Terex Corp (TEX) 2002 Q3 法說會逐字稿

Good morning my name is and I will be your conference . At this time I would like to welcome everyone to the Terex third quarter earnings conference call.

All lines have been placed on mute to resent any background noise. After the speakers remarks there will be a questions and answers period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad.

If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you. Mr. Ronald DeFeo you may begin your conference.

Thank you and good morning and welcome to the Terex third quarter conference call. With me this morning in Westport is our chief financial officer, , vice president of investor relations. Also available on the call for questions later will be president of our cranes group, , president of our Terex construction business and soon to be a president of our mining business.

This morning Terex is reporting earnings per share of 31 cents before special items and this compares with 32 cents in the year ago period. Also before special items obviously will discuss this in some detail.

Frankly I think this is a good performance in a tough environment. Our based business held up fairly well continuing to highlight the value of our business model. Acquisition inauguration progress continues but revenue and market challenges at CMI and operational progress set out less detracted somewhat from our performance.

I do not expect the market to help us in the near term. Nevertheless, the company we are building will continue to strengthen on many levels going forward.

A couple of over viewed comments. First we should expect in the near term a stronger more competitive franchise from Terex. Where growth comes from market share gains after all our non-acquired businesses while down 10 percent in the quarter were off only two percent on a year to day basis.

The markets are softer than this. Growth we think it can be achieved and we expect to continue to focus on this.

Secondly you should expect from us the continued relentless focus on cost reduction and the elimination of non-value added activities. We have a lot to do in this area in particular with the recently acquired companies but I think generally we're making good progress.

Third we're going to focus on cash generation and debt pay down to achieve a better balance sheet. Capital reductions will be a top priority.

And last you should expect margin improvements from the company. Even in this environment I think there is room to improve here. Probably not next quarter but throughout 2003 as the newly acquired companies continue to get integrated.

Perhaps we hold ourselves to a too high standard expecting a in year one from all of our acquisitions. I don't think so though. The standard I don't believe the standard is too high and I still feel we can achieve this in the vast majority of our acquisitions.

So overall we're stronger and better-positioned company today then last year and today then last quarter.

And is now going to cover the specifics and I'll return to do some segment highlights in a few minutes. Ah, .

Thanks Ron and good morning. Before I begin let me remind you that we will discuss expectations and future events and performance of the company on today's call.

And that such expectations are subject to uncertainties related to macro economic factors, such as interest rates, governmental actions and other factors.

A fuller description of the factors that affect future expectations is included in the press release and our other public filings. I encourage you to read them.

So the third quarter Terex reported net income of 31 cents per share before special items on revenue of $665 million. This compares with 32 cents per share before special items in 2001 on revenue of $454 million.

You'll note in our press release that we have added additional information in the financial summary on our performance excluding acquisitions and special items.

Let me address the special items for the quarter first. The after tax effect of the third quarter 2002 special items is a $4.1 million loss. It includes the following items: the loss on the early extinguished debt related to our third quarter refinancing was 1.6 million.

Restructuring activities of $2.4 million primarily associated with a consolidation of certain light construction product manufacturing operations and reductions in force of other operations in response to market weaknesses.

Thirdly, the impact of $2.5 million from the fair value accounting of inventory on the Genie and Demag acquisitions, which does not reflect the continuing operating performance of these entities.

Fourth, the operating results of the loss of $900,000 for businesses that are in the process of sale for phase down.

Debt, the equity loss on our minority interest position in was $1.2 million, this is a Chech Republic venter that provides a platform for the manufacturing design of military altering vehicles, as well as a potential source for reduced cost sourcing.

Six, we had a foreign exchange loss of $900,000 on a forward purchase of Euros, which was used to hedge the third quarter acquisition of Demag. You'll recall we had a gain of more $5 million on this item on the second quarter, and lastly, the resolution or legal claim or patten and infringement against the company related to our power screen group, resulted in a positive earnings impact of $5.4 million after tax.

So net sales for the third quarter of 2002 reached $665 million compared to 454 million for the third quarter of 2001, an increase of 47 percent.

The acquired companies drove the sales growth in the third quarter, and when you exclude the impact of acquisitions, net sales decreased 13 percent over the third quarter of 2001, primarily due to decreases in mining, mobile telescopic cranes, highway trucks, cranes and utility Ariel device businesses.

These businesses were partially offset by the continued strong performance of the power screen group, the boom truck business, the Beneford business, the material handling businesses, which continued to deliver on the US marine Corp contract, and lastly the Terex business.

The profit excluding special items increased to $96 million for the third quarter of 2002 from 70 million to the third quarter of 2001, reflecting the impact of the acquisitions. Without the acquisitions gross profit actually decrease by $1.5 million, however the margin increased to 17.3 percent from 15.5 percent through the third quarter of 2001.

SGNA expenses excluding special items increased to $53.5 million from $37 million for third quarter of 2001, overall this maintains a level of 8 percent of sales, excluding the impact from acquisitions from SGNA expenses decreased 10.5 percent, year over year to $33.3 million.

Operating profit excluding special items increased 29 percent to $42.5 million from 32.9 in the third quarter of 2001. And excluding the impact of acquisitions operating profit was 35.3 million or 8.9 percent of sales, compared to selling point 4 percent of operating margin in the third quarter of 2001. Now in fairness, roughly six tenths of a percent of the difference is due to the lack of good will amortization this year.

Net sales excluding special items for the nine months increased 40 percent to a billion nine 38 from a billion 382 in a comparable period in 2001.

The growth for the nine months was attributable primarily to acquisitions as the base businesses declined approximately three percent nine month's year over year. Operating profit excluding special items increased to $127 million from 113 million but margins decreased to 6.5 percent of sales compared to 8.2 percent of sales in the nine months ended September 2001.

Reflecting the impact of the acquired companies. Excluding the acquisitions operating margin was 7.9 percent compared to 8.2 percent in the prior year to date figures. Again the good will amortization was approximately the same percentage six tenths of point year over year.

Cash flow from operations during the third quarter was basically neutral and 8.3 million positive year to date. As a percent of annualized sales our net working capital is 36 percent when you include the recent acquisition of Genie and Demag.

While we have made improvements in some businesses in this area as Ron mentioned this requires significant focus especially given the delay in the N market improvement.

Our near term goal is to reduce to a level of 30 percent of revenues and facilitating some death pay down. Net death at the end of the third quarter increased to a billion 297 from 817 million at the end of the second quarter 2002.

This primarily reflects the impact of the Demag and Genie acquisitions. During the third quarter the company entered into amended re-stating credit facility with . We have raised the agreement provided 375 million of term death maturing in June of 2009.

Revolving credit facility of 300 million that is available through June of 2007 and $210 million term death maturing in December of 2009. The proceeds from the amended credit facility were used to re-finance existing term death from the acquisitions of Demag and Genie and for general purposes.

Our weighted average interest rate on the total death decreased to 6.2 percent in the third quarter from 7.3 percent in the second quarter. In conjunction with the Genie acquisition we also issued approximately 3.2 million shares.

So net death to book capitalization at the end of the third quarter was 62.7 percent compared to 57.5 percent at the end of year 2001 and 63.8 percent at the end of the third quarter of last year.

So while we have added roughly one and a half billion in annualized revenue in the last 12 months we've slightly improved this relationship and the 63 percent figures consisted of what we discussed at the beginning of the quarter.

In summary we maintain an overall profitability in businesses in difficult and market conditions. While our cost reduction and integration efforts in acquired businesses continues to develop.

The acquisitions of Demag mobile cranes and Genie in the third quarter add significantly to our global potential. Back to you . Thank you.

Now about each one of our segments following to a degree of the press release but highlighting some things that may not be in the press release. Terex cranes--actually, let me begin there.

We're very excited about what's happening with this business. Don't misread, me the market is weaker than it has been in years and the crane market is historically a fairly market.

However Terex now we think has tools necessary to compete and win. We have the right product. We will have the right cost structure and we have the right attitude in this business. In the third quarter we only benefited from one month from Demag revenues were up nearly 40 percent in total but without Demag down about two percent.

Operating profit in the remainder of business however was up nearly 10 percent without Demag reflecting the diversity and cost structure of our crane operations.

Looking forward Demag gives us a great . All terrain cranes where Terex was weak, strong cranes were Terex was weak and excellent consolidation opportunities to take cost out of the system with our other Terex European operations.

You will see us consolidate this product line and you will see us emphasis the Terex brand name and we expect to grow this business both in Europe and in North America. Demag has historically had a low position in North America where we think Terex can help a lot.

All in all the environment for our Terex crane business is challenging but we think the tools are in place to build this franchise and frankly the backlog at Demag is pretty good given today's market position.

Now let me move to Terex construction. We had a solid quarter here. Revenues were $312 million up 70 percent from the year ago period mostly from accusations. Though we also achieved the six percent organic growth level on the plus side we had very good performances from our crane, , , material handler business and our growing loader backhold business.

On the negatives we had soft performance on our articulated truck business reflecting the North American markets slowdown. Frankly we built too much inventory and we will have to work this off in the fourth quarter. We do have new models that are ready to go and our plan to be in the market in early 2003 and this perhaps is causing some of our slowdown or some of our customer hesitancy waiting for the new models.

The acquisition had a solid quarter but Atlas had a modest operating loss. At Atlas we are doing a good job in restructuring but this has been a tough restricting as we had a long way to go. We feel we have a game plan in place that will allow us to have a positive contribution from this business in 2003.

It's been a solid progressive road and costs are lower today than they have been and frankly the Atlas business does continue to offer to us an opportunity to access the German market with our other products that we had not previously been able to have.

Turning to the mining business. Mining is showing real progress. These guys have has a tough job. They pick at items with no commodity price help has made competing in this business a challenge. Revenue is down 25 percent versus a year ago but despite this we posted a small $31.1 million operating profit.

We had our first trucks built and shipped from our third parties supplier now that is closed a major achievement and a point of uncertainty now seems to be behind us.

This is an accomplishment that which we think improves our cost structure and meaningfully enhances our competitive position. We also reduced our working capital in this business for the second consecutive quarter reflecting the emphases that management has placed in this critical area so obviously working at getting our investment down and our return up.

shovels continue to do well and generally we feel there is a lot still in front of us in this business.

Turning to the Terex road building and utility sector this is a story here that's principally driven by public work spending and the slow down associated with non-residents for construction.

This really had our biggest impact at were revenues were down 30 percent versus a year ago. This caused a modest operating loss and implementation of a further cost reduction initiative which improves our cost structure further.

On a positive side there is more market activity right now than there was in the third quarter up four plants and we feel that we will get our share of this and the third quarter is typically the slow or weakest point for the and road building business.

Once again Terex has a commitment to road building sector which we think is a long-term positive sector to be in as a segment for the construction machinery business.

With in the road building sectors also our utility group which is really coming together quiet nicely. We have set our sites on building a strong and improving franchise here and we think this quarter's performance is reflective of that.

As you know we have acquired several of our distributors of this product or as the industry calls them a final stage assemblers and this we have done in order to improve our competitive proposition to investor owned utilize.

This is working. In addition to this working however it is also bringing to us some great cross selling opportunities as we are selling other Terex products such as we have sold more through our newly acquired distributors than we had ever done previously and loader back hose as we have taken several orders north of 10 to 20 units to customers that previously we had not had an emphasis on with these products.

With in the road building utility sectors also our advanced mixer business and as you may recall we acquired this business from chapter 11 earlier this year in April where we paid approximately $13 million for this business.

During the quarter we had operating profit at advance of nearly $2 million. Over all the road building and utility segment had a revenue level of $135 million up 93 percent from prior year. However excluding requisitions revenue actually declined 14 percent reflecting the market issues mentions previously.

The last segment I'll comment on briefly. We are also very positive about the opportunities with Genie. We feel great about the product about the cost structure and the hundred-day plan that has been both developed and has begun to be implemented by the management team at Genie. We don't expect the market to help us at all. And frankly we think the realities of this business remain challenging.

Never the less we feel quite positive about the ability for this acquisition to have very meaningful accretion to the company in 2003. I do need to say however that typical the fourth quarter is the weakest quarter of the year for the Genie area work class business as of course it sells into the red rental segment that typically doesn't buy much at this time of the year. So in summary says today is stronger than ever. Our market shares generally are growing. Our debt will be reduced and we expect margins to improve as we look to 2003.

Now look for the fourth quarter is below where we were expecting the market to be. Given what we are seeing it's a challenging quarter and likely to be in the range of 2001 performance. For all the reasons noted Demag and Genie in particular will remain cautiously optimistic for 2003 and we continue to focus on execution. With that I'd like to open it up for your questions, so operator please.

A this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from .

Hi Ron.

Hi

First question on the base business if I recall on the second quarter you had an eight percent gain and I think you said that the weighted average of your in markets were down 10 percent say it's significant performance. Two questions one is where do you think the industry vines were in the third quarter and why didn't you out perform to the same degree in the third quarter that we saw in the second quarter?

Frankly I think we did out perform in the third quarter and perhaps even to the same degree although at this stage it's hard to know. I think the in markets down in the range of 15 to 20 percent generally speaking. We feel the road building sector is down 30 percent. We've seen the loader loader back co market go down as you follow quite significantly. We think the articulated truck business is down 20 percent you know and the crane business is down generally another 30 percent although we don't have all final data right now.

So I think we've seen the expectation of a potential increase in the market in the second quarter and then the reality that the market was not improving in the third quarter with the principal issue being a difficulty among our customer base to get it's equipment financed. of course but with works spending being down. So I think we out performed the market.

OK. Also if we assume no change in industry volumes next year

Also if we assume no change in industry volumes, you know, next year what are some of the things you think we should think about in terms of earnings improvement? You know, things that you can control through, you know, cost cutting and synergies from acquisitions? Can you quantify what kind of expectations you would have there?

Well first of all I'm not prepared at this stage to give guidance of course for 2003, as we're going through our budget planning process right now.

Having said all that I don't think we need much help from the market for us to see solid contributions from Genie, from Demag, and from some of our other businesses as well. Atlas we expect to be positive next year that'll be a major year over year increase.

And you know, so you know, I think we're going to see some nice year over year improvements from Terex, not by the market, but by the things we're continuing to do.

And you would obviously continue to expect to outperform the industry?

You bet.

OK. Great. Thanks.

Your next question somes from of Salomon Smith Barney.

Hi. Good morning.

Hi David.

Hi.

On the outlook for '03, I know you haven't given anything in particular, but obviously this time of the year you're getting feedback from the . To some degree taking a peek into the spring selling season. Where is there any confidence that next year is, you know, a flat year in the ?

OK.

Well I think we sat here a year ago, and we were thinking that the second half of 2002 would be an improvement, it wasn't. What our customers and in general the industry is telling us is that 2003 will be pretty similar to 2002.

As we look at the distribution of our business, geographically it's obviously not all the same. And we shouldn't, just by the fact that we are sitting here in North America, cloud our view of the world only by the North American Business. If I were to handicap the North American business, I'd be inclined to say it will be softer in 2003 perhaps even than 2002.

Having said that, I think we are going to see some improvements in our business in Europe, and we'll also see some improvements with our business in Asia. And some of the cross-selling opportunities that we have through the Genie organization, as well as the investor owned utility targets for our business will offset some of those market .

And last question, on construction.

The margin performance there was less than I thought. Was there something in particular dragging that performance down?

I think Atlas more than anything is - has dragged that performance down, as it showed a modest operating loss.

But Atlas in North America is a pretty minimal piece, right? I mean Atlas is mostly all Europe?

Atlas in North America is, but Atlas in Europe is not.

OK. OK. I'll get back in the queue. Thank you very much.

OK. Thank you.

Your next question comes from of Credit Suisse First Boston.

Morning Ron.

Hi John.

How are you?

Good.

Can you quantify - you said that the two things that really hit you relative to expectations, which were I think the consensus was about 37 cents, was the loss at CMI and the loss at Atlas. Could you quantify either individually or even together how big the losses were in the quarter relative to what you'd been expecting when you had given guidance for this quarter three months ago.

Yeah I'll take a rough shot at that John, recognizing that we always expect some plusses and minuses, but in the quarter its north of 10 cents per share for the combined businesses.

This is the loss or the loss or the loss relative to the ...

Relative to what we expected.

OK the related question is on September 18, when you had the big meeting in New York, there was a question from the floor about you know how comfortable you were and you said the markets had deteriorated, but you felt you still had a shot at the quarter, you obviously come in significantly below the quarter you come even further below for the year could you talk about what you didn't see in September that you do see a month later, in other words its not really as much I guess it's really six weeks later, it's perhaps not as much there's nothing you're really saying that's a surprise other than what you said in just the position about what you said in September.

Yeah what I said in September was we had expected a second half recovery, that didn't exist, and I think that's the primary difference from the way that the earnings model was put together for the company in general, and I think frankly we beat the expectations five cents a share in the second quarter, so as we look at the third quarter we basically caught up, I think the real difference is the fourth quarter outlook right this minute and you know we're still early on in the quarter but frankly if we expected a recovery I don't want people to have the wrong impression.

OK and then just as a follow up question you had both Gary and David gave you a chance to talk about '03 and you said you're not ready to talk about it, in the past you have said that I believe that Genie and Demag were each supposed to add 25 to 30 cents in 2003. Is that still - you didn't repeat those numbers, are you still sticking with those numbers.

Yeah I think I said 20 to 30 cents each and I'm not changing my view on that.

And then how - final question - how big is the swing in Atlas, in other words on a relative basis if Atlas does what it's supposed to do does that add another 10 or 15 cents or what does that add ...

John you're taking the numbers out of my book--here it's 10 to 15 cents.

Thanks very much. I'll get back in queue.

Right.

Your next question comes from

Morning Ron.

Hi Rob.

You spoke specifically about inventory build in the Artic business and you clearly have demand issues that seem ... can you talk about where you are planning fourth quarter production shut downs and how the level of that activity might compare to last year.

OK, I think you hit some of the issues first of all at our articulated truck business we're planning reduced work weeks and slow down production there to both catch up on the inventory - balance the inventory and to prepare ourselves to introduce the new models for next year and I'll ask to comment additionally when I'm finished here in a second. At CMI we had taken a significant amount of working capital out of the company until the third quarter and then given the revenue reduction working capital basically is as it was when we required the businesses and I think we can get you know a meaniful amount of working capital out there.

We also have had a built in working capital on one of our businesses where we're planning to make a manufacturing change early next year and I think that has built our inventory but as we get the new factory started in United Kingdom next year, we'll be able to squeeze some working capital out of system, but that working capital is there for good reason, safety valve to support our customers and I think the mining group was able to get a substantial amount of working capital out of that business in the third quarter and is targeting to get a substantial amount of working capital out of the business as well in the fourth quarter.

So good active projects under way in all the companies and then if you add Demag to that fact we've acquired this company with excess working capital and a back log that was pretty high built that way because it was fixing some of the new models that it had designed.

All of those things are behind us now and the organization is pushing to get working capital out and revenue back. So there's a lot of positive things under way to get working capital. Now, Colin, do you want to add the comments on Artics.

I think the other couple of quick points I would make Ron, about a year ago the management team Terex in Scotland instituted an annual endeavor so that the workforce worked a number of others headquarter in line was market demands to technically 30 others in the first and fourth quarter ramped up the cost of 50 others in the second quarter where demand is greater. So that certainly has helped.

The Articulated truck volumes in the fourth quarter was basic leverages by 20 percent for two reasons. First of all the demand wasn't what we'd expected but secondly we're in the process launching our building new articulated truck range and we're going to make sure that 100 percent they're built absolutely right and the process documentation is where it needs to be.

The only other point I would add is that we are taking on additional two down weeks on articulated truck production but the rigid truck production is still fairly high and the demand is still for 17 hundred tone trucks weigh an excess of what we've seen for the last couple of years.

Right. Phil do you want to comment on Demag, Demag inventory?

Well as, as you've mentioned Demag inventory that we gotten at the end of at the first of September, was quite high but it was part of projects to grow our business and we continue to be very optimistic with the reduction of the current inventory that we have in Germany towards the market we must note that about 25 percent of inventory was sitting with two product models, DAC, the new AT 60 and the AC 350 models with site superlift that we actually started shipping in September and we continue to ship through the third quarter.

So we are looking for some significant reductions in our inventories from Demag pull us deeds subsidiaries.

All right and without getting into particular numbers on the sector by working capital any comments from you?

No I think our action plans are unscheduled and we have another big bite of apple to take in next quarter and I have no reason to think that we are not going to achieve the target that we set for ourselves on.

Great, a follow up Ron.

Yes.

Regarding I understand that you still see potential for 20, 30 cents next year and maybe I'm reading too much into this but I kinda got the sense as you were briefly talking about the business and your prepared remarks that your outlook and perhaps management management's outlooks for that business for next year may have been deteriorating recently.

Did I did I misread you.

No--well, yes, you did misread me. No the outlook is not deteriorating. In fact I think ...

I'm talking about market demands here.

Well, market demands is you know is going to be no better than this year clearly. And if it's off 10-15 percent we expect to be able to recover that by being a sleeker more capable organization with a lower cost structure in general.

OK thank you.

Next question.

Your next question comes from from J P Morgan.

Joe all my questions have been answered.

Thank you .

Your next question comes from of .

Mining business for a second--thought like you had some oars that were shaping up at the analyst meeting six weeks ago. Could you just touch briefly on that and do you think that you can improve your margins sequentially getting going forward.

OK let me ask , but our comment on our margins in the mining business. I think sequentially as we look at 2003 the answer to that will be yes. 2002 as we close this quarter I'm still a little bit uncertain looking at year over year performance how that will shape up but with regard to the orders do you want to comment on that.

Thanks, Ron. I think you know there's been no signs that the orders are not going to come in. We have a fairly awful backlog on the shovel business and on the trucks.

Where it was very dry we made a call in the beginning of the year. We do have quite a few trucks that we're going to get out in this next quarter and some of that already scheduled for Q1 in next year.

So I feel fairly confident that we will get what we have committed to.

OK, and could you also speak briefly about your cash flow from operations expectations for 2002. Have they changed at all.

In terms of, this is , we're basically flack from operations in the third. I think we'll see some improvement in the fourth but I don't think it's the significance is there yet as we balance the inventory with some of the opportunities we picked up with Genie and Demag.

OK, thank you.

Your next question comes from from .

Good morning gentlemen. Could you just go over what the key bank covenants are in you new loan facility leverage of coverage in a kind of fixed charge covenance. Bit of an EBDA.

The current debt to EBITDA level for the third quarter is 5.0 and we expect to be slightly less than four as we complete the analysis for this quarter.

It goes down to four and a half times for the fourth quarter and basically through the the third quarter of next year.

And that leveraged through the senior secured bank debt?

This is total leverage.

Total leverage.

Figure secured these has really not been a relevant factor on that, but the senior leverage ratio is 2.25 in terms of the covenant. And there is the interest coverage ratio, currently at 2.0 and that stays there through the beginning of the first quarter where it goes to 2.25.

It goes to 2.25 at what point?

Beginning in the first quarter 2003.

And when you said previously that we were expecting you know, your outlook for '03 would be that it would be flat comparable to '02, did you mean that it EDITDA for '03 would be roughly equal to '02, was that your ...

I was talking about fourth quarter cash flow from operations, I didn't really address '03.

Yeah, and my comment on '03 is reflective of the market conditions, not Terex's performance.

OK, market conditions for '03 you are saying are going to be flat compared to '02.

Right but at Terex's performance will be better given the acquisitions and the things that we have going on in the company. I think as I mentioned in my comments, our working capital objectives are significant to improve at a ratio of revenue to get to about 30 percent, in the kind of near term period. And that's to facilitate some debt paydown as we go through '03.

OK.

Could you comment about industry conditions, not really about what your EBITDA...

No, not at all about what our EBITDA is going to be, not at all, just it is about, we are not going to get any help from the market, so therefore the implementation of our execution plan, the integration's of Genie, Demag and the growth we expect to have happen from those is what will drive our overall performance.

Very well, thank you.

Your next question comes from Michael Lewith, of JL Advisors.

Good morning.

Good morning Michael.

Just for clarification Ron, my understanding of the last several conference calls was that this '02 and to a degree '03 guidance and list of '02 of what previously was the $50 to $75 range, was not predicated on any turn on any of the markets. Was that a misunderstanding?

Michael we said in the beginning of the year, that we expected an improved economic environment in the second half of 2002, and our plan was built upon a better performing market condition in the second half of 2002, as we sit here today we are not expecting any improvement in market for 2003, we had historically not expected a year over year 2003 market improvement over 2002, but we did expect a stronger second half.

And at the analysts meeting on September 18th it was not clear that of the fourth quarter was going to be so much weaker, with two weeks left in the third quarter, there is no visibility into what the fourth quarter is going to look like.

We didn't have a fourth quarter forecast roll but from our organization with any additional clarity, and what I would say to you is at the analysts meeting on the 18th of September, we obviously couldn't and wouldn't comment on our full year outlook, that was an analysts' meeting to that focused on our long term business prospects and I did indicate at that meeting that the current economic environment was weaker than we had expected and we didn't see a recovery.

And when you redid your bank lines to enter in to the new in the third quarter what kind of guidance had you provided to the banks at that point and time and are they going to you know have you spoken to them since I don't know yesterday or today whenever the new numbers came in to clarity for you and what are they expecting now.

You know I frankly think that we are going to be pretty close in general to in what we had told the banks.

How's that--I mean the forth quarter guidance is significantly below where the street was and you entered in to a new bank line in the third quarter right.

Bank let the company enter into an amended and restated credit facility.

I think the one thing to clarify this is gave us the company calculations for acquired companies are at proforma basis it last's 12 months. So in terms of Genie Demag and the other requisitions we have that is really what is going in to the calculation and gradually those quarters fall off and are replaced with our current performance so again we don't feel that that's going to be an impact in the four of that significance why don't we tip this over and one other comment I did get to speak on the interest coverage ratio that stays at a level of 2.0 through the third quarter of next year it does not go up to 2.25 in the first quarter. Sorry about that.

I just want to follow up for clarity the banks facility when you got an amended covenence that you got in the third quarter you are comfortable that the banks are comfortable with the new level of guidance does not affect with what the banks were expecting.

I haven't spoken to the banks over the past week or two but in the new level of guidance is that the reflection of the best information I have today about how the company is going to profroma in the next three months and then going forward following that.

Thanks.

OK.

The next question comes from of .

Hi this is here question on 2002. What is the net impact of requisitions in a full year I know '03 is set to be a bigger once you get the most recent requisitions put in place but what's the net impact in '02.

Year to date, one-cent dilution.

Sorry.

Year to date one cent dilution and on your question earlier in the construction group the margin is essentially flat year over year if not up just a little bit from the non acquired business.

that is one of the points of my questions I am trying to figure out the business. I understand the numbers we were getting are in individual pieces but when I step back and look at sales for the company for the full year what's the expectation I mean so what the first nine months.

Down three percent.

Down three and for the full year. I just don't see how we go from a dollar 42 down to a dollar 10 pretty modest sales decline if the requisitions aren't dragging the numbers down.

Well, first of all, again these things relate to timing. We don't expect much in the way of contribution from Genie in the fourth quarter. It is the weakest quarter of Genie of the year and that is probably one of the things that you have to consider here and perhaps we're being a little conservative at this stage for the fourth quarter but I think it's appropriate given what we know and the fact is that we're making the production slow down decisions in order to ensure that we can squeeze out some working capital form the company.

So the core growth for the full year regardless of how well the industry does it's going to decline in the fourth quarter given your initial take down production in the fourth quarter.

Right.

And then lastly on the balance sheet I know obviously the balance sheet has grown in general at the acquisition. Just want to make sure I understand the accrued warranty propped up the 86 million. If you look at growth and total assets sequentially with that movement or even inventory it makes sense I just want to make sure I'm not missing something.

Its all acquisition related.

OK. Thank you very much.

Yeah.

Our next question comes from of Credit Suisse First Boston.

Ron, let me go back to the guidance sheet there you gave at the beginning where you took the 41.40 or what ever it was last year and you said proforma because of the acquisitions you started out a $1.02 and then you added 20 cents from 142 20 cents from acquisitions to 20 cents from restructuring to get you about 50 bucks to 75 and then you knocked that down maybe a nickel or a dime with the you know the share issue on a delusion basis. Obviously we got the 20 cents from 142. Did we get the 20 cents from restructuring and do we lose all of the 20 cents from the acquisitions I mean obviously we're not getting it out of . Is that 20 cents actually a negative number?

Well here I think you - you're very close to the 30,000 foot as to how I see 2002 sharpen up when it's all said and done ...

OK ...

You'll get - you really have to start about a buck two I think for the full amount of delusion ...

I mean that's last year pro forma.

Right. Right with the timing of the shares through and

Yeah. Absolutely.

And I think we got about a half of what we wanted from the restructuring programs we took and part of the reason we didn't get the other half relates to the fact that you get the other half when you have volume. OK?

Right.

And the acquisitions were more than we had expected at the year and the timing of the acquisitions you know impacts the contribution during the year. Obviously if you have a Demag and a Genie at the timing we had and they don't contribute but yet you carry the cost of the acquisition to fund it such as we had financed Demag for example the first of July but didn't close on it till the 30th of August. Those things impact our accretion dilution and frankly CMI is lack of revenue and atlas off set some of the we've had so all in all I think acquisitions end up being pretty neutral to the companies earnings in 2002.

OK. And then obviously you get the 20 cents from the . I mean that's mathematical.

Yeah.

OK. So that gets you to $1.30, I mean, if we just do it on a purely, you know, half the restructuring and the fact that it's going to be a little bit less really speaks to some of the weakness in the core business.

That's correct.

In the fourth quarter and so on.

Right.

It's just a very technical question with regard to . Are you going to be able to take production down enough in the fourth quarter to get rid of the excess inventory? I mean you get a problem in that you got stuff, you know, laid on the build the models then you've got the new models coming in. Do you end up needing a write-off there? Cause you ...

No. We won't need a write-off, but it'll take us some time to get the production. And you know, we could also end up with a couple of good customer deals between now and the end of the year that we don't anticipate right this minute. So you know, all is not lost there.

OK. Just a couple of specifics.

On your view of no help from the market next year, OK? Which to me implies - and I'm asking you this specifically because I want to make sure I'm not misunderstanding words. To me no help from the market says next year's flat. But in order for next year to be flat, since clearly the second half has begun to deteriorate, you need almost you need a pick-up. Or are you saying no help from the market - from the run-rate of the second half of ?

From the run-rate of the second half of 2002.

So I mean really - so that says that '03 almost is a little worse than '02.

Well we had one quarter in '02 that gave us all hope.

Right, exactly, OK.

Second you gave us a 10 to 15 cent swing next year for Atlas, 20 to 30 cents each for the other - CMI, I mean CMIs do we ever see a - do we ever get a positive swing in CMI next year? Or should we just hope that we get a zero out of that?

Well I think it will get to a zero next year.

So zero - but is that incrementally a plus? Or ...

Yes it's incrementally a plus.

Five to 10 cents?

Around - well our look at it today is about seven. So yeah, five to 10 cents.

OK.

And then if I can just get one thing said which was 36 percent working capital on a trailing basis. Goal is to get to 30 on 3.4 billion in sales that's only 200 million. I say only, it's a lot of money it's - a big chunk of that's in Demag. What's you timing? Are we looking at getting more than the 50 million in working capital that at one point you thought you could get out nest year?

In other words, if we're looking at '03 and doing a funds flow, could you get 75 to 100 million out of working capital ?

Let me go through and make sure of the numbers, you understand and why I said them. But 36 percent is annualized. So we had Demag and Genie for the short periods, we had ...

No but you annualized ...

Yeah I did.

Yeah.

And that gets to about $3.4 billion revenue kind of number when you annualize them.

Right.

Looking at Demag. You know, they have working capital at the end of the quarter of $228 million.

Right.

They actually reduced about $10 million in the month that we had them.

Right.

And I think there's significant opportunity there. In particular in a work in process area. You know, finished good, used equipment and new equipment. Obviously, we'll turn as the orders do. I think work in process while we have some of these product change overs is probably higher than required.

I think, you know, looking at one company in isolation we'll get a lot more reduction out of Demag than we will out of some of our others businesses to bring that to fruition. Fifty million dollars I think is a reasonable objective.

Out of Demag?

In total, you're right. It's about $200 million reduction. And I believe that that's a good target for next year.

You think you can get 200 million, I mean, we can use 200 million of working capital in '03 out of the source of funds next year?

, I wouldn't use it, but I think that's the opportunity. I think, yes. I ...

Be still my heart!

But I think you see the sides and the reason why this is the right thing for us to focus on right now. You're not going to get any help from the market. You know, we have the ability to squeeze working capital out of these businesses that we acquired. It's a priority for us and will make a big difference in the overall profile of the company.

Absolutely. That's great. Thanks very much.

Your next question comes from of Credit Suisse First Boston.

Good morning.

Good morning.

Ron, maybe you could put this in perspective for me a little bit. The last couple of quarters your EBITDA has been positive by 10 million or so. You really did do the acquisitions. And clearly things are in tough shape out in the markets. When you look at fourth quarter being flat year-over-year, which was like a $35 million EBITDA number last year.

Is it the acquisitions aren't doing what you thought they were going to do? Is the base business worse? Is it a combination of both? How does that work?

Let's be a little bit careful here when we say flat versus last year in EBITDA margin.

No, no, not margin. Dollars.

EBITDA dollars. OK, we're talking earnings per share, OK? When we say that.

OK. Adjusted -- adjusted EPS or just EPS?

EPS.

OK. And how does that work, then, when you're talking on an EBITDA basis? I know how to do a translation, but would be -- what else is running through that would EPS but not impact EBITDA? Or easier for me anyway, if your EPS expectation is flat year-over-year, what's your EBITDA expectation year-over-year for Q4? It sounds like you're saying flat, which means we've lost something here.

Yes, it's -- you know, I think, to look at $40 to $45 million of EBITDA.

OK. So sort of the same sort of relationship we've had in Q2 and Q3?

Yes.

OK. Can you talk about Genie as far as, you know, we have, you know a month or so of numbers here. How they're looking, you know, for the nine months. How they look for the whole quarter year-over-year? And then, you know, versus what said yesterday and the other rental guys about taking down, you know, new buys substantially for '03? How does that factor into Genie's health for next year?

OK. Just, let's get ourselves referenced together. United Rentals represents about 15 percent of Genie's overall revenue in 2002. But it is Genie's single largest customer. I think we can grow our market position still with United Rentals. I think we probably have less business today this year than our competitor. Although it's probably close if you -- if you talk to both sides it's to get an exact number for me there.

I think United is doing the right thing by aging its fleet. It's right for United. And I think our expectation is that at Genie we will find other customers in other places, in particular, in Europe. And we'll end up with a 2003 performance similar to 2002. There's no reason for me to change the information we've provided on Genie, which was a business of about $575 million in revenue, and an EBITDA in the range of high 70s, approaching $80 million. No reason for me to feel that that won't be the case . However, you know, again, very little of that is contributed in the fourth quarter.

I thought the number you were using on Genie was 54 of EBITDA. Does the 70s include cost savings, or does the 70s represent what they'll actually do?

Well, the 58 number approximately is looking back as to what it was doing. The mid to high 70s is the number reflective of cost reductions. It's that $20 million of cost reduction that is underway and implemented at Genie today.

OK. And if you look at -- this look back, is that an '02 look back or an '01 look back.

An '02 look back.

So Genie today is doing somewhere in the high 50s for EBITDA for '02.

Yes. If not, probably a little bit more, but we didn't of course benefit from that since we're really only going to have Genie for the fourth quarter.

Right, but it's encouraging -- I mean I think one number was in the low 50s, so ...

Yes, I think those guys at Genie are doing fine.

Well, that's good to here.

Yes.

Your next question comes from of Lehman Brothers.

Good morning, guys. This is , actually, in for .

Hi, .

Wanted to focus a little bit on the working capital, and I just want to throw a number out, I just want to make sure I heard it correctly before. The 228 million of working capital from and Genie on the books at September 30?

225 at only.

How about -- I'm trying to get a sense as to what the usage of working capital in the base business was during the quarter. Could you help us understand that a little bit better?

June to September, net working capital, excluding the acquisitions, increased $23 million from 622 to about 645.

OK. And that was attributable to some of the factors we talked about earlier.

That's right.

And one other thing I wanted to focus on was the pro forma LTM EBITDA that you would be using to calculate your covenants. Could you give us just a general sense, help us build from the actual numbers to an actual pro forma, get a real perspective of ...

Sure. If you take the three months, or excuse me, nine months EBITDA for this year, 152 million, roughly -- add the fourth quarter, 2001, of 35 million. For the last 12 months at it's about 188. The pro forma adjustments from the acquisitions, I can go through the individual ones here, but in total, it adds 141 million to the figures. CMI is 12, but that -- again, for a short period of time, because that was right at the end of the quarter last year. was 25, Genie 78, Atlas and Schaeff, 18. , 2.1. Pacific utilities, and Advance Mixer, $3 million.

That gets you to about 329 million on the EBITDA for a pro forma basis and a net leverage ratio of just under 4.0.

OK, and then in terms of the fourth quarter, one thing that would be helpful in terms of getting a sense as to what you guys could do for working capital would be a pro forma third quarter revenue number, so you could assess the number in days during the quarter.

Yes, that's difficult, but we'll try to get you that. It's difficult because of the stub periods, and -- but I understand the point.

OK, and the only other thing. With regard to cash flow in the fourth quarter, some -- I want to make sure I understood this correctly, some improvement in cash flow from ops in 4Q. Can you just throw a number on that for us, just kind of a ballpark?

Again, I don't think we're talking significant if it's $10 to $20 million order of magnitude. And we're going to have some swings, as you can expect.

OK. OK, that's all I have, thank you.

Your next question comes from of T. Rowe Price.

Thanks, actually I think you guys hit most of my questions in the last couple.

OK, all right, Nate. Operator?

Your next question comes from of Robert W. Baird.

Excuse me. Ron, are there any other product categories that we haven't talked about besides Articulated where you're seeing significant issues in terms of channel inventory build? In other words, including distribution?

Probably not, Rob. I've seen channel inventory come down in a couple of our other product categories, but not really being replaced, yet, with new inventory. What comes to mind, for example, would be Cedar Rapids, where the paving industry and our crushing and screening channel inventory there has come down, but it's really been a run-off of inventory, as we haven't benefited from replacing any of it yet. And that's really more the situation than anything.

OK, so when we came into this year, you had a first quarter where your numbers were hurt incrementally because you had a necessary delay in clearing out some of that inventory in those products that you were talking about.

It was crane.

It doesn't sound like you think that particular issue would be as big an issue as we head into '03.

No, I don't.

OK. And you may have alluded to this, but I don't believe you said anything specifically about the likelihood that you might be taking another look at, you know, downsizing more of the businesses. I guess where I'm going would be -- if you had a charge to tell us about, you would have told us about it. But don't you think it's a reasonable assumption for us to walk away thinking that we might see something like that in the fourth quarter?

Well, what I think you're going to see from us is a reflection of what it takes to integrate both Genie and . And sometimes, that can be charged against an opening balance sheet, and sometimes that'll have to be charged against current operations, because if you restructure one of your existing businesses due to the fact that you acquired a new business, you cannot charge that to the opening balance sheet.

OK, thanks.

Go ahead.

Your next question comes from of Management.

My questions have been answered. Thank you.

Thank you. Operator?

Your next question comes from of Salomon Smith Barney.

I promise, last question. On the sales from acquisition in construction for the quarter. It came in larger than I thought, about $118 million. That is made up of just Atlas and Schaeff, right?

That's correct.

How do we get to 112? I'm just trying to dig into the loss at Atlas. On what kind of sales levels? Because it looks like the sales came in stronger than I would have thought. Also at ...

Sales came in strong at Atlas and, you know, were fairly positive.

It's part of the $2 million operating loss for the quarter.

I was looking at about 35 million from Atlas, and it must have came in at like, 50?

49, I believe.

49.

OK, all right. And then on the ADT, just so I understand what's really in the channel, is this related to one large competitive dealer having a lot of trucks, or is this throughout your channel?

It's not related. Colin, do you want to comment on that?

Basically, even in the last week or ten days, we're having a literally total out of large objects because many of our customers now buy in lots of 10 and 20, and they buy from contracts that are . There's been fair amount of reluctance for folks to take inventory, if you like, into their particular channel based on ifs, ands, buts, and maybes. So what we're basically seeing is -- it's like a low level of risk that the distribution channels are prepared to take, and therefore we've been left with a few machines, or some machines in excess. But as I said earlier, the new Articulated trucks, which we've only built the first handful, are 25 and 30 ton machines.

So it's maybe even a little bit fortuitous that we have some inventory in the U.S. and back in the factory in Scotland to help us with the ramp up with the new production.

Is the inventory more of an issue in North America or Europe? Because what I'm referring to is in North America.

Yes, I would say it's a little bit more heavily weighted towards the U.S. right now.

OK, thanks guys.

Your next question comes from of Credit Suisse First Boston.

Phil, can you just talk about, is that Genie limited recourse debt that was there before, is that still in here somewhere, and is it included in the balance sheet.

Yes, it was in the balance sheet. Again, I'm not ...

It's about 80 to 85 million.

OK, and the recourse percentage is what, 10 or 15 percent?

Correct, and it's non-cash. I mean that will eventually run off over the next 12 to 24 months.

Right. OK. And you replace with the Terex financial type financing.

It won't exactly be replaced, but Terex Financial Services will do that and they'll be, you know, hopefully they won't be that recourse issue.

OK, great. Thank you.

Your next question comes from of Lehman Brothers.

Morning guys. again. Just one thing I forgot to ask earlier. What is the specific time frame for bringing the working capital from 36 percent of sales down to 30 percent?

I think we're looking at the next 15 months.

OK. That's all I have, thanks.

OK?

At this time, there are no further questions.

OK, I want to thank everybody for their interest in Terex and please follow-up with myself, or for additional feedback. We appreciate your interest in the company. Thank you.

Thank you for participating in today's Terex third quarter earnings conference call. You may now disconnect.