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PARTICIPANTS
. Ron DeFeo, Terex Corporation, CEO . Phil Widman, Terex Corporation, SVP, CFO . Tom Riordan, Terex Corporation, President, COO . Terry Darling, Goldman Sachs, Analyst . Andy Casey, Wachovia Securities, Analyst . Tim Ford, Terex Corporation, Group President . Jamie Cook, Credit Suisse, Analyst . Alex Blanton, Ingalls & Snyder, Analyst . Bob Isaman, Terex Corporation, Group President . Charlie Brady, BMO Capital Markets, Analyst . Rick Nichols, Terex Corporation, Group President . Steven Volkmann, JPMorgan, Analyst . Andrew Obin, Merrill Lynch, Analyst . Charlie Rentschler, Wall Street Access, Analyst . Robert Wertheimer, Morgan Stanley, Analyst . Robert McCarthy, Robert W. Baird, Analyst . Robert Martin, Defiance Asset Management, Analyst . Seth Weber, Banc of America, Analyst
OVERVIEW
TEX reported 1Q08 net sales of $2.4b. 1Q08 income from operations was
$256m and EPS was $1.59. Expects full-year 2008 net sales of
$10.5-10.9b and EPS of $6.85-7.15.
FINANCIAL DATA
A. Key Data From Call 1. 1Q08 net sales = $2.4b. 2. 1Q08 income from operations = $256m. 3. 1Q08 EPS = $1.59. 4. 1Q08 debt less cash and cash equivalents = $769m. 5. 1Q08 share repurchase = $52m. 6. Expected full-year 2008 net sales = $10.5-10.9b. 7. Expected full-year 2008 EPS = $6.85-7.15.
PRESENTATION SUMMARY
S1. Business Overview (R.D.) 1. 1Q08 Highlights: 1. 1Q08 performance is another positive step in what Co. expects to be a milestone year for TEX on its way to 12 by 12 in 10 goal. 2. Has many accomplishments to be proud of, but also numerous opportunities to address along the way. 1. Is still a freshman in high school. 2. But expects to graduate later this year to be a sophomore. 3. While there's some cross currents that need to be addressed, Co. can and will respond to these cross currents as it achieves its near term goals. 4. EPS was up 46%. 5. Net sales increased a bit over 17%. 6. Reflecting upon revenue, Co. did benefit by approx. 8 percentage points on net sales relating to acquisitions and currency. 1. Net sales were up 9% on an organic basis.
1. This organic growth rate alone will get Co. to about $12b
level in 2010.
2. Would expect to be making some acquisitions during
aforementioned period.
3. Is hopeful that TEX can do better than this 9% organic
growth rate. 7. Had an operating margin of 10.8%, up from 10% level of 1Q07. 1. Probably the most challenging part of Co.'s goal, as
achieving 12% operating margin requires dealing with some of
challenging cost environment that's in front of TEX. 2. Some of the same reasons why infrastructure spending
globally is so strong and 70% of Co.'s business, which is
outside US, is so strong, also causes its input costs to
rise. 3. It is an issue but it is not something that cannot be
overcome.
1. To deal with this, Co. needs to aggressively explain to
customers the cost increase story and get price increases
appropriately. 8. Has the opportunity at TEX to fix some of its under performing businesses from a margin perspective. 1. Is doing this. 2. Believes some of the moves Co. can make to help Roadbuilding
and Construction businesses simultaneously will begin
showing benefits in 2009 and 2010.
1. This will be in the area of shared manufacturing assets. 9. Has some strong businesses that Co. expects will stay this way and balance out its business portfolio. 1. Cranes with a growth of 26% YoverY. 2. Materials Processing & Mining with a growth of over 42%. 3. Some had thought Aerial Work Platforms (AWP) business was
deteriorating on the brink.
1. 1Q08 actually illustrated growth in North America and
International. 4. For Construction business, there's definite softening of
certain countries in Western Europe and housing market in US
remains quite weak.
1. Continues to view the current marketplace more as an
opportunity than as a near-term risk as Construction
business has relatively low market shares that Co. feels
it can grow as it builds out capability today for future. 10. Remains strong and is getting stronger. 11. Welcomes ASV into TEX's family of businesses and bridge inspection equipment co. of Hydra that is being added to Roadbuilding operations. 12. Superior high wall miners has already shown great prospects for Co., focused on coal, which is a strong area of future growth.
S2. Financial Review (P.W.) 1. 1Q08 Results: 1. Net sales reached a record at $2.4b, up 9% excluding translation impact of foreign currency fluctuations and acquisitions. 2. While income from operations of $256m increased 28%, net income increased to $1.59 per share from $1.09 in 1Q07. 1. In 1Q07 Co. had an $0.08 per share negative impact related
to early extinguishment of senior sub notes. 3. Cash used in operating activities was somewhat higher than 1Q07 but fairly typical for this time of year. 4. ROIC, which Co. now measures on an after-tax basis, was 27.3% for trailing four-qtr. period. 5. Net sales increase was driven mainly by Materials Processing & Mining and Cranes segments, as worldwide infrastructure and commodity needs continue to provide significant demand for Co.'s products. 1. Had overall net sales growth in AWP segment although a
little different than geographic expectations. 2. Excluding acquisitions and impact of currency, remaining two
segments were relatively flat over 1Q07. 6. Income from operations increased to $256m and operating margin of 10.8% vs. $201m with operating margin of 10% in 1Q07. 1. Volume growth in Co.'s more profitable segments, the
positive impact of prior pricing adjustments and trend
towards higher capacity crane and mining products
contributed positively to the result. 2. Is dealing with commodity cost increases, efficiency
challenges and negative impact in 1Q08 of inventory
valuation and amortization effects of recent acquisitions in
some of Co.'s businesses. 7. SG&A expenses increased in relation to net sales volume and on an absolute basis, representing TEX's investment to: 1. Improve business processes. 2. Capitalize on developing market opportunities. 8. Crane and Materials Processing & Mining segments, where Co. expects sustained strength in end markets, contributed 60% of operating profit in the period while Co. still maintains excellent AWP results. 9. Effective tax rate was 33.8% vs. 37.5% in 1Q07. 1. Effect of recently reduced statutory rates in several
European countries had a positive effect relative to prior
year and the fact that 1Q07 rate included a discrete charge
for repatriation of international cash. 10. ROIC reached 27.3% on an after-tax basis for the trailing 12-month period as TEX benefited from excellent trailing profitability. 1. 2008 target excluding the impact of ASV is 25.6%. 2. Impact of ASV acquisition will tend to dampen this metric in
short-term somewhat. 11. Used $190m in cash from operating activities. 1. $25m more than 1Q07, due in part to a decrease in customer
advances as Co. completed commissioning and delivery of
large crane and mining products and a decrease in receivable
discounting. 2. 1Q08 Other Financials: 1. Working capital increases in anticipation of increased volume in mid-year period. 1. Level of working capital that trailing annualized net sales
reached 24.9%. 2. 0.8% which relates to inclusion of recent acquisitions. 3. [0.05%] to the difficulties caused by major flooding in
Australia during the qtr.
1. This compares to 21.5% in 1Q07. 2. Challenge with inventory is to improve processes throughout supply chain. 1. Specifically, logistics and planning. 2. Continues to maintain its focus in this area. 3. Debt less cash and cash equivalents increased $522m to $769m, representing 23.3% of total capitalization, mainly due to: 1. Completion of acquisitions. 2. Share repurchases of $52m. 3. Operating cash activities mentioned earlier. 4. Will continue to pursue opportunistic acquisitions and invest internally for profitable growth while executing share repurchase program. 5. Backlog Levels: 1. Continues to experience significant overall growth, up to
$4.8b from $3.4b in 1Q07.
1. This represents orders that are deliverable in next
12-months. 2. Has not included approx. $210m in potential backlog related
to rough terrain crane products until Co. finalizes pricing
for 2009 deliveries.
1. Expected to be resolved in 3Q08. 6. Given the strong 1Q08 performance, an assessment of challenges and opportunities in some of Co.'s end markets, the anticipated steel cost pressures and its response to these factors, TEX is increasing its full-year 2008 guidance to: 1. Net sales level of $10.5-10.9b. 2. EPS of $6.85-7.15.
1. EPS midpoint would represent 20% increase over 2007
levels.
S3. 1Q08 Operational Highlights (T.R.) 1. Current Views of End-market: 1. End markets for TEX continues to be reasonably strong on avg. as most regions and countries continue to improve their infrastructure, which drives demand for its products. 1. There are clear differences in relative strength of various
geographies. 2. Believes TEX is reasonably well positioned for current
economic environment. 2. AWP market continues to somewhat bifurcated: 1. North America is still a solid but flat market. 2. UK has slowed down based on recent (indiscernible) customer
consolidation. 3. Most of Europe continues to be strong along with Middle East
and Latin America. 2. AWP Business: 1. North America was up mid-single digits. 2. EMEA (Europe, Middle East and Africa) was up high-teens. 3. Latin America was up solid double-digits with Asia Pacific down for TEX based on recent severe weather in Australia along with the localized Asian market softness. 1. Expects Asia Pacific to rebound fairly quickly. 4. Margins were good at 18%. 5. Made good progress in continuing to build global sales and service infrastructure. 1. As part of this, TEX recently announced its plans to build a
new plant in Changzhou, China. 2. This is very much in line with Co.'s intent of having
production capability located to serve regional markets
along with taking advantage of lower cost sourcing and
assembly capability for its global markets. 6. Backlog and order trends continue to be very much in line with expectations with: 1. North American market up slightly. 2. European market down somewhat. 3. Global Construction Equipment: 1. Sees it continues to be quite varied. 2. North America continues to be depressed but stable. 3. Eastern Europe continues to be strong. 4. Softness in UK and Southern Europe and stable in rest of Western Europe along with Middle East, Africa and Asia all continuing to be very strong. 5. Had a tough qtr. 6. While net sales were up nearly 10%, this increase was driven by: 1. Exchange rates. 2. ASV acquisition, which is doing very well. 7. Cost pressures from steel and fabricated parts had an impact in 1Q08 along with some operational issues. 8. Overall: 1. Order rates are solid. 2. Backlog is up significantly from a year ago. 3. Expects good mid-term performance from this group. 9. First mini excavator was recently produced and sold in Sanhe, China. 4. Cranes: 1. Large infrastructure projects around the globe are driving the demand for Cranes. 2. Larger capacity cranes are continuing to see unprecedented orders, which is the core of Co.'s product offering. 3. Cranes business had a good qtr. with significant increase in backlog and 300 BP improvement in operating margins. 4. Continues to work on supply constraints diligently including Co.'s own bottlenecks. 5. Would hope to announce new plant capacity expansion plans in near future. 5. Material Processing & Mining: 1. General environment for Mining & Material Processing markets continues to be strong. 2. Basic material industries are investing heavily to upgrade and expand their capacities, which is driving Co.'s product demand. 1. Expects to see these trends continuing for foreseeable
future. 3. Had a terrific qtr. with: 1. Net sales up over 40%. 2. Profitability up nearly 50%. 4. Similar to Cranes business, TEX continues to stretch its suppliers and Co.'s own capacities. 1. Is making good progress to relieve these constraints. 5. Recent severe rains in Australia affected Mining business, which TEX expects to make up in coming quarters. 6. In addition to plant for India for Material Processing previously announced, Co. is hoped to announce additional new capacity expansion plans for both of these businesses in near future. 7. Backlogs have continued to increase. 1. Sees very strong quoting and bid activity particularly in
mining. 6. Roadbuilding & Utility Business: 1. Continues to struggle. 1. Although Co. has continued to cut costs and overheads,
fundamental sales and overhead trends in US remains soft. 2. Mentioned earlier that Co. is expected to see improved margins in this segment in 2008. 1. With the steel cost increases Co. is seeing and competitive
environment, it is likely to see very moderate improvement
of profitability this year. 7. Current Steel Cost Situation: 1. With recent significant increases in iron ore, coking coal, scrap steel, energy and other costs associated with manufacturers' steel, TEX is heavily engaged in managing availability and cost of steel and related components. 2. Has a number of fixed price contracts that Co. expects its steel supply partners will continue to honor. 1. Many of these raw steel supply agreements with expire at
2Q08-end although many fabrication component supply
agreements continue past that. 3. As price increase requests continue to come through supply chain, TEX is seeing strong cost pressures in Europe and moderate pressures elsewhere. 4. Corporate supply and management team is working closely with local business leaders and sourcing teams to ensure visibility and transparency with these cost challenges. 5. Many of Co.'s larger and longer lead time products such as cranes and mining equipment already have built in cost escalation contracts with customers. 1. Shorter lead-time products such as those in Construction
business have minimal pricing protection from existing
orders. 2. Expects to be able to raise prices or add surcharges in vast
majority of Co.'s businesses and products. 6. While Co. is sensitive to customers' needs and aggressively working to find other costs offset, it can and it will be raising prices to cover these field cost increases. 7. Although there is no assurance it will be 100% successful and there will be some timing issues, Co. is confident that, in general, it will recover the majority of these cost increases. 8. Other Details: 1. Working capital continues to be an area of focus. 2. Traditionally built inventories in '1Q' in anticipation of selling season in 2Q and 3Q and 2008 is no exception. 3. With strong growth in demand for many of Co.'s products, along with ASV acquisition, working capital as a percent of sales is somewhat high. 1. Positive side of this is the natural hedge against some of
the cost increases cited earlier and helping to mitigate the
supply disruptions. 4. While inventory is always considered waste in lean companies, TEX is prudently working to strike the right balance for benefit of its customers and stakeholders. 9. Management System (Co. wide ERP System): 1. Implementation of three pilot sites will occur around mid-year. 2. While Co. has significant focus and some last minute tweaking that needs to happen, TEX is still very confident of the benefits and is busy preparing for next sites to be implemented in 1Q09.
S4. Closing Comments (R.D.) 1. Key Business Segments: 1. Materials Processing & Mining segment: 1. This is a business that revenue was up 43% in 1Q08. 2. On a total revenue basis, it approximates the amount of
revenue of a couple of public comparables. 3. It is a high mid-teens operating margin business. 4. Thinks a high ROIC business and the equity valuation
attached to that certainly should be significant. 2. Crane Business: 1. Grew 26% in 1Q08 with a huge increase in backlog, probably
an unparalleled position in large cranes globally, which
should be giving TEX some sustained performance. 2. There is another public comparable out there from evaluation
point of view, leading to pretty substantial equity
valuations to be contributed from this segment. 3. AWP Business: 1. Is a business of $2.5b in revenue or approx. tremendously
good ROC. 2. High teens operating margin, 18% in 1Q08. 3. There is another public comparable from a valuation point of
view. 4. Aforementioned three plus the opportunity that exists in Construction business and in Roadbuilding and Utility business, which TEX intends to improve should argue for a substantially higher equity valuation than it has today. 1. Believes in this. 2. Is going to work on it. 3. Is going to continue making the changes necessary in TEX to
take it to the kind of performance that it thinks is
possible for Co. over next several years.
QUESTION AND ANSWER SUMMARY
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, CEO, TEREX CORPORATION: 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, PRESIDENT, COO, TEREX CORPORATION: 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, SVP, CFO, TEREX CORPORATION: 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: 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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