Terex Corp (TEX) 2002 Q2 法說會逐字稿

Good morning and welcome to the Terex earnings conference call. All participants will be able to listen only until the question and answer session begins.

At the request of Terex Corporation, this conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to introduce today's moderator, Mr. Ronald DeFeo. Sir, you may begin.

Thank you and we'll take questions at the end of our remarks.

This morning with me is Ernie Verebelyi, Joe Apuzzo, Kevin O'Reilly, and Colin Robertson is on the phone as well. As is usual, I plan to make a few opening comments and then Joe will walk you through the overall numbers and key comparisons and I'll come back and summarize and provide some detailed review of the operating activities across our businesses.

We'll take your questions following that. Overall, we're quite pleased to have exceeded expectations in the second quarter in what we all know has been a challenging environment. We specifically reported an earnings per share of 47 cents or a net income of $20.5 million compared with $14.2 million in the year ago period or 44 percent ahead of that period, excluding all special items. At the beginning of this year, I emphasized that I was cautiously optimistic about our performance and that Terex was a much stronger company today than one year ago.

These comments remain the same and with the recently announced acquisitions, plus the capital structure improvements we have made over the course of this past year, I believe we will be an even stronger company in 2003 than we are at this point in time. We remain focused on implementing our business model and feel that it is appropriate for this type of business.

There remains a lot of upside leverage from our model as well as an appropriate level of flexibility and agility in these uncertain times. Customers that buy Terex products today are being rewarded by an equipment that delivers solid performance, is simple to use and provides a terrific return on invested capital. We are delivering on what we said.

Our three areas that are most noteworthy, the base business, cost reductions and acquisitions. I'm encouraged by our base business as non-acquisition performance in the second quarter was quite positive. This came primarily from Terex initiated actions and not the market. Revenues were up eight percent versus year ago in the quarter. The operating margin was 8.6 percent, albeit down 1.2 points from last year but up nicely from the 6.4 points in the first quarter.

Some of this margin of decline reflects the growing lower margin businesses that we have and the distribution business in North America. As opposed to the manufacturing business growing in a year over year comparison basis. SG&A was 8.9 percent, down from 9.1 percent in last year's quarter.

I'll discuss the specifics, pluses and minuses after Joe's remarks in a few minutes. Regarding cost reductions, from a simplistic point of view we had manufacturing absorption across the company. We had gains of $5 million in the quarter compared to last quarter, reflecting our on track performance from the cost reduction initiatives implemented last year.

And, the cost reductions implemented at our acquisitions, which is the last area I wanted to mention. Regarding acquisitions and after the issuance of stock, these companies added about five cents per share in the quarter and about six cents on a year to date basis. Now let me turn it over to Joe, who will give you an overview of the consolidated performance. Joe.

Thanks Ron. Good morning ladies and gentlemen.

As you know, during the course of today's call we will be discussing our expectations for future events, which is subject to risks and uncertainties related to the competitive environment, macroeconomics, and other factors which are more fully explained in our press release and other public filings. And I encourage you to read that.

Today I'll cover the consolidated results, provide some additional background regarding the restructuring activities and the accounting changes and then turn it back over to Ron. For the second quarter, Terex reported net income of 47 cents per share before restructuring and asset impairment charges. Revenues for the quarter were $690 million.

Gross margin was $124.3 million or 18 percent compared to last years 18.5 percent. SG&A was $72.7 million or 10.5 percent compared to last year's 9.1 percent. And operating profit was 51.6 million or 7.5 percent compared to last year's 9.4 percent. As Ron indicated, it was an 8.6 percent operating profit margin without acquisitions.

The acquired companies contributed 210 million in revenues, 40.5 million in gross margin or 19.3 percent, 29.9 million in SG&A or 14.2 percent in an operating profit of 10.6 million or fiver percent of sales. And were credited to earnings per share by five cents. IN the quarter we have positive cash flow from operations of million, $8 million year to date.

Working capital as a percent of sales was 31 percent on an annualized basis in the second quarter, about 34 percent year to date. An improvement over end of year 38 percent of sales as we continue to focus on reducing our working capital as a percent of revenues.

During the quarter we executed a couple of capital markets transactions, refinancing our bank debt in a transaction that closed, actually, in the third quarter. Three hundred and seventy five million dollars of term loan V and plus 200, a very good execution.

We also issued equity, 5.3 million shares for $113 million in proceeds. So a couple of good capital markets transactions. We have strong liquidity with cash at the end of the quarter of $280 million and combined with our revolver providing liquidity for the company in excess of $500 million.

EBITDA for the quarter was $60 million actual, not pro forma, and a $100 million year to date on track with our expectations. So, in all, good operating performance, access to the capital markets and cash flow. Let me talk for a moment about the asset impairments and restructuring activities in the quarter.

These things were primarily related to the implementation of FAS142, changing the accounting for goodwill. Our debt process calls for an evaluation of the book value of the business units based on the discounted cash flow expectations of the company. Comparison of the discounted cash flow expectations of the company to the book value of the businesses including goodwill resulted in the identification of impairments to goodwill at light construction and mining.

In the mining business, the impairment of goodwill was primarily related to the underperformance of the truck business. Not the shovel business, which is where the goodwill was generated by the acquisition in 1997. But the accounting standard calls for bundling the businesses into like economic units and therefore the evaluation was done on mining as a whole.

On the light construction business, the evaluation also resulted in an impairment of PP&E, which is not part of the cumulative effect. So it all gets fairly complicated and intricate but the net result of all of this was an impairment charge of $130 million pre-tax, about $124 after tax recorded actually in the first quarter. So it's in the six-month figures.

We had restructuring activities in the mining business and at Cedarapids. In the mining business, the previously announced outsourcing of the truck manufacturing led to the announcement of the closure of our Tulsa facility. Which will result in a write off - an annualized cost savings of $2.7 million. At Cedarapids, we reduced headcount resulting in a pre-tax charge of just under a million dollars.

And that is expected to result in $1.8 million in annualized cost savings. When we originally announced the closure of the truck manufacturing facility, it was estimated to cost 6.4 million. It is now estimated to cost $5.5 million. The difference is due to a refinement of the estimates and the fact some of the costs will be recorded in future periods.

In addition in the quarter, we recorded a gain of $5.5 million the forward purchase of euros to fund the acquisition of Demag. Accounting rules specifically prohibit hedging counting for acquisitions. So that basically summarizes the special charges and restructuring activities.

I think the summary message for the quarter is, you know, good performance from an operating standpoint. We strengthen the liquidity and capital structure of the company through access of the capital markets and our cash flow performance was good. With that, Ron, back to you.

Thank you Joe. And just a overview point reflecting our revenue - the revenue increase to 57 percent. Before I get into the segments, I just want to emphasize that that revenue increase came eight percent year over year in the base businesses and the remaining $210 million from acquisitions. But that $210 million of revenue increase year over year did not result in any increase in net debt for the corporation, year over year.

In fact, net debt was down slightly year over year overall. I'll now review the specific performance in four groupings, the Terex America's business, Terex Europe, Terex Mining and the Terex Acquisitions group excluding all special items in the quarter and in the base comparison periods.

Terex America's overall had revenue for the non-acquired businesses of $227 million, down only three percent from the year ago period. Operating earnings were $17.1 million or 7.5 percent of revenue. About flat with the year ago period despite the fact that roughly 27 percent of this business came from products imported from our European operations versus 18 percent in the year ago period.

This group summary masks some very good performances against some continued weaknesses. The weakest year over year businesses continue to be the mobile telescopic crane business, where revenue was off by about a third and margins dropped almost three points. This has been a continuing weak area, as we believe our performance is roughly in line with the market.

On a historical basis, this is not unanticipated in a weak economic environment. This confirms the appropriateness of our Conway factory closure last fall and when the market improves we will have a lot of leverage here. Our margins are still quite good in this business. The Telelect business was also weak, down around 20 percent year over year.

Although we continue to show double digit operating margins in this business. Now offsetting those two principle negatives, was some good performance at several of our businesses. Some of this came from cost initiatives, such as the initiatives at Cedarapids and other from revenue increases, such as the Terex truck and loader backhoe initiatives and the loader backhoe initiative is going quite well.

Our boom truck business or the Terex RO business, had a record quarter and had over at 40 percent revenue increase as we grew market share. Our operations at American Crane, were up over 50 percent from a revenue basis. Reflecting mainly the United States Marine Corp order. But our large crane business was also quite solid and we feel we continue to grow share in the sizes where we have models.

Our infrastructure business, which includes Cedarapids, Simplicity and , had an eight percent revenue drop but year over year profits were up about $3.7 million. Reflecting that two factory closures and we believe market share gains from our paver product line at Cedarapids.

Consequently, the efforts we took in late 2001 to close operations and grow our new products aggressively, such as loader backhoes and Terex rigid trucks, has paid off. The markets didn't drive this performance. We feel we had an influence on it.

Moving to Terex Europe. The best performance in the company probably came from our European operations in the second quarter. Again, let me give you the performance excluding acquisitions. Total revenue was $270 million, up 20 percent from the year ago levels.

Operating profit was $24.8 million or 9.2 percent of revenue, about 1.2 margin points below the year ago levels. SG&A was 6.1 percent of revenue better by 60 basis points. And of course, all of the performance data I'm giving you is the actual currency run rates.

Let me summarize the three European groups that we have, construction, PowerScreen and lifting. WE are very pleased with the construction group performance. Revenue was up 20 percent in this group, as was rather operating profit performance.

We had some noteworthy performances such as our truck operations where both rigid and articulated truck revenue was seven percent, but operating profit was up a solid 11 percent - was up at an 11 percent margin level and overall was up 75 percent from the year ago level. Reflecting the strength of the recent emphasis we have placed on our rigid truck business.

The Benford product line, which is small dump trucks and compaction equipment, was up over 30 percent and operating profit up 20 percent. We've successfully penetrated several new customers in the United Kingdom and Europe. Our loader backhoe business, which as most of you know, is a relatively new business to the corporation as we acquired the manufacturing company in early - really the beginning of 2001.

This loader backhoe business was up 40 percent as we were growing share worldwide and our penetration is increasing on this highly competitive - with our highly competitive product offering. Profits were up over 50 percent and margins are increasing despite the fact that we have a lot of manufacturing work to be done here.

Frankly, we have an unsatisfactory backlog level here because it's too big. We continue to outsell our increasing production rate. PowerScreen had a great revenue performance, up 20 percent. But margins slipped somewhat. Nevertheless, the operating profit margins in this business remain in the mid-teens.

We are focused on growing share and getting the job done with our BL-Pegson pressure product line delivering terrific performance. The European lifting business had a good quarter with revenues up also north of 20 percent. As you know, our margins at the factory had historically been low.

We had about a four percent operating margin here, albeit still up 1.2 points compared to last year. These issues, inclusive of some issues on our power crane business and , will be addressed at the time we acquire Demag. As we will put together an integration plan that incorporates some of these issues and is one of the strategic benefits of adding Demag to our company portfolio.

Our Bendini Italian rough terrain crane business had a great quarter with revenue up 33 percent and operating profit double the last years level. Turning to our mining business, this business remains our most challenging operation. And while the operating profit performance doesn't yet reflect the new actions underway, I'm confident that year over year progress perhaps still this year but certainly in 2003 will be better.

You will see progress here. In general this business has two very different performances. Our large mining shovels under the 0&K brand, are doing very well and the truck business is troubled and is being restructured as the Tulsa plant closes. The overall revenue level of $73 million is, frankly, a solid performance.

The operating profit was 1.1 million or 1.5 percent of revenue. Obviously way below where we would like to see of about seven to eight percent. This volume end margin - volume end margin here for trucks is the principle issue. The outsourcing plan for our production, does reduce our cost substantially.

But we still need some revenue from this segment. Obviously this is the cause of our mining sector goodwill impairment charge. ON the other hand the O&K businesses, which we acquired in 1998, had an outstanding quarter with mid-teens operating margins.

Turning to the acquisitions group. Obviously a key measure of Terex's ability to create value both short and long term is our performance on acquisitions. As mentioned earlier, these added about five cents per share in the quarter and they are on track with our expectations.

Acquisitions added $210 million of revenue and $10.6 million of operating profit in the quarter. It goes without saying that we have not received a lot of help from the market. The road building business at CMI is quite soft, but this is offset by a very good performance at Chef, Advanced Mixer and the distribution additions of Pacific Utility and the Southeast business.

At CMI, the cost reductions are paying off where we have consolidated several factories into the Oklahoma City facility. Despite revenue being off in the neighborhood of 15 percent, our operating margins were still over 7.5 percent. When revenues return here, we believe we will have a solid and profitable - more profitable business.

By itself, this acquisition was still accreted in the quarter. At Chef, we implemented the "why pay more" advertising in the United States to grow two new products under the Terex name in the North American market, mini-excavators and wheel loaders. We offered specific and compelling price reasons to buy these products, which have a terrific performance capability and now are being marketed under the Terex name with a terrific value proposition.

The response has been outstanding and we are needing to increase production at our German manufacturing plants. At Atlas, we still have - we still lost a small amount at the operating profit line in this business and we plan future reductions in staff at the end of the third quarter.

Having said that, reduction rates have been increasing, revenue rates have been increasing and we feel quite confident that this very significant restructuring activities at Atlas will pay off for us and that this will return a substantial level of profitability for us in 2003. And some profit in the later half of this year.

At Advanced Mixer and the distribution businesses, these are all doing very well. All in all, we feel we are building our businesses profitable and we are doing this by reducing cost and increasing share. In conclusion, our outlook for the second half of this year remains cautiously optimistic. We feel positive about the actions underway at Terex.

Terex has never been stronger than it is today. As we look further forward, the Genie and Demag acquisitions are both strategic and highly accretive to the company. We feel that the approximate level of revenue for Terex Corporation will be in the range of $3.4 billion.

Making us the number three player in the construction and mining business, following Caterpillar and . We face significant challenges, of that there's no doubt. But feel that we have the right focus on cost, growth and capital structure to deliver meaningful best in class earnings performance in this environment.

And with that, I'd like to open it up to your questions.

Thank you. At this time I'm ready to begin the question and answer session. If you would like to ask a question, please press star one on your touchtone phone. You'll be announced by us asking a question. To withdraw your question, please press star two.

Once again, to ask a question please press star one now. Our first question comes from , from Salomon Smith & Barney.

Good morning.

Good morning .

On the core sales performance, obviously a pretty strong performance given where the markets are. Could you give your core sales versus the industry numbers? Obviously you gave the individual core, but do you have an industry number?

I know it's hard to kind of weight them overall, but just to see the out performance more clearly. And the follow up would be, where do you see core sales growth for the full year? Just the indicators your getting so far into July. What's the full year thought on core versus the industry?

OK. Well, , I would offer a natural guess on the industry with the industry being down in the range of 10 percent. OK?

Our industry component, though, are a tad bit different than some because we have products in the crushing and screening area and also - and there is very little industry data on some of those areas. But I think we're operating in an environment where generally year over year industry trends are in the negative 10 percent range.

I would expect that our revenue on a year over year basis would be in several percentage point increase versus the prior year period. A swing factor for us is somewhat what will happen in the mining business. Because, while that adds revenue it doesn't add a lot profit for us.

I think our overall game plan for the year was to have revenue level fairly flat in our base businesses year over year. It was down slightly in the first quarter but up eight percent now as you see in the second quarter. So our outlook for the second half is still a bit cautious, but I would say, you know, I'd be very pleased if we have several percentage point increases in the second half. Particularly since the second half comparisons are a little bit easier.

I don't want to forecast or handicap the industry other than to say that I don't see it getting better. So our focus has been on what can we do in that environment.

And on the mining business, the business I assume shovels at these revenue levels is profitable. Parts came down as percent of total, but obviously still a pretty profitable business. So it really speaks to how the trucks are losing money.

With Noble now doing the manufacturing, what is the swing potential if truck revenues stayed flat? Just a cost structure change. What is that swing potential and when can we first see it?

I think the swing potential is three to five million dollars. It's a little - I realize that's a fairly broad range I'm giving you, but I'm being a little bit hesitant because there's always some start up costs. And you'll generally begin to see that in the fourth quarter.

Fourth quarter. OK. Thank you very much.

Our next question comes from Gary McManus from JP Morgan.

Hey Ron.

Hi Gary.

We saw these acquisitions like shooting a moving target here. Can you talk about - I mean, in your second half earnings, you know, how would you third and fourth quarter from a seasonality standpoint?

I mean it looks like you expect somewhere - let's just call it a dollar, I guess in your range. How would you rate the third and fourth quarters?

I would say, probably the third quarter given at this point in time is going to be weaker than the fourth quarter but that's historically the way it has been. Our business, now remember, we've had a number of acquisitions that we are trying to get a benchmark on seasonality for.

And compared with last year when 55 percent of our business was in North America. This year our base business - 55 percent of our business actually is in Europe. OK? We are a little bit more vulnerable to the summer shut downs that take place in Europe.

So I would say in the range of 35 to 40 percent of our earnings will take place in the third quarter and the balance in the fourth quarter.

OK. And you kind of stole my second question here. The 3.4 billion in pro forma sales, you would say break it down into three segments. America - you know, mining I guess really doesn't change with the acquisitions but ...

Right.

The other two is 55, 45?

In general that's correct.

Fifty-five percent Europe. And just a comment on currency, how did it impact your quarter and how do you see if the dollar continues to be weak - how beneficial is that? Just kind of conceptually?

Joe, you want to take that?

I think there's a couple of stories. You know, we had a benefit in the equity of about $60 million from the movements in the pound and the euro. I think there is a fair amount of cross border activity in both directions from purchasing to sales.

So quantifying - and of course we're using an average rate, so in the - most of the move took place at the end of the quarter. So on an average basis it's not as dramatic. So I'm not, you know, -- identifying currency impact is - in isolation is difficult. Net, the impact is probably neutral because you have, again, there is purchases and sales in the various currencies.

And you mark to market the receivables and payables.

That's right.

So you don't think you would - if the dollar were to continue to weaken versus other major currencies, you don't think you'd benefit from that in terms of your - at least translational there should be a benefit.

Yes.

Translation there's a benefit but we have support a fair amount of our construction products in the U.K. of the U.S.

OK. So you don't think it's that big a deal if the dollar were to continue weaken.

Let's put it this way, Gary. When it was going the other way we didn't say that that was affecting our performance negatively.

Right.

And frankly at this stage, it's hard for us to see in some ways that we ought to claim that it's affecting our performance positively because there are puts and takes on both sides of the ledger. And, you know, we realize that translating European based profit to the United States is helpful.

On the other hand, we have 35 to 40 percent of production coming out of Europe to North America. Which, you know, we're not changing the selling prices in the United States to reflect that. So that's why we take a relatively neutral forward view on currency.

OK. Great. Thank you very much.

Our next question comes from from Credit Suisse First Boston.

Morning.

Morning .

Can you go back for a second, Ron, and talk about when you look at the base business being up eight percent but the margins being down. Which is sort of not what we would expect. Obviously some businesses are up, some are down.

If you separate into core businesses that revenues were up year over year versus core business revenues were down. I would expect margins to follow the revenues, I guess in PowerScreen was one example where it didn't go that way. Can you try to talk about that a little bit? Specifically PowerScreen, I guess, why the margins were down there on higher revenues.

And how we're suppose to look at, sort of, this base business dichotomy between revenues and margins.

Well, I think there is always a challenge in making comparisons that it's a steady state of mix. And a lot of our businesses shifts around in terms of where we ship product year over year. So that's kind of the macro answer I appreciate most management teams offer.

But I think there's some truth to the mix differential. With regard to PowerScreen, let me just ask Colin to comment on that.

I think basically that your two key points are absolutely right on the money. We have our own arm. Their revenues are close to whole group around 20 percent. Geography does play a significant role in the overall PowerScreen business.

I have seen some considerable competitive activity, particularly in our crushing business in Europe and obviously to counter that effectively - a little bit more aggressively maybe than we would have liked to have been. But also in the process of growing some different channels of distribution, if you like, and again to have done that we'll have to offer some of the new distributors very, very competitive pricing and terms to grow the overall franchise.

So the benefits that we're taking from the incremental volume in terms of absorption and pricing - I beg your pardon, purchasing improvements will help pass some of our own to grow the franchise both in Europe and in the U.S.

Thanks Colin. Yes. I think those are logical reasons to do what we're doing.

When you - and I've got to go kind of put all this on piece of paper, I guess. But when you look at the rest of your core businesses that generated that growth, are the other businesses that had positive revenue trends up on margin?

Generally speaking, I would say yes.

Are they up as much as you would expect, given the operating leverage you should have built in?

But again, there's other changes taking place here, . For example, I gave you the Cedarapids example where revenues were actually down eight percent but we went from a loss last year to a very substantial profit this year because we closed the factory. We closed the factory. We consolidated that into Cedarapids.

So, you know, some of the restructuring moves that we took actually impacted our margins this year. On the flip side of that, take our telescopic mobile crane business. Where the combined revenue from Conway and Waverly was actually down 35 percent year over year. This was still a solidly profitable business, but obviously when revenues drop 35 percent it's difficult to maintain the same level of margins.

Despite the fact that we had one less factory. The flip side of that, of course, is that we are now in the fourth year of a declining telescopic mobile crane business and history would suggest that this business would turn around shortly.

How did that business do versus Q1?

It was up a little bit versus Q1.

Do you see sort of stabilization at - is that enough to let you say that there is stabilization at the bottom? Or ...

Yes. I think that's for sure. Particularly from our point of view, because we've got several new models being introduced in the second half of this year. Which we think many of our customers are actually waiting for.

... Ron to that point. We came into the second quarter in Waverly with about an eight-unit backlog. We're coming into the third quarter, we had 28 units sitting there in backlog for this next period. So, you know, that factor of three plusses is a good sign and I think as those markets come back we're well positioned to take full advantage of that.

Thanks. And then just to wrap up, can you just talk about overall the trends during the quarter as far your order activity. Did things get better, stabile or did they get worse over the last three to four months?

Frankly, I think we were pleasantly surprised on our order level through the quarter. During this past two year period, as has been I think with most companies, it has always been a bit of a nail biter as you went through the quarter with the first quarter - first month of the quarter being the worst. Second month of the quarter being a little bit better and everything happens in the last couple of weeks of the third month of the quarter.

In this past quarter for us, we had a much better balance of our business between April, May and June. I'm not sure I can handicap that that will be repeated in the next two quarters. But it sure felt a whole hell of a lot better than it had for the past couple of years.

I'm not saying it's going to be that way this quarter. Its still early. But, you know, one quarter does not make a trend but its better than the alternative.

Correct. Thank you.

Our next question comes from John McGinty from Credit Suisse First Boston.

Good morning.

Hi John.

The - I agree with Gary McManus, this is a little bit tough to try and figure out what all this means.

The - can I get back to Europe just for a second? Revenues ex acquisition for 20 percent. In other words, 230 up to 270 and the acquisition - the margin, if I get this correctly, the margin on the 270 was 9.2 percent.

Correct.

What was the - did you say the margin was down 1.2 percent from a year ago? Does that mean that the margin on that same number would have been 10 four or did I mishear you?

That's correct, John.

OK. So that means that last year on 231 million, you earned 24 million, on 270 million you earned 24.8 million. So in other words, operating profits were essentially flat on a 20 percent volume increase.

You talk about tel being up 75 percent with a fabulous operating margin. Benford being up. Track loader backhoe being up. Something must have really been ugly within that number or I'm doing something wrong to have all those gains. Something must have really been down pretty much even on higher sales.

And I thought you ...

Sure.

... PowerScreen was just - had higher sales but margins slipped. Did they slip such the margins were - operating profit was really down?

No. Operating profit was not down at PowerScreen. It was flat year over year. There's a couple of businesses that had year over year declines in operating margins. The power crane business being the most notable ones with year over year margin declines.

Did they ...

Let me finish.

Oh, I'm sorry.

We had some currency losses in the power crane business and some cost increases in that business. And - but, you know, frankly we also think that we had a very strong period year over year in that power crane business as they shipped a bunch of product to a couple of very special jobs in the United Kingdom.

We also think that some of the business we thought we would shift in the second quarter there, will now go in the third quarter. So I don't think that is any real worry on our part about the base level of business that exists there.

I would also say to you that in the construction growth, we shipped a lot more loader backhoes to North America where our business was up 40 percent on still a relatively small margin. However an operating profit was up significantly, the margin is still somewhat small.

Having said that, some of the actions we have in place and with the growth of that revenue, I believe in 2003 we're going to have a much better margin on a very strong business. And, you know, Colin, did I summarize that accurately?

Yes. Again, not wrong. In terms of Terex Cranes, a year ago the margin business tends to be international on launch Terex Cranes. The business this year to date has typically been much more domestic and a much smaller Terex Crane. So the margins have definitely been under a lot more pressure.

And the growth in construction and power crane pretty much offset most of the Terex Crane decline. The other Italian businesses, as you said earlier, in terms of Bendini and the eco market are also forcing significant year over year growth.

I also want to say, John, and I want to say this to everybody. That we're talking about operating margins in our business down that by comparison to everybody else in the industry would be heroic.

I'm not - I just want to make sure I understood what was going. The shipment in the U.K., was that the year ago or this year?

A year ago ...

And they were very profitable, I assume?

Yes. And basically we have some customers in the U.K. that Bantam wins significant jobs, for example, for terminal five and we anticipate in the third and fourth quarters that some of that business will come good for us.

And then, you didn't mention, I think, ADT's? What did they do in the - and maybe you did and I just missed it. But what did they do in the quarter and why?

I didn't specifically articulated dump trucks. I think they had a solid quarter. Colin, you want to comment on that?

Yes. Again, we're seeing 2001 was a very difficult first half for us and 2002 year over year we have seen consistent growth in all markets. Particularly the U.S.A, the U.K., the Far East has been somewhat soft but we're seeing some nice growth in France and with recent acquisitions Germany.

Again, year over year volumes are up. A lot of that, but nothing compares to where we can be, particularly as we integrate some of the distribution with the distribution in the German marketplace. Which shows, as you guys probably know, the number two marketplace for trucks weight.

Sure. Are you - you know, you've gotten a very nice share in the States. Is the share still miniscule in Europe or have you made inroads there versus Volvo?

Again, it depends on what market you talk. We're very happy with the U.K. shares at 23, 24 percent. France, you know, consistently double digit, 11, 12 percent.

Germany, couple or three years ago again was in the 10 to 12 percent range. But probably falling back a little bit to seven, eight percent. Obviously there's been some real economic issues in Germany and some of our competitors have been able to offer, kind of, blow your brains out deals which we just frankly wouldn't do.

So again, with incremental distribution and places that we have now in Germany, I really do see that as key market for us there.

Yes. One of our weaknesses was distribution in Germany. So, you know, it's ...

Atlas.

... Atlas will do for us.

If I can go over it - one other line of business. If we look at mining, you give us a couple numbers which are interesting. We show a sales increase of $30 million. If we assume that that's all O&K, O&K's probably bigger.

But you talk about O&K having a mid-teens margin. So if we take a 15 percent margin on 35 million, that's a little over five million. Parts sales were down to 47 percent, so that's $34 million. If we take a ridiculously low 10 percent margin on parts, that's 3.5 million. That's eight or nine million dollars you only earned one million.

Is that the measure? Are we losing $10 million a quarter in trucks? And if so, is the three to five million dollar reduction from the shift to the manufacturing enough?

I don't think the math exactly works like that, John.

I'm sure it doesn't.

When you have the year over year comparison we have to remember that last year we also took back $12.5 million of trucks from Chili. So the year ago number would have bee higher compared to the $73 million number this year.

What I really would say here is that we face about three primarily issues in our truck business. One, we virtually got no orders in the second quarter. OK? So consequently, almost all the variances - purchase price variances, manufacturing variances, et cetera, hit maximum levels in that period.

Right.

Since the quarter, you know, since that quarter is over we now have a, you know, a meaningful number of orders to build in the operation. So I think that will be helpful.

And secondly, pricing was pretty ugly on some of the few things that we did ship. So, you know, we had some orders from the first quarter that we shipped in the second quarter.

And third?

OK. Third is, we have some cost overruns in some other line items that we are just cleaning up. Some contingencies with regard to some maintenance contracts with some of our customers.

OK. On the balance sheet, if we come back to the slides and the presentations you have made. On the Demag we have 150 million to debt. We added 207 in 89 on - based off the slides off of Monday's Genie.

We had 63.3 to equity. That gets us to a 62, 63 percent debt to capital ratio. My question would be, A, would you agree with the math or is there something else that would go in there? And then, B, how much debt - how much cash do you expect to generate in the second half?

Part of the problem is that timing on this thing gets to be tricky. But do you expect to be able to generate positive cash to reduce debt from these levels between now and the end of the year?

Yes. And, John, you've now had four questions. So in fairness to everybody else I want to address this well and I want to make sure that other people have a chance to ask.

It is an important question and let me back up on it. First, after Genie and Demag, your calculations are roughly correct. We'll be about 62 percent net debt to total cap. But let me start from where we started.

Without impairment charges, the numbers we report - without impairment charges and special items, the numbers we reported today would have resulted in approximately a 50-50 net debt to total cap level. Impairment adds about four points to that, going from 50 percent to 54 percent.

Genie and Demag, together, add about an additional eight points. Taking us to 62 percent. That 62 percent is still well below the 66 percent we were at only one year ago. We will generate cash in the second half of this year. How much is still a bit uncertain, but we still are committed to trying to achieve the 80 to $100 million of free cash flow.

And we believe there are additional things that we are doing that will improve the equity line in the company without selling additional shares of the company stock. So, I'm committed to try and achieve that 50-50 level, but I'm also committed to trying to achieve a very significant return on invested capital for our shareholders. And to have solid earnings performance.

So this is the balance we're trying to manage.

Thank you.

Our next question comes from Robert McCarthy.

Good morning gentlemen.

Morning Robert.

Ron, in your remarks about the backhoe order business you made an interesting comment that your backlog has basically gotten too big and your not keeping up. Can you speak to what kind of volume you might have done in the quarter if you were able to keep up, and what you're going to do about it?

We'll I'm sure Colin may take a little issue with my statement of not able to keep up. But, you know, because he's done - frankly, he and the team have done a terrific job of both increasing production and lowering costs simultaneously.

I don't think we could have actually gotten any more business had we had been able to get a lot more production out. You know, maybe a 100 more units. But I think what's really happening here is that as people get exposed to our loader backhoe, they see the terrific value in it.

And, you know, we are kind of surprising ourselves that the order levels are remaining pretty solid. And, you know, while we plan, you know, while we plan to have production increases we obviously want to manage our working capital too. And, you know, it becomes a constant challenge to keep up, particularly since the factory is located in the United Kingdom and most of our increases in revenue is taking place in the United States.

OK. And it sounds like - unless I'm losing track of, you know, various restructuring initiatives, that you're planning on taking another cut out of Atlas? Is that right?

Yes. I think that's - this was planned all along.

Yes.

OK? It was planned all along since we have been putting the cost structure in place for Atlas in a way that has our new manufacturing process aligned. Colin Robertson is now responsible for that business. You want to comment on that, Colin?

Just - if I could just make one comment about the just fine. We've increased production by 50 percent in terms of the out-group from the end of March through the end of June and it's still not enough.

So it's a real nice problem to have, particularly driven by the of advertising here and the U.S. and hopefully it's going to be a problem that we continue to have for quite a long time.

Yes.

As far as Atlas is concerned, what we have there is basically a super brand. Extremely well accepted, particularly in the German domestic market but also in other territories in Europe and a significant amount of what has been done, as you know already. It reduced the level of headcount and improved productivity.

And also to adjust the level of operating expenses. So, you know, year to date we have seen some considerable improvement. Between now and the end of the year, what we're basically focusing on are the two core group plants in Germany. In terms of some of the processes are currently in place moving toward prepaid investment ways of assembly.

And also, basically to optimize the purchasing leverages that we know have an overall European construction business. So, I'm fairly confident that, you know, the next three to four months you'll see some additional cost reduction activities to get that business exactly as real it can be.

We're seeing significant backlog in the U.K. without distribute, that was product through our Terex U.K. distribution. And in some of the product, you know, we don't have an excess of a three-month backlog. So we're focused on getting more product through the factory. Getting it through quicker and really working hard to optimize the purchases base.

Thanks Colin. One more, Ron. Are you - can you speak to - in an $80 million free cash flow forecast, what the increments for working capital would be and speak to, you know, while you put up a good quarter. You're obviously pleased by that, could you speak to how you feel about working capital progress to date?

In our base business, excluding acquisitions, working capital on a reported basis dropped from about $704 million to $644 million. Now that $644 million is a reflection of currency as it exists today.

So it probably, you know, if we were to adapt it on a light currency basis we actually made more progress than that on a core base of businesses. Having said all that, I still think that, you know, we have more room to do to improve our working capital performance.

The fellows in the mining business are in that area. As Phil structures and plans for the Demag acquisition and our overall crane initiatives, which I think will be terrific in the future. Because there's lots of cost reduction potential and lots of opportunity to grow.

The crane business, I'll think you'll see us managing the working capital there better and using the working capital better. I think as we get some of the new acquisitions up and running from our revenue point of view, we will spin off working capital that has been sitting.

So, you know, I am positive about our ability to improve our working capital but also recognize that in a difficult economic environment and with a company that outsources its manufacturing processes, handicapping how we will generate cash from working capital is a tough thing.

So, you know, I think our overall we're not expecting a lot of cash to come out of our working capital and most of cash to come from earnings.

OK. Thank you.

Our next question comes from from Lehman Brothers.

Good morning guys.

Morning.

I was wondering if you could give us a little bit of detail surrounding the new covenant package under the renegotiated credit agreement?

Joe?

Let's see. The total debt - they're pro forma numbers, right? So it's net debt to pro forma EBITDA is five times through the end of the year and then it steps down to four and three-quarters and four and a half over the course of next year.

Interest coverage is - I want to say, EBITDA to date interest is like two and a quarter going up to two and three quarters over the same timeframe. There's a senior leverage ratio which really is kind of irrelevant to the whole calculation at this point.

OK. And were you in compliance at the end of the second quarter?

Yes.

OK. And the only other thing I had, was could you just sort of refresh my memory as to how you calculate free cash flow for purposes of your values for the year?

It's cash from operations minus capital expenditures.

OK. Terrific. Thank you.

All right.

Our next question comes from from .

Good morning gentlemen.

Hi .

Regarding the working capital improvements expected in the second half, where do you see most of the gains and could you comment on your inventory levels?

I think I generally just did that with Bob McCarthy and but maybe I wasn't clear enough. I'm sorry.

Our - we don't expect to generate a lot of free cash flow from working capital in the second half of the year. Probably much of the improvement in working capital is already happened. Out from our core businesses offset somewhat from our acquired businesses.

You know, maybe there is 10 to 15 million that we're hoping to achieve. Having said that, you know, that doesn't mean that if the economic environment improves, we can't throw off a substantially greater amount of working capital.

But I'm not trying to handicap that or forecast that at this point in time. The challenge we have, of course, is in a company that outsources most of its manufacturing processes. We're bringing in product for a planned production level and we will, you know, we have to manage those logistics pretty carefully.

Joe, you have anything to add to that?

No. I think it's a question, you know, it fluctuates from quarter to quarter. It's a longer-term goal. So - and generally speaking as we look at this we don't anticipate any benefit from working capital. We work on it and it's a focus for various reasons.

But when we talk about 80 to a 100 million of, you know, free cash flow from operations, we don't have any working capital benefit in that.

OK. Thank you. And do you have any company wide initiatives for attacking the inventory levels or is it really business by business?

Well, the company wide initiative for attacking inventory levels is our compensation program. OK? Where we charge each one of our operations 12 percent on the weighted average - not the weighted average across the capital, rather.

I'm sorry, but on the net assets that they maintain. And the principle asset that they maintain is working capital. So to the extent that a business can, like BL=Pegson, grow its profits and lower its working capital. We've got a $100 million business in BL-Pegson, that has only $11 million of working capital employed.

And that - those - that team is going to do exceptionally well. From a compensation point of view, if they keep that up over the course of the year. SO that's our principle company wide initiative. Are there other things that we can do? Perhaps. But in order to have that kind of a program, we'd have to manage our company more centrally than we care to and we - that loses a little bit of the entrepreneurship that we like to have in the enterprise.

OK. Thank you very much.

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Correct.

OK. Great. I want to thank everybody for their interest in Terex and please follow up with us if you have any additional questions or comments. Thank you.

Thanks.

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