Terex Corp (TEX) 2003 Q2 法說會逐字稿

Good morning. My name is Anay and I will be your conference facilitator today. At this time I would like to welcome everyone to the second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (CALLER INSTRUCTIONS) Mr. DeFeo, you may begin your conference.

Thank you and good morning to all and thank you for your interest in Terex today. On the call with me this morning is Phil Widman, Senior Vice President and Chief Financial Officer, Kevin O'Reilly, Vice President Investor Relations and Corporate Communications. Also on the phone will be Fil Filipov, President of Terex Cranes, Bob Wilkerson President of Terex Aerial Work Platforms, and Thys DeBeer, President of Terex Mining. Phil will be covering the financial performance in detail in a few minutes. I will open with overall comments, as is my custom, and then we will open it up for questions later on. Please try to limit your questions to one and a follow-up, so we can get as many participants a chance to ask their questions. A replay is available shortly after the conclusion of this call and can be accessed until Thursday, July 31st at 6:00 PM Eastern time. To access this replay, the number is 800-642-1687 for domestic callers and 706-645-9291 for international callers. The conference ID is 1650863, and as usual, this is on our website.

Overall, excluding special items, we are really where we expected to be for the first half of 2003. Our first quarter was a bit better and our second-quarter a bit worse, but for the full year we are still expecting earnings to be in line with prior guidance, however at the lower end of the range. We are doing better on cash and working capital reductions. Generally our acquisitions are exceeding expectations and the base business in particular, the North American Crane and Roadbuilding businesses, are below expectations. All in all, a respectable first-half considering the environment.

The underlying economic environment plus the excess capacity that existed in a number of our acquisitions is reflected in the restructuring impairment and special items charges we are reporting. To provide some perspective over the past couple of years, we have closed 23 manufacturing facilities and 3 sales offices. We have added one new facility. We have taken an extraordinary amount of cost out of these businesses, and frankly this was needed. Some of these charges went to the opening balance sheet reserves for acquisitions, but of course these still use cash to achieve, and others simply went to special items as noted.

As we sit here, we have a wide product range in front of us with a lot of growth potential. Growth plus margin expansion with less working capital is our basic game plan. Now, Phil is going to summarize the quarter and I will come back for some specific remarks by operations.

Good morning. Before I begin let me remind you that we will discuss expectations of future events and performance of the Company on today's call, and that such expectations are subject to uncertainties related to macroeconomic factors, interest rates, governmental actions, and other factors. A more complete description of these factors that affect the future expectations is included in the press release and our other public filings. I encourage you to read them.

For the second quarter, Terex reported a net loss of $49.1 million or $1.02 per share, compared to net income of $5.2 million or 12 cents per share in second-quarter 2002. Excluding the impact of special items, net income for the second-quarter, 2003 was $24.7 million, or 50 cents per share on net sales of slightly over 1 billion, compared to 20.5 million or 47 cents per share on net sales of 653.2 million in 2002. In our press release, we have provided additional information in the financial summary related to our performance, excluding recent acquisitions and special items, which we believe helps provide better priority to the ongoing performance of our businesses. I will address the special items first.

In total, special charges for the second quarter were $94.7 million pretax, with roughly $10 million in cash charges. Given the recent performance in the Roadbuilding unit and the continued uncertainty in U.S. Highway spending at all levels of government, we accelerated our review of the long-term carrying value of this business. We conducted a comprehensive review of our product portfolio, the impact of recent and potential management actions, inventory levels, and asset valuations. This review has led to the discontinuance of certain recycling product lines and rationalizing inventory levels in other areas. The pretax charge associated with these actions includes a goodwill impairment of $51.3 million and $30.6 million associated with the product inventory rationalization.

Additional special items included the closure of the Peiner tower crane facility in Germany and the Kilbagen (ph) operation in the Republic of Ireland, as we continued to consolidate manufacturing capacity. This was for a charge of $9 million. The loss on retirement of $50 million and the redemption of our 8 7/8 senior subordinated bonds was $1.9 million. We wrote off the remaining investment in SDC International for $1.1 million, and completed the flow of the Genie inventory fair value accounting treatment of $100,000.

An additional $1.3 million in charges related to the facility closures initiated in the second-quarter will be recognized in future periods. Similarly, we incurred 700,000 in the current quarter from previous restructuring projects. You will note that the tax effect of our special charges is not quite at the same rate. This is due to the deductibility of a portion of the goodwill related charges between Roadbuilding units. We continued to maintain our effective tax rate for the remainder of the unit of the previously established 28 percent level. Before continuing with the financial performance, I would like to explain the accounting treatment required relative to our recently announced mining transaction with Caterpillar.

The Company has accounted for the portions of our business, namely the mining truck business, and the company-owned product support subsidiaries as discontinued operations, in accordance with financial accounting standard 144. As a result, the performance for these businesses are reflective of the statement of operations as income or loss from discontinued operations. On the balance sheet, the assets and liabilities are netted and included in other current assets. Due to the size of the remaining mining business, we have decided to include the retained business in the Roadbuilding utility and Other segment. We included a table with the press release that provides the historical information for this structure.

Net sales for the second quarter of 2003 were slightly over $1 billion, compared to $653.2 million during the second quarter of 2002, an increase of 54 percent. The acquired companies drove the sales growth in the quarter and excluding the impact of acquisitions, net sales increased 2 percent in the second quarter of 2003 when compared with the second quarter of 2002. Gross profit, excluding special items, increased to 150.1 million for the second quarter of '03, from 124.8 million for the second quarter of 2002, reflecting the impact of acquisitions.

Gross margin excluding special items declined roughly 4.2 percentage points over the prior year. These are focused on reduction of inventory for cash generation, in other words used equipment sales at low margins first in the Roadbuilding and North American crane businesses, and the impact of net unfavorable foreign exchange movement in the construction business. These were partially offset by the margin improvement in mining and Aerial Work Platforms.

SG&A expenses excluding special items increased to $90.5 million from 68.8 million for the second quarter of 2002, again due to the acquisitions. Overall this achieves a level of 9 percent of sales, which is down from the 10.5 percent in 2002. Income from operations excluding special items increased to $59.6 million from 56 million in the second quarter of 2002, representing a 2.7 percentage point reduction in operating margin. Excluding the impact of acquisitions, operating profit was 30.6 million or 4.8 percent operating margin compared to 8.8 percent in the second quarter of 2002. This deterioration is mainly due to the base Roadbuilding and North American crane businesses. Additionally, the construction business has been impacted by the foreign exchange movement and an increase in provision for certain customer accounts. These were partially offset by improvements in mining over the prior year.

Overall, currency impacts are reflected in several areas in our financial statements. We have some natural hedges with Genie exports to the UK and Europe, and with construction in cranes they are net importers to the U.S. Overall, the impact on income from operations is slightly negative. Cash flow from operating activities was 69.5 million in the second quarter of '03, with 38 million coming from working capital reductions. Trade receivables provided 12.4 million in improvement and inventory provided 42.4. Accounts payable was a net use during the quarter of $17.1 million dollars.

Normally we would use cash during the second quarter due to the seasonal pattern of sales. However, our focus on turning used equipment quickly, more properly balancing our production levels to a realistic assessment of demand, and a relentless pursuit of the cash we deserve from our customers is evident in our results. Year-to-date cash flow from operating activities is $184.4 million. We have made progress in the last three quarters with cumulative cash provided from working capital of $196 million, and cumulative cash from operating activities for this period of $246.4 million.

In perspective, this is close to the purchase price of Genie. Our management team is clearly focused and we see opportunities on a daily basis where we can still improve. As a result, we are increasing our targeted working capital reduction from our previous goal for 2003 of 150 million to 200 million in cash generated from working capital. Free cash flow for the second quarter of '03, defined as cash flow from operating activities less capital expenditures, was $63.9 million and 170.3 year-to-date. Net debt decreased 62.6 million, to 1 billion 46.3 million. During the second quarter of '03 and since the end of 2002, we added $162.7 million. We remain committed to pay down a minimum of $200 million of debt in 2003 and through June, we are more than halfway to that target. We feel that a level of 250 million of debt reduction may be attainable.

Net debt to book capitalization at the end of the second-quarter is 57.3 million as a percentage excuse me, compared to 61.1 percent at the end of 2002. Our weighted average interest rate on total debt was at 6.4 percent at the end of the second quarter, which is flat with the prior quarter. Back to you, Ron.

Thank you, Phil. Now let me offer a few highlights by segment. First, the Terex Construction business. We had a respectable quarter here. Revenues were up as a result of currency because unit volume was basically flat or slightly down. The overall operating margin was 5.5 percent, which is a slight disappointment, but a full percentage point was lost due to an increase in reserves for doubtful accounts. Plus, we carried about .5 margin point of extra cost with the duplicate facilities of Fermec and Benford. These are now closed. Margins, therefore, should have been in the range of about 7 percent.

As we promised last year, the Atlas business in Germany now is a positive contributor and accretive to earnings, and the focus on cost reduction here as paid dividends as the German market is still challenging. We have announced the consolidations of the Kilbagen facility in the Republic of Ireland into our Dungannon facility of Powerscreen. This simply improves efficiencies. We are looking forward to adding a Terex hydraulic crawler excavator and a mid-sized wheel loader to our North American product line as we source these from Daewoo in Korea. Marketing will begin in the fourth quarter. Our overall product lineup will be highly competitive.

Moving to Terex Cranes, net sales for our cranes segment were $273 million for the quarter and $510 million year-to-date, basically doubling the year ago levels for the quarter and a 90 percent increase for the first six months. In general, business conditions are tough. The revenue growth comes from acquisitions, and if you pull the acquisitions out, our business was actually down with an even greater reduction in North America. We have always known that the crane business is highly cyclical. This is due to the longevity of the product and the fact that they are virtually always sold to rental company specialists. Furthermore, replacement is not always driven by age or utilization, but at times the financial capability of the customer base. This is what we see today. This customer base generally becomes -- has become overlevered and is now going through a retrenchment process that we think will likely continue through mid 2004.

Furthermore, we have worked to lower our crane inventory. While this has cost us some short-term business, it has been necessary, as the inventory levels of new cranes were too high for current utilizations in North America. Turning to Europe, we have grown the Demag business about 40 percent compared to pre-Terex levels and we have introduced several new models that have improved our competitiveness. The Terex Crane operating profit in the quarter was 3.3 percent, a low number. There are two reasons for this. First, the depressed North American revenue has caused some margin compression. Further adjustments have been made over the past few weeks to staffing and structure levels in North America. Secondly, about 10 percent of the total revenue is used equipment. We are trading out many competitors units and building share principally in Europe and selling the units at breakeven for for cash to ensure that we are turning our cash.

Next, let me turn to the Terex mining, Roadbuilding, and utility and other products. Things of note in this group include obviously the previously announced CAT and Terex mining transaction. We think this is good for customers, dealers, and manufacturers alike. The best electric drive truck with the best shovel will now be sold by the best distribution network that services mining. We are in the process of negotiation with the local sales and service network, with many CAT dealers. Generally this has been well-received.

Roadbuilding revenues were down 25 percent. We're focusing on cash with these business units. The operations of both CMI and Cedar Rapids Paving, and we are implementing severe production cuts to avoid perpetuating current problems into the future. The Roadbuilding sales team has been redirected. We've formed two new groups, a direct sales team selling asphalt plants and a distributor team selling pavers, milling, equipment, and other related products. We believe asphalt plants require direct attention and the other products require dealer support. We are attracting substantial dealer interest, as many of these products were sold direct previously by CMI.

The utility group posted good results, but they were meaningfully below the year ago level. I'm generally pleased, however, with what is happening here as we continue to shrink the supply chain, lower costs, and cross sell a range of Terex products to the utility customer base. Despite a soft market, this group has helped counter it with over $20 million of new business to customers we haven't sold previously or on products that were not part of our Group, products such as Terex loader backhoes, mini excavators and our RO-Stinger cranes. The light construction and Advance Mixer businesses had very good operating profit performance in the quarter.

Turning to Aerial Work Platforms, the Genie team has exceeded their commitments for the first half of the year. I am please with this business, even though rental companies are generally not buying. Revenues are ahead of expectations at $167.8 million for the quarter and $315 million for the half-year. Operating profit margins are at 12.8 percent for the quarter and 12.1 percent year-to-date. Genie did benefit from restructuring actions taken immediately following acquisition and the exchange movement between the dollar and the Euro. Genie builds in the United States and sells in Euros and pounds, and had approximately 30 percent of its revenues in these currencies during the second-quarter. Genius gains, though, are to a degree Terex Cranes and Terex Constructions losses, as we have a natural hedge with the United Kingdom and German construction and crane products that are sold in the U.S.

During the quarter, we assigned the Terex Handlers product, the Baraga product in the Upper Peninsula of Michigan to Genie. Sales jumped. In fact, they nearly tripled as a result of this reassignment. This is a natural fit, as Genie really focuses on the rental channel and this product is appropriate for that channel, and we will do more of this with other Terex products. Looking forward, we are neither pessimistic nor optimistic about the current market outlook. However, we remain quite positive about how Terex is positioned. We've got great products, a good cost structure, and the opportunity to improve our marketing and further grow share.

We have made some hard decisions and paid the price. We have generated $184 million of cash year-to-date and our financial position continues to strengthen. All in all, we remain a young company that is getting stronger. I would like to open it up now for questions.

(CALLER INSTRUCTIONS) Cliff Ramsey of Ramsey Associates, Inc.

Are you seeing any glimmers in the rental fleet business that utilization rates either measured by Fleet utilization or dayrates are getting better?

The rental channel has been working awfully hard to improve rental rates, and we are seeing signs that they have bottomed out and are improving. Obviously this is good for all manufacturers. Probably the product line that has been most challenged here has been the Aerial Work Platform business, and Bob Wilkerson, would you like to comment on that?

Cliff, United Rentals announced this morning that rates were up 1.5 percent for the second-quarter, 2.5 percent for the month of June. And this is consistent to what we're seeing across the rental industry. We are starting to see some rate improvement.

If there is a replay, I would do it, but have gone into the strategic sense of the CAT Terex swap? I am not sure I understand it. Do you think you talked about it to the general public enough, I will do it off-line.

Well, we haven't probably talked about it broadly, we did not have a conference call at the time, so.

I know what the details are, but why is it a good thing for Terex?

It is a good thing for Terex for probably three reasons. First, the mining equipment business is a highly working capital intensive business and our ability to get a reasonable rate of return in mining trucks has always been the challenge, because 60 percent of our product cost has been controlled by others, the General Electric drive system and the engine that gets put in the truck represents 60 percent of the cost. But we would have to carry the working capital required plus the parts in disparate places of the globe in order to get a return on a highly bid out product, so the absolute margin on the product we were achieving was pretty low.

Secondly, we had to with both O&K and our Unit Rig trucks have a global distribution network, which added costs, and we owned that network, so in places like Australia, South Africa, and others, we had to carry that extra burden. And thirdly, the opportunity for us to grow our business in particular with the best mining shovels on the globe had certain limitations, because one of the primary issues customers had back to us was well, we think the product is great, but it requires local services and are you going to be there for us? And of course we believed with a 30 percent share in the large shovels, we were there, but obviously the opportunity to do better certainly was attractive to us. And this is a reasonably profitable product line for us, so if you couple the fact that we had a chance to lower our investment and focus on the product line where we have the manufacturing process and control most of the product cost, it is just a very good transaction for Terex Corporation. We are going to grow and reduce our investment.

Tom Clasta (ph) of CSFB.

Ron, did I hear you right when you said Demag sales were up, I think you said 40 percent since the acquisition? Is that apples-to-apples with timing, or what does that refer to?

You are generally correct. Phil, you want to comment on that?

Yes, the Demag had a significant going into the acquisition but really they worked through the backlog, continued to develop new prospects on a global basis, and have added a lot to our crane quality perspectives. It is apples-to-apples.

It is apples-to-apples six months of 2002 versus 2003.

It just seems surprising. I thought Demag was closed -- was it August of last year?

Basically, September 1.

When you look at it on a pro forma basis, you're up -- and there's only something like $27 million equipment sales in there?

At the quarter.

For the quarter, okay. And what is driving the improvement there in a market that is generally in tough shape?

Well, I think we've had also some very good international sales, but Phillip will comment on that.

We are generally driven by the large crane sales. We had several good deals in Canada, in Mexico, and we have improved our market sharing all over the world, both in all-terrain and in lattice booms cranes.

On your narrative about the used equipment sales as far as turning competitors' equipment, is that existing used inventory that Demag had brought in, or are you basically taking other guys' equipment in on trade in order to execute the new sales?

We are generally taking used equipment and continuing to turn it much faster than it has been turned in the past.

Okay. Then how long -- when you do that, you really have to look at the margins together, because you're sort of giving up part of your new equipment margin as part of your used trade-in. Is that a strategy you need to do for some time in order to clean out other guys' inventory, or what happens there longer-term?

In general, what we're trying to do is we're trying not to lose anything on a trade-in value, so we're really turning inventory that we receive on a used and sell it for the trade-in value.

All right, and then on AWPs, was this consolidation of the Telehandlers, is that reflected in the sales numbers? And in your narrative when you say AWP sales were flat to up a little bit, how much of an impact does the Telehandlers business have on that?

Bob, do you want to comment on that?

So 10.5 million in total sales, Tom.

And it was nothing in the AWP segment last year to reclass if for last year too?

It is about the same. We did show prior year in that segment. (multiple speakers) That is the Telehandlers business.

Okay, and what approximately is the D&A associated with the Genie business?

Okay, Tom, you've got us stumped right here for this second. About 25 million is what my memory is.

I don't have it at my fingertips.

I think it is about 25 million. That was our assumption at the time of the acquisition, but we will get back to you on that.

Steve Haggerty of Merrill Lynch.

Just a couple of quick questions. Have you identified what the net cash impact of the transaction with CAT will be Terex?

We have not disclosed any of the financial terms of that transaction. As the press release reads we have an agreement in principle. That agreement has been approved by both Board of Directors. We are in the process of executing that agreement and moving it toward a definitive agreement, but inclusive of that game plan is a series of negotiations that has us selling our regional distribution centers to the CAT distribution network and it would be premature to determine exactly the valuation that takes place. Frankly, we expect this transaction to be positive cash generator for Terex Corporation, but we have not disclosed any details here.

Phil, can you just talk a bit more about the reduction in inventory that contributed to the improvement in working capital? I'm still a little confused as to -- where are these inventories coming out of, which particular business units?

I will give you the segment impact. It was really pretty widespread, but the crane activities really drove the most significant reduction and largely we're seeing it in the finished goods area, so I would say we still have opportunity and work in work in process in raw material, but really each segment has contributed to the performance improvement, but I would say largely the cranes business has been the leader in terms of dollar magnitude.

And you are saying -- you came in and you are implementing some processes that are hoping to reduce this finished goods inventory and there is still more room for improvement in cranes and across the other business units?

Well, it's not just me. It is really the shift in the focus for the company towards what we can control. And the focus on cash is trying to streamline the balance sheet that we have in terms of inventory, receivables, and payables. As we go through each activity, the management can identify areas that in the past maybe were not emphasized.

And frankly, we changed our compensation plan at the beginning of this year to focus on rewarding cash generators.

I understand. Ron, just to get a sense -- I know it is a tough market out there, but we seem to be picking up better vibes about the end use for construction equipment in North America. We hear something from United Rental this morning, we have had positive comments from CAT; Deere's posted some decent numbers. C&H for the industry numbers shown some decent numbers. I know it is tough, but do you think things are better than they were at the end of the first quarter just when you look across the broad range of construction equipment sectors?

I think across the broad range they are improving, I think modestly improving is the way I would characterize it in North America. The piece of the pie that is probably a lag area will be the crane business, simply because of the nature of the customer base per my remarks, but frankly I do think that we are a bit more hopeful today that we will see improvements down the road than we have been. A highway bill would really help, and there is generally three basic pockets. It's the mainstream construction equipment business, commonly known in the industry as the dirt business, and that we're seeing improvements in. Then there is the products that are up, which is the lifting related products area, work platforms, cranes, etc., and those are quite dependent upon rental companies, and different types of rental companies, as we have talked about.

And then there is the paving and road building related products, which tend to be related somewhat to infrastructure and governmental led spending. So these are operating at three different speeds, more or less, so we're more encouraged, Steve, but recognize that we have got a little ways to go.

(CALLER INSTRUCTIONS) John McGinty of First Boston.

Ron, the question that I have concerns the guidance, and the guidance is -- we are within the guidance for the year although we are at the low end of it, although I had a little trouble figuring that mathematically. You gave us guidance before in terms of revenues on a pro forma and margins are up for the year, in other words I have got construction and cranes both fixed at 7 percent, Terex Mining which is no longer around, 6.5 to 7.5, but Roadbuilding was 6 to 7, and Aerial Work Platforms 9 to 10. I look at the six-month performance, and you are not even within the ballpark of those. Can you run through those four businesses and give us your view of in order to get to the guidance, low end or not, of what you see on a pro forma revenue and a margin range for these businesses, just so we will know what we're supposed to be looking for?

John, as you begin a year you set up your game plan by company segment, as you plan to report. And then as we went into the year, we did give color on each one of the businesses performance, for example in cranes we indicated that while we expected to achieve this level of margin, we knew we would be trading out a bunch of used inventory and perhaps the absolute margin level would come down, but the overall earnings performance might remain within the level. As we sit here in midyear, it is not my intention to go through each one of the segments and the newly created segments because of how we restructured it and provide renewed guidance.

I think it is always difficult for a management team to break its performers and nonperformers down as you begin the year. That is why guidance comes in the form of ranges, so as you look at the ranges and with the estimates that are currently in the marketplace, we're comfortable with what those estimates are that are out there. Probably there is no need to go back and dissect each one of the pieces individually. I think that is what good analytical assistance usually does, and it is how you end up with the numbers that first call has posted.

Okay. The follow-up to that, we have -- and this is a little bit confusing -- want to be sure I understand this. We have a guidance for a paydown in total debt which is 200 with the possibility of 250. What is the guidance -- that is the actual debt paydown. What is the guidance for the paydown in net debt, forgetting about whether or not you actually pay off timing and everything else? What should we look for in a reduction in net debt, given the increase in the reduction, the goal for working capital, and so on?

Probably about 50 million higher.

50 million higher than the total debt? Great, so in other words 2 to 250 would become 250 to 3 for the net debt base, and that assumes that the working capital is the 200 up from the 150.

Yes, that's right.

Okay. All right, I will get back in queue. That's my two questions.

Joel Tay of Lehman Brothers.

I'm wondering if you can talk about your OEM versus aftermarket mix in this quarter versus some sort of a decent benchmark, maybe a year ago quarter or the year ended 2002?

I don't think we saw any meaningful change from our historical levels. Typically we run the company with about an aftermarket level of about 20 percent of sales, but it can range as high as 23, 24 percent. Currency obviously will move that because when you translate -- currency moves the various, there is nothing unusual happening in our mix.

Again, aftermarket parts are still around 20 percent in the quarter, which is pretty close to our historical levels.

Okay, and also can you comment at all about the opportunities for price increases in the marketplace, maybe by some of the different segments?

We would love to think that there is opportunities for price increases, and I'm glad to see that the number one construction equipment maker in the world is indicating that pricing is sticking and that they are generating increased profitability as a result of price increases. That will be a positive thing for manufacturers in general. It will have a trickle-down effect. It has not had a trickle-down effect to us at this point in time. Most of our product categories are highly bid out product categories were there are at least one other major supplier competing for the business, so while it will create a reasonably decent umbrella for equipment manufacturers right now, I certainly would not handicap anything about our future performance that would depend upon us achieving price increases.

Larry Peck of Copper Beach Capital.

Copper Beach capital, I might have missed this if you mentioned this. In terms of the average interest rate for right now you said did I hear you correctly about 4.9 percent?

6.4 percent.

Is there anything in the current interest expense for the second quarter that was maybe one time debt paydowns or amortizing some debt issuance costs?

It's really in the cost of debt retirement the 50 million of bonds we redeemed. That will not show up as an interest change until the third and fourth quarter, the 7/8 was there. Nothing significant in other interest expense levels.

So the second quarters an okay run rate then?

No, that is what I am saying. The 50 million on the 7/8 went away end of June. Other than that, it is reasonably close.

Okay, I just want to make sure.

Cliff Ramsey of Ramsey Associates, Inc.

On the crane trade in business, it may be I'm just out of touch here. Have you accelerated your willingness to buy competitive product to swap it out with new product of yours? In other words, what is new about this drag on the disposition of used inventory?

Phil, you want to comment on that?

Yes, what we really have done is we have accelerated the reduction of used inventory all the way from the beginning of September of last year. On the competitive base, on a comparable basis, we are probably 10 or 15 times more selling of used equipment on the prior days of Demag and in North America. So the selling of the used Cranes, moving them quicker, reducing the working capital, has allowed us to come back in and get more competitors machines into trade in and grow our marketshare in new machines.

You can argue that that is good for your specialized rental customers in Crane, but you could also argue that it is negative because to the extent that you are depressing the price of the residual equipment, you're distressing the residual value, which is a big part of their own financial calculation. Do you get any push back from your customers on this 10 or 15 percent fold increase in this activity?

Not really, because the equipment that we have been getting is very much equipment that has been selling at the rate that we take them in as, and it -- we feel that it is improving our brand-name and our used equipment value as we move it at a higher price.

Cliff, one of the things that we have to do as manufacturers here is we have to recognize that the playing field is set in this way, sometimes by others. And one of the largest competitors is a European company that is privately owned, and has historically had very good activity in this practice. And I think what we are finding is we are developing a level of expertise in our ability to evaluate the inventory and find homes for the inventory, consequently building our image and reputation with principally very large customers that want to see their fleet freshened, and if they can do that without having to worry about an auction loss and we can do that because we have access to more selling places than they would in their particular geography, it is a win-win proposition for both. Would you agree with that, Phil?

Yes, I do, and we have also created some sort of a re-conditioning of Demag and EPM machines in our two facilities, which is helping to turn our machines into better condition to the customer.

David Raso of Smith Barney.

A question on the working capital reduction. The full year we're now looking for 200. What is the thought on the breakout from net inventories? What do you think of the 200 will come from inventories? So far this year, 83 of the 128 improvement in working capital has come from inventories. Can you help us understand that mix?

I would give you general trends where we are today. If you look at receivable levels today based on the volume in the second quarter, I would expect you would see cash generated from receivables between now and the end of the year holding our days constant. Payables would be at usage again, given the volume levels in the quarter. I still think we have opportunity in inventory, and that is where I would think -- let's say order of magnitude one-half of the increase from the 130 year-to-date and total from working capital to the 200 would occur. And net receivable based on the volume reduction.

Okay. I am just playing with numbers here. If accounts payable, the cost is 20, inventories up 35. To get to the full 70, you would still need 55 reduction in receivables.

Right, based on the volume difference between the fourth quarter and the second quarter.

And regarding the inventory write-downs we have seen, where do the inventory write-downs come again in the order of magnitude?

None of that is in these working capital numbers that I talked about. It is really the cash effect.

But where has the inventory been written down?

In Roadbuilding, the charge in this quarter approximately $20 million. (multiple speakers)

We exited recycling products --

I'm sorry, 26 million was the second-quarter charge. Nothing really in the first quarter.

Regarding the cash impact, there is obviously no cash impact on the charge -- what happens to the equipment after it is written down?

We will get whatever value we can out of this. We have written it down to the fair value, so we will get some recovery and that would actually be included in our plan.

I will follow-up off-line. Thank you very much.

Bob McCarthy of Robert W. Baird.

It is Pete Liznik sitting in for Rob. On the debt reduction target, you are targeting 200, but chance of hitting 250. What kind of things have to happen to get to that 250 number?

Well, I'd say the working capital reduction is the main issue that will drive the extra, and also I would say the -- certainly, operating performance holding up to the levels that we've talked about. But really the working capital.

By that you are implying upside to the 200 number that you're targeting as well?

No, on working capital reduction, yes, the 130 to 200 will occur. That is largely what is going to drive the debt reduction to get to the 250.

(multiple speakers)

You mentioned pricing pressure in cranes in the press release. I'm just wondering if you can give us order of magnitude or some sort of color on what type of pricing pressure you are seeing in the North American crane market?

In the magnitude of 10 to 15 percent.

John McGinty of First Boston.

I just want a couple of clarifications. The used cranes, the increase in the used cranes, were you talking primarily Demag because of Liebherr, or is there also some of that going on in the states?

John, some of it is going on in the states also, as Ron indicated. During the downturn in a cyclical crane business, we are also taking look a look at a lot of the Cranes that are not moving and we are moving them around, and we have taken some trade-ins from major customers in North America.

I would say, John, it is probably 75/25 Europe to North America.

And as a follow-up to the previous question, you did cite in the release, and I'm -- it looked to me like what you were talking about in the release, the international business still shows signs of life in certain areas, however pricing remains very competitive. Is what you're talking about there in terms of pricing being impacted in the quarter and so on, is that primarily international, or would the same 75/25 hold, or is it primarily North America and I misread that?

Our pricing is both sides, and it is related to both margins from new sales and margins on machines that we take back.

Okay, if I might, if we come into North America where Liebherr is not a major presence in the crane market, in North America there are two people in the crane market that control the vast majority of the crane market, and have we met the enemy and it is us, or why is pricing this tight? Is it always the other guy that does it, or are you doing it or is it -- how would you characterize it?

Well, two reasons. One is we actually have an exchange problem that we come in with the machines from Germany coming into the United States, so it is really related on the transfer pricing that we have. And the second thing is that the customer base that is not buying, so we're fighting for the same piece of the cake, and I don't believe that there is any trend on who is doing what. We're just out there trying to take the apple away from the other guy.

Is it more that we're talking the all-terrains that comes in, because the bulk of the mobile hydraulics you produce here, right?

Yes, the mobile hydraulics is -- the market is probably 50 percent down, so it is a record of volume, and it is reflected by trade-ins, but when we look at the all-terrain market, it is probably 50 percent down from a year earlier in the North American market.

And pricing is bad both in all-terrains in North America and in the mobile hydraulics in North America? That is what I was trying to get at.

Mobile hydraulic, rough terrains, and lattice booms.

All horrible.

Well, horrible is probably not the word, but tough.

And Ron, let me ask you a structural question, have you given any thought as you've looked at this to saying at some point this Roadbuilding business is just something that no one's ever made any money in, and why don't we just say, okay, let's just get out of it?

I think we will make money in the Roadbuilding business, John. I think we have the opportunity with the combination of Cedar Rapids Paver and the CMI products that we're now putting together under one Roadbuilding plan and we will eventually have a compaction product line from our Benford facility adapted to the U.S. market. We have the opportunity to really have a comprehensive product line that is almost unmatched by others, and if we get the cost structure in line, as we have done, and we have been pretty brutal with the cost structure, I think it's a business that can make money. I would also turn that question around to you and say do you believe that we're going to let the country's roads, bridges, etc. deteriorate ad nauseam forever in this country? I don't think so.

My only problem is Ron, I've been hearing that since 1970 and no one has ever done anything about it, but that's fine.

Okay, John. There were a lot of disbelievers on a lot of product lines we entered into over there, so just work with us.

Tom Clasta of CSFB.

Just on the EBITDA numbers, last year I believe you reported EBITDA was lower. Is it higher now for '02 because of the mining trucks coming out of it and they had a loss? Is that what is going on? I thought it was 61 and change last year, if you go back to last year's releases. Has the mining -- has the Caterpillar transaction been pulled out of both years?

Yes, now it is without mining.

And I'm assuming that loss on an EBITDA basis would have been -- looks like they probably lost 3 million, 3.5 million on the EBITDA line last year. Would that have been substantially worse this year had it not been pulled out?

No, we made money in the mining. The mining buys had a decent quarter, they've had a decent first six months of the year. We made a lot of changes to the mining business over this past year.

Remember, we closed down the manufacturing operation outsource. We still had it in the second quarter of last year.

We're only showing it as a discontinued operation because that is what we are obligated to do. Year-over-year, it probably had the best performance of just about any business in the company, albeit the law of small numbers applies here.

And it is going away?

Well, the truck piece of it is going away, okay?

You are saying the truck piece itself actually did better because of shutting down the facility?

Absolutely, even with no volume, very low volume.

And when you kind of try to split out the crane business versus acquisitions as you lay them out here, excluding Demag, is the rest of the crane business at breakeven, or is it at a loss?

The North American Crane business was at a small loss and the European business was at a reasonably nice profit, more than offsetting the small loss in North America. And it is the North American loss that we're really addressing with some of the changes that I referenced.

David Raso of Smith Barney.

I had a question on the foreign exchange. You mentioned 30 percent of Genie sales were U.S. shipments into overseas and the pound and the euro. That's about 47 million on 157 of Genie, Telehandlers added 10.

Assuming none of it was passed on to customers.

I'm sorry?

None is passed on to customers.

I'm sorry, I was referring to the amount of sales from Genie shipping U.S. overseas, about $47 million. If I think through your other businesses, especially in construction, all the Powerscreen products come out of Ireland, the numbers are a lot larger than that. Backhoes alone coming out of the UK, assuming you're doing about 100 million, or at least close to it, the trucks at least 150, if not 200 million.

Not in a quarter, David.

No, no. I'm not looking at it on a quarterly basis, still adds up to a business that is a lot more than $40 million. I'm just trying to understand the aspects, why is it -- let it just flow would be a net zero?

When we look at the plans for the year, we look at the net flows of cranes, construction, and Genie. Then we do take hedge positions on a portion of what is left. Though there is a natural hedge, then we look at the remainder that's there and we have taken positions in terms of hedging that exposure.

So it is not just all natural flow, but there is some hedging involved?

Exactly.

All right, operator, do we have any more?

No, sir, not at this time.

I want to thank everybody for their interest in Terex and please follow up with anyone of us if you have additional questions. Thank you for participation today.

This concludes today's second-quarter earnings conference call. Thank you for your participation. You may now disconnect.

(CONFERENCE CALL CONCLUDED)