply and
management team is working closely with local business leaders and
sourcing teams to ensure visibility and transparency with these cost
challenges.
Many of our larger and longer lead time products such as cranes and
mining equipment already have built in cost escalation contracts with
our customers. Shorter lead time products such as those in our
construction business have minimal pricing protection from existing
orders. That said, we also expect to be able to raise prices or add
surcharges in the vast majority of our businesses and products. While
we're sensitive to our customer's needs and aggressively working to
find other costs offset, we can and we will be raising prices to
cover these steel cost increases. Although there is no assurance it
will be 100% successful and there will be some timing issues, we're
confident that, in general, we'll recover the majority of these cost
increases.
Working capital continues to be an area of focus. We traditionally
built inventories in the first quarter in anticipation of the selling
season in quarters two and three and this year is no exception. With
the strong growth and demand for many of our products, along with the
ASV acquisition, our working capital as a percent of sales is
somewhat high. The positive side of this is the natural hedge against
some of the cost increases cited earlier as well as helping to
mitigate the supply disruptions. While inventory is always considered
waste in lean companies, we're prudently working to strike the right
balance for the benefit of our customers and our stakeholders.
The last area I would like to cover is the CHARTs management system
or our new company wide ERP system we're migrating to. The
implementation of our three pilot sites will occur around midyear.
While we have significant focus and some last-minute tweaking that
needs to happen, we're still very confident of the benefits and are
busy preparing for the next sites to be implemented in Q1 2009. At
this point, I'll turn it back to Ron.
RON DEFEO: Thank you, Tom. Thank you, Phil. A final point before
going to questions. Really, a point of reflection upon valuation of
our Company. If you examine three of our key business segments, our
materials processing and mining segment, this is a business that
revenue was up 43% this quarter and a total revenue -- on a total
revenue basis, it approximates the amount of revenue of a couple of
public comparables. It is a high mid teens operating margin business
and we think a high return on invested capital business and the
equity valuation attached to that certainly should be significant.
Reflecting upon our crane business, which grew 26% in the quarter
with a huge increase in backlog, probably an unparalleled position in
large cranes globally which should be giving us some sustained
performance, there is another public comparable out there from a
valuation point of view, leading to pretty substantial equity
valuations to be contributed from this segment. And, of course, the
area work platform business which is a business of $2.5 billion in
revenue approximately tremendously good returns on capital, of course
and high teens operating margin, 18% in the quarter. And there is
another public comparable from a valuation point of view.
Just those three plus, of course, the opportunity that exists in our
construction business and in our road building and utility business
which we intend to improve should argue for a substantially higher
equity valuation than we have today. We believe in this. We're going
to work on it. And we're going to continue making the changes
necessary in this Company to take us to the kind of performance that
we think is possible for Terex over the next several years. So, with
that, I would like to open it up to your questions.
OPERATOR: (OPERATOR INSTRUCTIONS) We'll pause for just a moment to
compile the Q&A roster. Your first question comes from Terry
Darling with Goldman Sachs.
TERRY DARLING, ANALYST, GOLDMAN SACHS: Thanks. I just wanted to come
back to the price steel cost issue which I think you guys covered
very well but a couple of follow-ups there. First, can you talk about
what you expect in terms of order of magnitude, the price increases
you're looking at to offset those pressures?
RON DEFEO: Terry, we are trying not to be so specific that somebody
can simply paintbrush a price increase because it really is all about
each one of our individual businesses. And we expect, frankly, to
recover the full amount of our cost increases. But that obviously
will vary because, in our crane business, as we said, we have the
opportunity to have some escalation, particularly in our larger
cranes. In our mining business, I think something similar to that is
true. However, our area work platform business will be a little bit
more challenged, particularly in the short term to recover that
increase although we're going to work hard to do that. So, it really
varies by business. But it is our intent with -- within the next six
to 12 months to fully recover our entire cost. If you reflect upon
the last time steel went up significantly, which is in the 2004
period, most companies, ourselves included, were caught a little bit
flat-footed, relative to how to price to recover these kinds of
increases. I think we learned our lessons. But that doesn't make it
any easier. And we -- I think have a pretty good road map. So, while
others are out there saying we're going to take prices up 5% or up to
5%, I just don't think that's an appropriate way to give guidance
here. Because we want to take prices up as necessary to recover the
cost, no more but certainly no less.
TERRY DARLING: Understood. Maybe come at it from a different angle.
Within your guidance, what increase have you assumed for maybe just
raw materials broadly?
RON DEFEO: I don't think we can tell you that, Terry, to be perfectly
honest with you. We have looked at what our variances are. We think
we have some sensitivity handicapped. But if we give you that number,
you're going to look at it and say what is your contingency to your
EPS guidance. And what I would just like to say is we look at this
rather holistically because, of course, there are other things that
are happening that are positive that may be offsetting this. So, that
is kind of the way we approach this.
TERRY DARLING: You've got great orders here and the backlog enhancing
visibility. You guys have touched on it. The big uncertainty is this
price cost differential. I'm trying to get a sense in terms of how
conservative or how aggressive your raw material assumptions in the
back half of the year might be. That's just where I'm going with the
question.
RON DEFEO: Here's the challenge to answer that question precisely,
Terry. And I know this is a little bit frustrating. Is that as Tom
indicated, we have some -- we have some agreements that we're seeing,
you know, no increases in steel to speak of because we have
commitments from those suppliers but those contracts run off in the
third quarter. And we're not sure yet, frankly, whether or not we're
going to have 5% increases or 20% increases. From some of our steel,
and we think there's some marketing that's taking place on the part
of steel that would have them argue for greater increases. And
simultaneously, we're going to argue for substantially lower
increases because we are combining our purchasing power at this
stage. So, we're in a -- we're in kind of a supply battle where, on
one extreme, you might say there is $100 million of risk and on
another extreme, you might say we can mitigate virtually all of that,
both through pricing and through some purchasing leverage. So, that's
kind of the state of play.
TERRY DARLING: One more related then I'll get off. Can you help us
understand the timing of when you will be in a better position to
know about that second half steel cost profile? Is that April, May,
June? Can you help us with that at all?
TOM RIORDAN: I would think that, again as Ron mentioned, the state of
play with suppliers and increases within the industry, I'm not sure
we're going to be able to give much more visibility before the next
quarter's earnings call which would likely be late July. I think we
need to be cautious about announcing any strong intent here because
one, we've got a very widely varying situation with our products and
geographies and secondly, I think we also got a widely varying
sensitivity on the part of different end markets relative to pricing
receptiveness. So, all in all, I think it is going to be somewhat
choppy. The steel companies themselves continue to posture and change
their position somewhat in real time as we speak. And I think the
story likely will come out over the next 90 days or so.
TERRY DARLING: Appreciate the help.
RON DEFEO: Okay.
TOM RIORDAN: We're trying to be helpful, Terry. Frankly, we think
we've got pretty solid guidance here and it would have been easy to
try and give a simple answer but it is a little bit more complicated.
OPERATOR: Your next question comes from Andy Casey with Wachovia
Securities.
ANDY CASEY, ANALYST, WACHOVIA SECURITIES: Good morning, everybody.
RON DEFEO: Good morning.
ANDY CASEY: A little bit of clarification on the revenue and input
cost guidance and the comments. Are you including this expected raw
material pricing in the increased revenue guidance? It really doesn't
look like you are.
RON DEFEO: In the increased revenue guidance?
PHIL WIDMAN: Not specifically, Andy. One of the increases in there is
also ASV. That's part of it.
ANDY CASEY: Yes.
PHIL WIDMAN: It was not pricing that caused us to increase our
revenue guidance.
ANDY CASEY: I just wanted to clarify that, thank you. And on the
normal 50/50 first half to second half seasonal earnings mix, do you
expect that within this guidance to shift more heavily to the first
half?
PHIL WIDMAN: No.
ANDY CASEY: Okay. And then lastly, on the U.K., AWP customer
consolidation issue, do you expect that to, persist through this year
or is it just pretty much contained in the first half?
RON DEFEO: Tim, would you like to answer that?
TIM FORD, GROUP PRESIDENT, TEREX CORPORATION: Sure. We think that the
consolidation has a first half effect. We believe that the customers,
once they get a sense for what their situation is will begin to
release some orders for second half.
ANDY CASEY: Okay. Thank you very much.
RON DEFEO: Okay.
OPERATOR: Your next question comes from Jamie Cook with Credit
Suisse.
JAMIE COOK, ANALYST, CREDIT SUISSE: Good morning and congratulations.
I guess my first question, I think you guys, on the area work
platform side, I think in your prepared comments, you said North
America was up mid single digit or at least it seemed pretty solid. I
think when you guys had originally given guidance, you talked more
about a flat market. I guess I'm surprised by the strength of the
market. Was it market share, was it pull forward? And can you just
talk about what you're hearing from your customers anecdotally giving
the weak AVI numbers, commercial construction numbers in general, how
you think that market sort of -- how we see the market evolve
throughout the rest of the year.
RON DEFEO: Tim, why don't you answer that.
TIM FORD: Our North American market has remained more buoyant than we
thought it would. In the fourth quarter, Jamie. The customer base in
the U.S. is -- continues to perform well. We've had some market share
gains that have been favorable for us. And frankly, all of our
customers haven't put orders in for the year. So, we think that we're
in a pretty good position for the remainder of the year in North
America. We think North America will be a decent story for us this
year.
JAMIE COOK: Okay. And then I guess, too, can you just talk to some of
the your comments, while it was more related on the construction
business but within western Europe, it sounds like the macro
environment has deteriorated a little which is a big part of the area
where platform business. Outside of the customer consolidation that
you saw, how are you looking at those markets and how big is the
developing markets at this point? Because I think the obvious concern
is the area where platform which is a significant percentage of your
profits is going to -- this is the best to come and I think everyone
is pretty concerned about how we should look at 2009.
RON DEFEO: Okay, Jamie. Well, there are several things of good news
to emphasize, really. First, our area work platform profit was up
over a year but as a percentage of our profits actually meaningfully
down. And that's really due to the improving profit performance of
our crane business and our materials processing and mining business
which we have been saying for several years but I think frankly, I
think has been falling on more deaf ears than people listening. So,
from my point of view, I think that's a good sign.
The other thing that we have said for some time is the
diversification of our revenue base outside of traditional markets.
And that continues. If you examine our business while the western
European markets particularly markets like the United Kingdom, Spain,
some of the southern European markets have shown weakness, not just
in area work platform business but also in construction, our
construction product businesses, that is more than offset in most of
our businesses, at least, by the strength in the eastern European
markets and the oil booming regions of the Middle East and, in fact,
some beginning significant improvements in our revenue in Russia. So,
we are seeing a move east and south from our European factories that
is being reflected both in our area work platform business and to a
degree, in our construction business. The crane business remains
pretty solid across that range. And the mining and materials
processing business remains pretty solid across those ranges. So, I'm
feeling like -- and Steve Filipov here, he's got a lot of work to do.
But as you examine the performance of our business, we're really
seeing our western European business actually slow somewhat and our
developing markets continue to accelerate.
JAMIE COOK: Let me ask you this. In the area of platform business
then I'll get back in queue. You only report backlog through the end
of the year. I mean what -- do you have orders that would go into
2009 and how would that compare to last year?
RON DEFEO: We do report, Jamie, remember, 12 months.
JAMIE COOK: So beyond the 12 months, I guess.
PHIL WIDMAN: So -- our backlog for 12 months is as reported, there is
a small amount beyond that that we have that is not reported.
JAMIE COOK: In the area work platform division.
PHIL WIDMAN: Right.
JAMIE COOK: And how would that compare if we were to compare this
year versus last year, would a lot more go beyond the 12 months?
RON DEFEO: I would say it is pretty much steady state like it was a
year ago.
JAMIE COOK: All right. Thanks. I'll get back in queue.
OPERATOR: Your next question comes from Alex Blanton with Ingalls and
Snyder.
ALEX BLANTON, ANALYST, INGALLS & SNYDER: Good morning. On the
customer consolidation, I think you said was in the U.K. In the AWP
business, I take it those were rental fleets that you're referring to
and could you give us some details on what exactly that was?
TOM RIORDAN: Our market in the U.K. has really seen a consolidation
in the last 90 to 120 days where two or three companies have been
merged together and those companies -- the acquiring company is
evaluating the fleet overall and is assessing what their needs are
going to be as they go forward.
RON DEFEO: Alex, this is really -- this is pretty typical in our
industry. I think in the short term, it causes orders to be canceled
as fleets get rationalized but frankly, that's good news. I would
rather have that happen than for us to continue to push inventory
into the market place that's later going to be rationalized with a
more disruptive downturn.
And I think if I reflect upon, I guess my nearly 20 years experience
in this business, now, which is frightening for me to think about,
frankly. But I think it has given me some perspective. What we're
seeing is a much more thoughtful and analytical approach to fleets,
to mergers, to combinations than I have seen historically. We have
seen companies that don't go up to the edge and fall over. We see
companies that look at the market place and say the market is
changing, therefore, we're going to change and we're going to make
our company stronger and I think that's frankly good for our
business.
ALEX BLANTON: All right. Tim, could you give us the names or could
you care to mention the names of the companies that have merged
together?
RON DEFEO: We really don't want to do that. I don't think that's
appropriate for us to do. But I think if you -- probably ask our
competitors, maybe they'll let you know.
ALEX BLANTON: Well, I can pursue that later. The second question is
on ASV which I followed at one time before you bought it.
RON DEFEO: We do know that, Alex.
ALEX BLANTON: You said they're doing well. Of course, we only have
one month of sales in your numbers that you have disclosed. So, we
really can't tell from that what the results are. Year over year.
Could you give us some more details on that? Because they were being
heard, of course, by the housing business, dropped off substantially
for them in the last year or two. And I wondered if there is a
recovery taking place there and to what degree.
RON DEFEO: Alex, I'll first make a comment and then pass it over to
Bob Isaman who is leading that integration. But when we say ASV is
doing well, it is doing well against the goals and objectives that we
set for ourselves. We want ASV to be an important contributor to the
Terex Corporation. We have specific things we want to accomplish with
that business. Both the build franchise and North America to expand
it more globally, to help integrate some of our other products. And
we couldn't be happier with the leadership team that's there. And
with their openness and willingness to participate in the same goals
and objectives that we have. So, in our opinion, doing well at this
stage is about seeing the same opportunity and attacking that
opportunity with passion and vigor. We do think that the U.S. housing
industry is down. We are certainly glad we did not go long with the
number one franchise in that industry. And because we think they will
have a difficult time in the short term but we think that provides us
opportunities. Bob? You want to add anything?
BOB ISAMAN, GROUP PRESIDENT, TEREX CORPORATION: Well, yes. We
currently have ASV in the integration process. In the Terex
integration process. But if you look at their platform and their
technology, there is a lot of runway to take their technology, their
undercarriage technology and integrate it with our current light
construction product line. There is tremendous opportunity to use the
ASV base in Minnesota as a manufacturing platform for us in the
Americas which will help to offset the effects risk that we have. I
think lastly, there is tremendous runway for us to move that product
line into Europe. And they've recently got certification in Europe.
So, we're very excited about that.
ALEX BLANTON: Have you done anything about that in terms of moving
their business overseas which most of it was over 90% was U.S. or
domestic, I should say, U.S. and Canada.
BOB ISAMAN: Certainly more to come. Answers, yes. But again, we're
into this less than two months.
ALEX BLANTON: Thank you.
BOB ISAMAN: All right.
OPERATOR: Your next question comes from Charlie Brady with BMO
Capital Markets.
CHARLIE BRADY, ANALYST, BMO CAPITAL MARKETS: Thanks. Hey, with
regards to the crane segment, you highlighted the RT cranes as having
a backlog priced, can you comment on what it looks like beyond the 12
months for crawlers and for the all terrain crane market?
RON DEFEO: Rick, you want to comment on that?
RICK NICHOLS, GROUP PRESIDENT, TEREX CORPORATION: Well, is this a
pricing comment? I don't quite understand.
CHARLIE BRADY: Overall demand and sort of build slots beyond the next
12 months and I guess that also accounts for pricing into that as
well. But obviously you have the escalators give you some protection
on that.
RICK NICHOLS: We certainly have build slots scheduled for our
customers on the all terrain cranes and the crawler cranes out
through 2009 and probably into 2010 in some cases. We do have
escalation built in to protect us on price in most cases. So, we are
booked out farther than the current backlog.
RON DEFEO: Our backlog, again, is a 12-month backlog. It is product
that we expect to deliver. In addition, we have that $210 million
that we highlighted but we do have customers that are reserving slots
well past the next 12 months. What that tells us is two things. One,
that the opinion of our customers is that they expect
infrastructure-related projects to remain quite strong because it is
mostly the big cranes that, here that work. And the kind of things
we're talking about is cranes to build nuclear power plants, cranes
that build wind power. Cranes that move massive bridges. And, it is
the type of cranes that really aren't available from many other
manufacturers in the world. So, if you are in the business of renting
and positioning those cranes, you want to get build slots. But it
also tells us that in this crane business, we have to work to
increase our capacity. Because customers waiting three years for
cranes, if they can find an alternative is also not a particularly
good position to be in. So, that's what we're doing.
CHARLIE BRADY: With regard to the capacity increase you talked about
within cranes and also in the mining segment, would anything you're
contemplating have an impact on 2008 or is that really sort of a 2009
beyond impact.
RON DEFEO: 2009, I think. Primarily 2009. We should have some minor
late fourth quarter 2008 incremental help on some primary
fabrications, et cetera. But it is primarily 2009 and 2010.
CHARLIE BRADY: Within the construction segment, you commented on the
Motherwell, Scotland facility, can you sort of expand on how do you
define temporary shortfall and when you might expect the volume
opportunity and cost reduction opportunity to come through.
TOM RIORDAN: Sure. What we did in Motherwell, Scotland was we took
two manufacturing lines that made arctic trucks, articulated off-road
trucks and combined them into one mixed use line. And we did that to
tree free up -- to free up space to be able to manufacture more rigid
trucks in order to put more throughput through that manufacturing
facility. Whenever you do that, you have a temporary disruption in
your ability to produce. So, that's a short-term, one-time issue, we
expect the second quarter to be back up probably a little bit higher
than where we thought we were going to be in first quarter.
CHARLIE BRADY: One final question. I'll get back in the queue. On the
road building segment, would you expect Q1 to be the last quarter to
see a loss in '08 or are we still having some problem here in the
first half?
TOM RIORDAN: My belief is that the loss in Q1 is not acceptable
performance between road building utilities. I think there are a
number of things that are challenging. I'm not certainly in a
position to guarantee strong profitability but I do believe our
second quarter and balance of the year performance will be improved
as compared to our Q1 performance.
CHARLIE BRADY: Thanks very much. Great quarter.
TOM RIORDAN: Thank you.
OPERATOR: Your next question comes from Steven Volkmann with
JPMorgan.
STEVEN VOLKMANN, ANALYST, JPMORGAN: Good morning, guys. Just maybe
some comments on the cash outlook. Maybe Phil, but as I look forward
on the year here, how should I think about how working capital as we
go forward and it sounds like there is a few things you're doing on
the capacity side which maybe flows through into CapEx I assume and
give us a sense of what we should be looking for there.
PHIL WIDMAN: Okay, Steve. Start with the last piece of the CapEx
side. We're staying at our guidance level of $160 million for the
year which includes several investments in capacity expansion which
Tom alluded to earlier. In terms of working capital, it is still one
of our challenges as I mentioned in the release. I would expect we'll
see improvement as we go through the year but with the very large
products in mining and cranes, it does cause some lumpiness. But from
a process standpoint and programs that we've got in place, we should
see improvement as we go through the year. Typically, we generate
most of our cash in the back half, however, because of the high
second quarter volume we have is kind of a neutral quarter and then
we generate in the third and the fourth quarter periods. But I would
say our working capital as a revenue relationship should come down as
we get further into the year.
STEVEN VOLKMANN: Okay, great. The tax rate, I was interested that you
changed your ROIC to after tax. Should I read that as incentivizing
the team to focus on the tax rate and try to bring that down?
RON DEFEO: You can believe that, Steve. It is the prime measure for
near term objectives and--.
PHIL WIDMAN: And incentive comp.
RON DEFEO: And incentive comp, that's right.
STEVEN VOLKMANN: Should it be down over the course of the year here?
RON DEFEO: I think long-term, we really believe we can make a big
difference here. Handicapping it immediately is kind of challenging.
STEVEN VOLKMANN: Okay. Fair enough. And then the comments about the
cash, the working capital, Phil, in terms of -- I don't have the
words right in front of me but something about the mining and crane
that you get cash payments, I guess when you get orders and then
those go away when you deliver them or something.
PHIL WIDMAN: The advances, yes.
STEVEN VOLKMANN: I'm sorry. So, I guess I'm trying to square up the
fact that that was a negative on cash. With the fact that you still
seem to be getting lots of orders. How should I think about that?
PHIL WIDMAN: The timing of when you get cash on some of these
products, there is usually -- I'm talking in the very large mining
equipment and cranes. Maybe 10% to 15% when you get an order and as
you get closer to the delivery time frame, when it is ready to ship,
you might get 60% of the cash and then the remainder closes out as,
when you recognize revenue basically on commissioning. So, in the
fourth quarter, we were in the process of delivering several of these
including the twin boom 8800 we talked about over several quarters
actually. We finally completed that in the first quarter of the year.
So, it is again, the lumpiness of that. We still will achieve cash
advances on the larger orders but given those and the RH400s we
delivered in Canada, again, very large. We're really getting the 60%
kind of number in the prior year and then completing it this year,
they roll through.
STEVEN VOLKMANN: That's what I was referring to.
RON DEFEO: One quarter to the next, it can swing cash 20 million to
$40 million in that range.
PHIL WIDMAN: Very lumpy.
STEVEN VOLKMANN: I can't really read anything with respect to like
your filling out orders for really big stuff but taking in orders for
smaller stuff or something like that.
PHIL WIDMAN: No, because of the mix, again, the percentage over the
time. It is going to be fluctuating.
RON DEFEO: You also should not read into that, any change in our
terms practice either.
STEVEN VOLKMANN: Fair enough. Good. Then just a final one from me.
Just starting to make some decent headway on the margin side, I guess
on a bunch of the business, is there any change in terms of what your
expectations are for the longer term in terms of margin opportunities
in the segments and specifically, I guess I'm thinking as you've
talked about localizing production more globally and I assume that
perhaps as a potentially bit of a headwind on margins because you're
probably getting some benefit from currency and export and so forth
now that you might not get in the future. So, I'm just trying to
square up how I should think about that longer term.
RON DEFEO: It's a good question, Steve. And in fact, the way I think
about it is reflected in my 12 by 12 in 10 goal because when I
committed to the 12 by 12 in 10 goal, I did expect that we would have
both positives as well as negatives. The currency won't always help
us. But, raw material costs won't always be a strong a headwind as we
have here as well. And we won't always have construction at a very
low margin and road building and utility at a very low margin. Nor
did I expect necessarily that AWP would stay at an 18 to 20% margin
all the time. But nor did I expect cranes to continue when we started
at the high single digits margins which is now in the 13% operating
margins. So I really looked at this in the fullness of a cycle and
said hey, we ought to be able to deliver 12% operating margin when
not everything is going well. Which means that if, per chance and it
has never happened since I've run this Company now for 15 years,
everything goes well at once. Our margin ought to be in mid teens.
On the flip side, if everything goes bad, all at once, which has
happened once or twice but not recently. But now, I think we got
ourselves positioned so we're in the high single digits at least. So,
I really think our business is so different today than it was a
number of years ago and it has to be. Almost by definition. We've
come from nothing. We're a 10 billion to $11 billion Company that has
the best returns on capital in the industry and if not, the best
clearly right there with the best. And so my feeling is that we have
totally changed how this Company has been positioned. Yet we don't
have deeply rooted processes that we can say are as sustainable as we
would like to have. Which is why we're building in the lean
processes, why we're building in a Terex management system. Why we
are changing our manufacturing footprint, supply chain. Why we're
initiating many supply chain programs. That is what's going to take
Terex from being a sophomore in high school which we aren't quite yet
to the university. And so I'm very optimistic but I know we have --
we have some choppy markets and choppy situations to still work
through.
STEVEN VOLKMANN: Okay. Great. If I could just sneak one more in. You
made a comment that intrigued me, Ron. You said you're going to make
sure that you get pricing to offset your raw material costs but no
more, I think. And I don't know, hopefully I'm not putting words in
your mouth. But I was intrigued by that because clearly in your end
markets, there ought to be an opportunity to maybe get a little more
and it is maybe make hay while the sun shines and is there a
philosophy there that you want to talk about?
RON DEFEO: Well, we have fortunately some of our customers absolutely
listen in to these calls and we want to assure our customers that we
are not going to use the raw material cost situation to have their
cost of business go up unnecessarily. Because it is easy to say when
times are good you should get every last penny but that comes back
and haunts you. We're interested in building relationships with our
customers and have our customers understand that when they buy a
piece of equipment manufactured by Terex Corporation, they're going
to get the highest returns on capital possible because we will
deliver to them great value, great performance, good follow-up
support, and they have confidence, therefore, when they purchase from
us that we're not just about making today's return. We're about
making a long-term relationship. And that's what's going to take
Terex from a number three franchise player in the globe to a bigger,
more diversified and successful enterprise.
STEVEN VOLKMANN: Thanks. I appreciate the time.
RON DEFEO: Okay.
OPERATOR: Your next question comes from Andrew Obin with Merrill
Lynch.
ANDREW OBIN, ANALYST, MERRILL LYNCH: Good morning. Great quarter,
guys. Just -- most of my questions have been answered but just have a
couple of technical questions. In terms of this one-time item,
roughly $7 million, that we got, should I expect this benefit to
continue throughout the year?
RON DEFEO: Which one-time item are you referring to?
ANDREW OBIN: Not a one-time item. I think it is other income of $6.6
million.
RON DEFEO: Oh, some of the exchange of minority interests. Not
necessarily.
PHIL WIDMAN: No, not necessarily. That doesn't fluctuate quarter to
quarter. Minority interest in there is there for different
acquisitions and so on as well as some of the currency gains.
ANDREW OBIN: Should I be modeling it at zero roughly for the end of
the year? Is that safe?
PHIL WIDMAN: I think that's safe, yes.
ANDREW OBIN: The second question, just -- I noticed a language change
on road building where you are talking about possibility of
revalidating the fair value of the business. Could you elaborate on
that a little bit?
RON DEFEO: Sure. As disclosed in our 10-K, we do an annual assessment
on fair value of our goodwill and intangibles. As of October 1. The
road building portion of our business is the one that's the closest
to the fair value difference versus what we're carrying. When you
look at the performance of that business, if there is a triggering
event, their performance doesn't meet our expectations, we may have
to reevaluate that. We didn't quite get to the second step of
reevaluation in the first quarter but if continued performance
doesn't realize versus our plans, we may have to go further in terms
of that. In total, we have about $34 million of goodwill in that
business. So, that would be let's say the worst case. But again, as
of this stage in the first quarter, there's not a need to do that.
ANDREW OBIN: And I know the question on the tax rate has been asked
but just want to clarify. What should I model for the rest of the
year?
PHIL WIDMAN: Again, Andrew, we're not changing from our guidance of
the 35% but, it is one area that we're expecting some opportunity in.
ANDREW OBIN: Thank you. So, there could be changes through the year
but you're just not modeling them right now.
RON DEFEO: Andrew, I think, as you reflect upon Terex with your
constituencies, I would suggest that we still are pretty positive. We
still feel very positive about our Company. And you've been following
us a long time and I would encourage -- I really would encourage you
to look at the total valuation of us because I think there is
opportunity here.
ANDREW OBIN: Thank you, Ron. I appreciate it.
OPERATOR: Your next question comes from Charlie Rentschler with Wall
Street Access.
CHARLIE RENTSCHLER, ANALYST, WALL STREET ACCESS: Yes, good morning.
You've given us -- I guess you've snugged up the guidance for '08 and
repeated the goal for 2010 which gives us kind of a trajectory to
think about but what I'm wondering is as cranes and material
processing and mining become bigger engines in pulling the Terex
profits say relative to AWP, I'm wondering -- I sort of think of a
lot of that equipment as being late cycle. Maybe I'm old-fashioned
but I think of that as late cycle and AWP is maybe early mid. But can
you talk a little bit about your thoughts about '09 because -- do you
think that those businesses will stay strong just because they're
global and they benefit from infrastructure and nuclear, et cetera?
RON DEFEO: I think, Charlie, the thing I would like to say and I
clearly do not want to come across here as having the answer but I
will give you my perspective on this because I don't think there is
an answer. But over the course of time, our businesses have
essentially been North American and European based. And our industry
has essentially been North American and European based. And when
North America went down, Europe was sure to follow. And we got a
periodic boost from Asia but it really wasn't that big of a driver of
the businesses. That is clearly different today in a very, very big
way. And that we're seeing in our material processing, in our mining
business, and we're seeing that in our crane business as well. And in
part, that's because we do have economies that are being driven by
some of the changes in raw materials as those economies go through
drastic growth periods. You know it, India, China, Russia, many other
markets in Asia. Many markets in eastern Europe. And as you see the
petro or the oil effect which is essentially taking dollars from
those that need the oil to dollars that -- to markets that have the
oil, and then having those markets reinvest in their own
infrastructure. Such as the Middle East. That's what's different
today. And that's not about late cycle. It is about longer cycle. And
the longer cycle is clearly in play in our crane business and is
clearly in play in our materials processing and mining business.
I do believe it is long enough to take us well past 2010 and I think
whatever disruptions or bumpiness we'll see in our area work platform
business, will be back in a strong period in the 2010 period and I
also think that area work platforms will be a product for the
developing markets also. And then, if you back up and say well,
what's going on with construction products, that's another big
opportunity for us because we plan to participate in those developing
markets and while we are still not one of the big players, a big A
player in a market that needs equipment can be a big growth
opportunity for us. So that's why I'm generally bullish about our
overall business.
Okay? All right. Let's take the next question.
OPERATOR: Next question comes from Robert Wertheimer with Morgan
Stanley.
ROBERT WERTHEIMER, ANALYST, MORGAN STANLEY: I keep getting surprised
by the currency that there is not more flow through the margin and
revenues. And maybe this quarter provides the answer. Is euro
denominated sales related occasionally maybe of 10% of the business?
Or is that why the currency flow through on the revenue line was low?
PHIL WIDMAN: I missed part of your beginning, Robert but I think I
know what you're getting at. The way we look at our translation
effect on revenue, AWP, we distribute through the U.K. There wasn't
much movement on the sterling year over year. So, we're looking at
converting that. In Australia, versus the U.S. dollar, the U.S.
dollar -- weakened quite a bit versus Australia and part of the
impact of the flooding caused some of that impact downward year over
year. There is some sterling to Euro that may be a little higher than
what we've got in the release that we're looking at.
RON DEFEO: I also think that one of the reasons there's less currency
effect in AWP is because frankly, in the first quarter, we had more
revenue in North America. Sorry, Tim? We had more revenue in North
America than we did last quarter where our European business was
stronger.
ROBERT WERTHEIMER: That I understand but just to be super clear. In
France if you sell AWP, it is nominated in euros, not pounds, right.
I'm wondering if you know the euro value of the sales in the euro
zone.
PHIL WIDMAN: We denominate our products in both pounds and in
sterling -- in euros.
RON DEFEO: One other factor in this, Rob is we're increasing local
content in euro zone purchases so that's also kind of a negative
against that exchange rate.
ROBERT WERTHEIMER: On the margin line, yes. Okay. Then I guess the
last question is the mining business was very solid. Can you talk
about the sustainability of the production. You've had a lot of years
of growth. Can you -- was there any pull forward from Q2 and can you
continue to grow that production?
RON DEFEO: Robert, maybe I'll take that one. We did not have any Q2
pull forward. In fact, I think we -- we're still a bit behind some of
our customer expectations. We've done a really excellent job at most
of our mining facilities in taking lean to a really higher level to
get productivity out and production out the door. I think we're
bumping up as Tom mentioned earlier against some capacity
constraints, not just in the supply base but in pure factory
footprint. And we're -- as a part of our capital plan, both this year
and into next year, we're going to be taking both the German facility
up in footprint and beginning to transition some of the products into
lower cost markets. So, we do have to address the capacity for the
'09 volumes that we expect to see.
ROBERT WERTHEIMER: Okay. Thank you.
OPERATOR: Your next question comes from Robert McCarthy with Robert
W. Baird.
ROBERT MCCARTHY, ANALYST, ROBERT W. BAIRD: The strength of the crane
market, with--.
RON DEFEO: Rob? Could you repeat yourself because I don't think she
had you on speaker until you got part of the way into your question.
ROBERT MCCARTHY: No problem. I wanted to follow-up on the discussion
about the strength in the crane market. And the exceptional strength
that you're seeing in the rough terrain market. And I'm wondering if
you could -- given that there's exposure in that business to building
buildings, if you will, which is a weak market in North America. The
actual application, could you talk about what's driving the strength
in that product class specifically and whether some of the strength
you're seeing is really a reflection of pent up demand from the
dealer base related to all of the work that you've done at Waverly
over the last 18 months and the better availability of product now.
TOM RIORDAN: I think, Robert, we would clearly see some effects of
the housing market in the crane business. Boom trucks would be down
per se. On a year over year basis.
ROBERT MCCARTHY: Right.
TOM RIORDAN: But as Ron mentioned a little bit earlier, our mix in
the business is changing to the much larger crane part of our
portfolio. With the larger rough terrain cranes, the larger crawlers
and the larger all terrain cranes that is really where the meat of
the market is and it is where really the larger global demand is in
the product.
ROBERT MCCARTHY: Does that mean that a lot of this incremental RT
business is going offshore?
TOM RIORDAN: Some of it is. Some of it is, Robert. In addition, I
would say don't discount the fact that some of these RTs are very
good at working on petrochemical operations and nonhousing-related
applications. It is easy to say that everything is housing related
but the reality is this country's got infrastructure, it's got energy
resources that are rusting away. And we have a crane rental fleet
that got pushed out of this country in the last downturn has been
replaced, still is in need of being replaced and so I'm still pretty
positive about the RT opportunities.
ROBERT MCCARTHY: Okay. Thanks. And I think I heard you say as part of
your -- this would be for you, Tom, I guess. I thought I heard you
say as part of your prognosis for the road building and utility
segment that you're looking at, moving -- or doing some plant
consolidation, which I presume would involve some incremental expense
and I wonder, in your comments about the road building segment
remaining challenged this year to show a lot more profitability than
what we saw in the first quarter, is part of what you're thinking
that you're going to have these incremental expenses or would they be
an additional issue beyond the soft performance that you're getting
right now.
TOM RIORDAN: The clarity answer as I would describe it is Ron made a
comment about beginning to synergize manufacturing assets between
construction and road building. The specifics behind that, frankly,
is not necessarily plant consolidation as much as it is an
opportunity to take a number of product lines in the construction
arena that we are underserving North America on the basis of what we
believe to be an eventual turnaround over the next several years of
the U.S. market, begin to produce some of these products in the U.S.,
and position those in road building excess facility plants that we've
got today. So, my comments on the profitability of the segment are
really nothing related to any consolidation or excess cost of
facilities.
ROBERT MCCARTHY: Okay, great. Thanks. I appreciate it.
OPERATOR: your next question comes from [Robert Martin] with Defiance
Asset Management.
ROBERT MARTIN, ANALYST, DEFIANCE ASSET MANAGEMENT: Congratulations on
another excellent quarter. The mining business is currently I guess
had a quarter that was bigger in revenue than one of the publicly
traded companies that's approaching a $5 billion market cap. While
the margins aren't quite similar, there's opportunity to expand them
in the mining business over the next couple of years as you stated in
the past. What are the primary drivers behind the materials and
mining business growth? Is it as much materials processing as it is
iron ore and coal or is it weighted toward one of those two? Thank
you.
TOM RIORDAN: I think, Robert, we see strength clearly in both. The
materials processing pieces are aggregates business, that has
historically been a very dependable, very high margin business for us
with very reasonable growth. But the real change, the delta in that
segment has been the substantial increase in our mining shovel
business, our (inaudible) shovel business as well as some growth in
our mining truck business and some growth in our drill business and
the addition of superior high wall which is a great franchise
improvement.
ROBERT MARTIN: Could you give us an update on that? Is the
globalization of that product taking off as you expected with your
increased distribution?
TOM RIORDAN: Yes. Yes. We've actually sold one unit into Russia and
we have several deals pending on a global basis. And I think -- it is
early on in the integration process but we're looking at
opportunities to leverage synergies on a component side across the
other businesses plus take advantage of our more global distribution
network in the mining group. So, we see real opportunities with SHM.
ROBERT MARTIN: Thank you, sorry.
TOM RIORDAN: To be a meaningful contributor. Okay.
ROBERT MARTIN: Okay. And secondly, you guys had a -- I think you had
an infrastructure summit here, conference in the U.S. Infrastructure
spending has, particularly nonresidential construction that is
spending. Some people think is about to implode or fall off a cliff
like the construction business. I kind of look at it differently as a
percent of GDP. It has just come up from a very low level and in
fact, if you do it on a real basis, it is not that much off the
bottom because construction material costs have gone up so much. What
did you guys conclude from your infrastructure, domestic
infrastructure summit and is there a chance that the public spending,
the roads, bridges, highways, tunnels, water, power, infrastructure,
energy infrastructure can sort of hold up while office tower and
shopping center construction and gaming casino construction falters
in this domestic economy and credit crisis.
RON DEFEO: Robert, the simple answer to that is if our infrastructure
spending implodes, so will our way of life. And I don't think that's
going to happen in this country although with the level of politics,
the way it is, sometimes I have a level of fear with that also. I
mean what my conference -- fundamentally proved was that we are
underinvesting in our infrastructure in this country and when you get
people together like we did at this conference which was the head of
the AFL-CIO John Sweeney with former Governors Pataki, Governor
Engler, the Assistant Department of Transportation Secretary, Jim
Oberstar who is the guy that's in charge of -- Chairman of the
Infrastructure and Transportation Committee. What this proves is that
we have to find a way for both public and private partnerships to
collaborate, to deal with our crumbling infrastructure. It is not a
matter of if. It is a fundamental need.
Jim Oberstar basically went on record as saying we need to double the
country's spending level on our highway bill from $280 billion to
over $500 billion. But I think it is easily said in a political
environment. What we need is vision and we need will. And that's
where we struggle. So I hope that the leadership of the country can
get its act together to deal with this issue. It must. But it is
going to take some pressure from both business as well as the
investment community and I encourage you and anybody on this call to
take this up because it is a real risk for our country's way of life.
Fundamentally, infrastructure investment, equals economic prosperity.
They are attached at the hip.
ROBERT MARTIN: Thank you.
RON DEFEO: Okay. Can we take one last question.
OPERATOR: Your final question comes from the line of Seth Weber with
Bank of America.
SETH WEBER, ANALYST, BANC OF AMERICA: Thanks. Good morning. Squeaked
in here at the end. Ron, couple of questions on the -- something you
said about the crane business with lead times extending out here,
have you noticed any increased competition from the Asian, the
Chinese manufacturers, do you feel like you're losing share, you're
losing opportunity there? First question.
RON DEFEO: I think we have, for now, nearly two years, identified the
fact that China will be a player and a manufacturing source for
cranes which is why we made the investment in our [Chen Chang] crane
JV in [Loujio], China. We do see the beginnings of some entrants from
China into western markets. But to me, this is about being intimate
with our customers and making sure we demonstrate the value that's
implicit in our products. A Chinese-produced crane may have a low
price today but over the long-term, they'll be moderation of currency
differentials, there will be a lot of reasons. It is a long way to
bring a crane into western Europe from China or into the United
States from China and it is a big risk because fundamentally, you
have that asset which is what you do business on. And if that asset
valuation can't be assured, then you need to -- your business model
becomes vulnerable and services clearly what is going to be
important. We have got a history of decent service.
SETH WEBER: Right. Okay. Just going back to your RT comments on the
'09 pricing and backlog, is the -- am I misinterpreting that the
crawler customers are more willing to take escalator or is that
incorrect?
RON DEFEO: No, I think it is just a function of size. I mean size.
When you're dealing with somebody that's ordering a $0.5 million
piece of equipment, it is a little bit different than someone
ordering a $150,000 or a $200,000 piece of equipment.
TOM RIORDAN: And it is also a function of the lead times that are
involved in terms of some of the larger products that we have where
typically, you're not talking about two or three month lead times in
many cases. You're talking 9 to 12 or longer lead times and as a
result of that, obviously there is pricing protection, cost
production that both sides are looking for in any negotiations.
SETH WEBER: Right. Which is why I was surprised you didn't make the
same comment about your crawler business that you made about the RT
business or am I just misinterpreting that?
RON DEFEO: Well, I think you're probably misinterpreting it. The
crawler business is primarily over 300 tons and would fall into
really a large purchase price for customers such that, we would be
negotiating a price with escalations in it where an RT would be
significantly less in value.
SETH WEBER: Okay. Last question on the aerials business, the U.S.
aerials business, is there -- where are you seeing the strength
there? Is it coming from more the mid tier rental companies or have
the big -- your more traditional larger rental companies stepped up
maybe more than you would have thought?
RON DEFEO: I think we've seen a combination of all of the above. I
think a few of the big rental companies have stepped up. A few
haven't yet. So, the good news is some of our better customers still
haven't ordered but some of our also better customers have ordered.
It is really -- it really is a bit of a broad spectrum of customers.
SETH WEBER: Okay. Thanks very much, guys.
RON DEFEO: Thank you. And thanks, everybody for their interest in
Terex today.
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