Terex Corp (TEX) 2003 Q3 法說會逐字稿

Good morning. My name is Chandy and I will be your conference facilitator today. At this time I would like to welcome everyone to Terex 2003 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number one on your telephone key pad. If you would like to withdraw your question, press star and then the number two on your telephone key pad. Thank you. Mr. DeFeo, you may begin your conference.

Thank you,. Couple of housekeeping things, the domestic replay of this call is at 800-642-1687, the international replay is 706-645-9291. With the conference ID number 3164043. That'll be available until the 30th of October at 6 P.M. eastern time. Obviously, this is also available on our web site through the Investor Relations section.

With me this morning is Phil Widman, Chief Financial Officer, Kevin O'Reilly, outgoing Investor Relations person and Tom Gelston incoming Investor Relations persons. Tom is Director of Investor Relations. Kevin is becoming the Chief Financial Officer for our Terex Construction business. Also available for questions following all our remarks on the call will be Fil Filipov, President of Terex Cranes, Colin Robertson, President of Terex Construction, and Bob Wilkerson, President of Terex Aerial Work Platforms business. I'm going to as is my custom I am going to make a few opening comments and then turn it over to Phil who will cover some of the details and then I will come back and add some highlights relative to operating activities.

Let me begin. Overall, we are quite pleased with our third quarter execution and performance, although recognizing that we are in what I would consider to be a continuing to be a challenging environment. But if you step back and reflect upon Terex's performance, we are a stronger company today than we've ever been. This is particularly positive, I believe, since the end is nearer to a rather protracted downturn that we have seen in our business and in our industry in general.

During this period, the difficult period, we have built a stronger Terex and by virtually any measure, we think that's the case. Revenue on a year to date basis is up 50%. Net income excluding special items on a year to date basis is up 38%, 57 million versus 41 million. Our earnings per share excluding special items is 19% ahead of last year. Net debt to book capitalization is at 56.6% better than we have been at and we have reduced our debt by $156 million year to date. Cash flow positive to $216 million and our working capital efficiency is the best that it's been.

Lastly, we have executed the acquisitions we made a year ago but yet when you sit back and think about Terex, there's still much more opportunity in front of us than behind us. We have great opportunities to continue to deepen and broaden our franchisees, to continue to build share where our value propositions are better than the competitive alternatives, to improve our financial performance with margin opportunities as well as working capital efficiencies, those are all the kinds of things we see in front of us.

We have done these changes in Terex in an environment which has been challenging. We've been a niche player broadened out into a broader player and we’re going to continue to concentrate on those market segments where we have a meaningful position. With those opening comments and pardon me for a little gravelly voice this morning, I've been speaking a lot having participated at a recent annual conference in San Francisco so I am going to turn it over to Phil who will cover the financial results.

Thanks, Ron. Good morning. Before I begin, let me remind you that we will discuss expectations of future events and performance of the company in today's call and that such expectations are subject to uncertainties related to -- warrants related to macro economic factors, interest rates, governmental acts and other factors that affect future expectations are in the press release and our other public filings. I encourage you to read them.

The third quarter Terex reported net income of $14.5 million or 29 cents per share compared to 9.8 million or 22 cents per share in the third quarter of 2002. Excluding the impact of special items, net income for the third quarter was 16.5 million or 33 cents per share. On net sales of 872.3 million. This compares to 13.9 million or 31 cents per share of net sales of 64 4 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 provided better clarity to the ongoing performances of our businesses. Special charges for the third quarter with 2.8 million pre-tax relating to previously announced restructuring actions in businesses held for sale or closure. Net sales for the third quarter of 2002 of 872.3 million were increase of 35% over the third quarter of 2002. Foreign exchange translation was approximately 5% of this increase. The acquired companies mainly Genie and Demag accounted for majority of the net sales increase as they both acquired late in the third quarter of 2002.

Excluding the impact of acquisitions and foreign exchange, net sales decreased by approximately 2% in the third quarter of 2003 compared to the third quarter of '02. North American Cranes most significantly construction mainly in the off highway trucks which was down in line with market conditions, in the mining shovel business are the main areas of softness over 2002. However, we are still seeing strong performance in our Italian, Power Stream and - Construction businesses. Quarterly income from operations excluding special items is $44.3 million. Basically flat with the same period in 2002. From operating margin standpoint this is a decrease to 5.1% from 6.9% in 2002. While our acquisitions contributed positively to the operating performance, a continued difficulty in the North American crane market and a decrease in volume in largely shovels largely offset the dollar improvement from acquisitions.

Cash flow from operating activities was 31 million for the third quarter of '03 with 39 million coming from working capital reductions. Trade receivables provided 48 million in improvement and inventory provided 29 million. Accounts payable net use of 38 million during the quarter. This puts his well within reach of our total year goal of $200 million in reduction and working capital having achieved 167 million year to date. Year to date cash flow from operating activities is $216 million. We made considerable progress over last 4 quarters with cumulative cash provided from working capital of 227 million and cumulative cash from operating activities for the same period of $278 million. As a percentage of trailing three months annualized sales we have improved to 26% in the third quarter of 2003 from 36% at the same period last year.

Net debt increased by $6.9 million to 1 billion 53 million during the third quarter of 2003 as we consolidated additional 33 million in debt with the majority interest acquired in the Contra business during the quarter. Year to date net debt decreased by 156 million. Remain committed to pay down a minimum of $200 million in debt in 2003 and through September reduced by approximately $124 million. Net debt to book capitalization at the end of the third quarter is 56.6% compared to 61.1% at the end of 2002. Our weighted average interest rate on total debt, 6.3% of the at the end of the third quarter slightly down from the prior quarter.

So basically, the full quarter effect of Genie and Demag businesses are major positive contributors to our performance in the quarter, as we have completed the one year anniversary of these acquisitions, their integration has been on or ahead of schedule and the financial returns have met or exceeded our expectations in profitability, cash flow, and return on investment. Financial returns are not -- are only measures of success, however, as Demag solidified our position as Global Crane company and Genie provided access for other Terex products through the rental channel as well as best practice opportunities to leverage other Terex businesses. Ron, back to you.

Thank you, Phil. Some discussion by business segment. First starting with Terex Construction. We had a solid quarter in this segment with revenue at about $300 million, a very modest drop from last year. Operating profit was basically flat at about $15 million. Currency was probably a net negative here but there were some substantial activities that will be positive contributors in the future. First, we completed the --- compact equipment factory start up. This is a beautiful facility, which will be producing back hoes, mini dumpers, compaction equipment.

During the quarter we wound down most production at the Manchester facility, and the Bedford facilities. This allows us to really consolidate our engineering, manufacturing position on this important compact equipment line. Profitability for this line looks to be positive with a potential for further cost reductions benefiting from this new factory.

Secondly, we consolidated the Kilbagen facility from the Republic of Ireland [inaudible] facility in Northern Ireland at the Duncannon operations. This is a consolidation we committed to and that went smoothly without any disruption. Third, we reorganized the construction segment of our business into three focused areas, concentrating management's emphasis on heavy equipment, compact equipment, and crushing and screening the mobile screening business. We assigned three groups executives to work and put a new position into our mix ahead of lean manufacturing and best practices so that we can do some operational sharing across this sizeable construction market segment.

We think this managerial decision to split this business will result in better product focus and better execution. Next, improvements were made to our U.S. selling efforts. Genie and I will comment on this a bit later, is taking the lead on our compact construction equipment selling in the United States with back hoes, mini x, mini-excavators. Furthermore, put new leadership into our parts operation at South Haven, and that is already beginning to show some benefits.

Moving next to our crane business. Crane revenue was $227 million up about 32%. More than this increase came from acquisitions. So, consequently on a comparable basis, revenue was down 9% reflecting continued weakness in our North American business which was partially offset by growth in Europe. In particular you're European business this some nice increases in our tower crane operations and the mobile [inaudible] crane business in Italy. Operating profit was $6.9 million or 3% of the revenue compared with 11.8 million in a year ago period. As the North American margins overall remain depressed and the pricing situation difficult.

We continue to focus on managing this business for cash in particular managing the North American business with cash with a depressed part -- with the industry down approximately 30% and being quite depressed in our view. This is more than we expected and this is resulted in meaningful changes to our North American business. We've taken aggressive cost reduction activities and production time outs in our operations. We think we have implemented the right balance and expect this business to return to profitability in the fourth quarter and in 2004.

We are very pleased turning to Demag with that business's performance. Demag has been a critical element to us for broaden our product line and to balance our business between North America and Europe. It has accomplished that.

During September we had over a thousand customers through our factory in Germany clearly re-enforcing the great product technology that we acquired and introducing several new models which we have initiated following acquisition.

The European crane rationalization plan that we implemented with Demag also is virtually complete and we remain pleased with the performance of Bendini which is our Italian crane – hydraulic crane product line. Turning to mining road build and utility segment, revenue in this segment was $195 million versus $175 million in 2002. Basically, the revenue was flat versus a year ago except for acquisitions of Terex utilities distribution business and a little bit over $10 million of incremental revenue from at that time are a is virtually no contribution at the operating profit line. Taking a couple of the pieces and making some editorial comments here, mining had some decent truck business but we had a difficult period in the shovels year-over-year as the third reflected some challenging shovel business. We expect to have some decent results in the fourth quarter from our shovels so this really is more the lumpy nature rather than any fundamental change to our O and K shovel business. And of course looking forward, we expect the Caterpillar distribution network once we complete this transaction to be a great marketer of our shovels in 2004.

Road building business made good progress in the third quarter, frankly, despite a rather challenging environment. Basically, our revenue was flat year-over-year in this business and we had some positive profit contribution from this business but if you reflect on a year to date business, the year to date revenue was, in fact, down. However, the third quarter revenue flatness is quite encouraging to us. We don't think that happened as a result of a market improvement. Turning to the utility products business, we are quite pleased with how this business is coming together. Terex utilities has been formed by the creation of Terex Telelect and the distribution companies that we acquired and we were able to offer today a rather substantial product offering one that not only appeals to the utility products made at Telelect but also an exclusive of back hoes, mini x, excavators, and other Telelect other product lines.

We introduced this full line concept at the recent IQ show in Louisville which took place in September and we have the best show we have ever had. We had over 1200 attendees at our hospitality event and we have subsequently seen numerous orders for the future. And frankly as we reflect on the utilities as general. We feel that the recent blackout that took place has gotten a lot of attention and this sector could be a real turning sector for us in 2004. We have introduced a new model or two which appeals to the transmission side of this business and we are positive about initial customer reaction to that.

The light construction business which is included in this sector also had a very nice quarter with revenue up 29% but of course this business is rather small in the overall context of Terex. We think, though, it indicates a couple of things. With business in the smaller equipment up and this business has an operating profit today of around 10%, this plus the fact that our parts businesses have started to improve suggests to me, at least, that the marketplace is seeing an increased utilization of equipment and this, of course, is a good precursor to additional new equipment purchases down the road. The last segment I want to comment on is the Aerial Work Platform segment, which include Genie [inaudible] business. I’m delighted with the way this business has come together. I don't think you have to talk much more than the [inaudible] financial performance here. $136 million of revenue, $16.5 million of operating profit for 12% margin. Year to date, total revenues of $451 million, 54 million of operating profit and 12% revenue. Pretty delightful performance from the Genie team.

What's perhaps most encouraging is that the Genie influence has been positive on other Terex companies and the Terex influence on Genie has also been quite positive. This is a classic example where one plus one, I believe, will equal three. There are a lot of best practices at Genie from a manufacturing and leading process point of view that are being learned by other Terex corporations and we're creating the culture of learning within the Terex corporation that's just beginning. On the other hand, there's been excellent financial discipline put into the Genie organization and the process of selling our products and getting a good return and as well as managing our working capital has been something that's been encouraged.

During to the a telehandler business,which has been part of the Genie's operations since this past summer, we are seeing some nice revenue improvements and have a game plan to significantly improve manufacturing costs here. And, lastly, as I mentioned earlier, we have assigned the sale of compact construction equipment that is back hoe and mini-excavators to the Genie sales team as they concentrate on the rental channel. We think the opportunity to add substantial revenue, grow our market position here for 2004 is quite meaningful. We have had, quite frankly, a good 2003 on this -- in this product area but to really deepen the franchise, we think the Genie sales approach, service approach, andintimacy with the customer base will be quite helpful. So as can we look forward and have an overall outlook, we remain unchanged in our current expectations, although we feel the potential to strengthen for the future is quite good. Reflecting on the past several years, in fact, I think the corporation has weathered the economic environment reasonably well. We have had our ups and downs but I think the net net is that the company's continued to look forward and look to manage for the longer term and our short term financial performance has been reasonable. With that I would like to open it up for your questions. Candy, please open it up for questions.

At this time I would like to remind everyone if you would like to ask a question simply press star and then the number one on your telephone key pad. We will pause for just a moment to compile the Q and A roster. Your first question is from David Raso of Smith Barney.

Good morning.

Good morning, David.

My question regards the core growth. On the construction business I understand the comment about the off highway truck being weak. Can you give us a little more color between the difference segments of it from a suspect Power Screen still doing fairly well, back hoes are doing fairly well. How much was the off highway truck drag broadly. I just want to get a feel for how isolated is it and when do you think core growth can turn positive in that segment.

Colin, you want to comment on that.

Okay, Ron, yes. David, basically, revenues year-over-year were only at marginally down. There was one significant transaction which occurred late in the quarter and based on some funding issues that deal actually swept into the fourth quarter. Had that not happened we would have seen modest revenue growth year-over-year and almost flat earnings and really driven by the fact that marketplace is very competitive and currencyhas definitely taken its toll in the truck business.

Besides the truck, anything else down year-over-year? I am trying to get how broad get a feel for how broad an improvement we could be expecting.

Right. Well, basically, in the compact equipment sector, revenues are effective flat year-over-year. We are starting to see growth, for example, in the share products in domestic Germany and helped to offset somewhat soft German market for the domestic producers like atlas and share. And the screening market marginally up year-over-year around 6 or 7%. So there is no business would say significantly down year-over-year in terms of revenue.

What I would like to say, David, to that is if you reflect on just the construction side of our business, we have had a quarter where we kind of didn't participate yet in what appears to be an improving environment at the end user level. Some of that is a reflection of not building dealer inventory because we don't have the same types of distribution approach as many of our other competitors and also we used up, in fact, some of our inventory that we had in the system as we lowered inventory through the start up of our Coventry [inaudible] facility.

That’s an excellent point, Ronald, I should have talked to the [inaudible] situation particularly where we went through the sub quarter ramp up and used that as an opportunity to get our inventory balances where they need to be in key markets, particularly the USA..

Colin your commenting about contacting flat, obviously is touching a few new markets that haven’t been before in the US, and I figure Fermax should be doing fairly well is trying to [inaudible] but you are saying there's some inventory adjustment we should see more of the back hoe production picks up on that.

Basically a year-over-year comparison there's a few perks and ticks because in the first year of acquisition of shares there was a few numbers had to be fixed if you like but share broadly year-over-year definitely compared to where we had planned them to be was broadly flat. [inaudible] Fair max was down several million but again we plan that softness in the third quarter because of vacations, because the Manchester facility was drawn to complete close in the third quarter and we were carrying excess back hoes in the U.S. marketplace which we are not connected.

In fact, we've seen the selling through put there and as you said, David, we would expect to see that improve in the fourth quarter in 2004.

Lastly before I get back in queue I wanted to touch on the crane segment. You mentioned the traditional U.S. crane business was unprofitable, hopefully turning profitable in the fourth quarter. Can you split out the 226 million, 227 million of revenue between Demag and traditional power screens, basically Waverly and Wilmington.

It is hard to split out Demag, I am sure we can but a lot of enter company shipments in our European operations. Why don't I try to give you an Europe and North American split and Phil why don't you comment on that. Do you have that number.

Yes. I was going to say revenue for the quarter in the American cranes group is about 50 to $55 million of the total this year.

Wow that low.

Down from about the mid 90's last year.

If that business, tell me if I am way off, lost 3, $4 million. I am trying to back into what Europe is doing on profitability and if anything put a little more profitable than I thought I expect there's still some used sales wrapping up in the third quarter and how much margin has show European Crane then maybe did about 6% [inaudible] margin.

I think you're on the money there, Phil. Do you want to comment on that? I don't really want to report individual European operating profits and North American operating profits, you know. You can do your analysis. I think you are pretty close, David but, Fil, do you want to make any editorial comments on that.

Well, I think, David, you are estimating probably a little lower. We are losing a little bit more money in North America.

Okay. Thank you very much.

Your next question comes from Joel Tiss of Lehman Bros. brothers.

Hi, Joel.

Hi guys how you’re doing, I had just two questions kind of more overview. Can you give us a sense of what you guys can do internally to keep from losing traction as you integrate the brand and dealer networks and everything that you are not really losing traction in the marketplace and you can maybe use it as an advantage.

Okay. I do think as I like to state internally that Terex was a bit of a quilt right now and we need to move the company more towards acting like a blanket in our approach to the marketplace. We have not lost any traction on any individual brand yet. We haven't fully realized the potential strength in the overall Terex product line. We have a process under way in the company to examine how we take advantage of where we are today and I expect that as we get into 2004 I'll be able to provide a more detailed view of our long-term brand development plans and marketing improvement plans which will include a view of distribution and an integration and development of the Terex brand.

But with that said, most of our effort over the past couple of years has been to begin to plant the seeds of this process. Up until recently, we really didn't have in the North American world an excavator and wheel loader product line but when with the recent additional of a private branded product from Daewoo this gives us those two products which puts us in a position to have a full enough product line to make some changes in the way we approach the market. I think those are good things for us, and those are areas of development that we're spending a lot of time on.

Okay. And, also, if you could, give us a little bit of a sense of the moving parts in European Cranes for 2004 just so we can get an idea of what the picture looks like.

I haven't seen the 2004 business plan yet, Joel, so I'm a little hesitant to make any prospects on it at this stage. So we are right at the stage where we're going through the business plans for each one of our businesses and, you know, when I'm able to kind of give you some more guidance on that, I will.

Okay. Thank you.

Your next question comes from John McGinty of Credit Suisse First Boston.

Good morning, Ron.

Good morning John.

Are you willing, Ron, to talk about markets in '04 -- I mean, not Terex forecast but kind of your thoughts on the markets or is that too early as well.

No, I will give you my sense of the market in 2004. I'm willing to do that. I am just not willing to provide any change in guidance from what's happened previously. We haven't given guidance.

That's what I was going to say you haven't given any guidance.

We hadn't given any guidance.

Okay. Will you talk to the markets in '04.

You want me --

Yes, please.

Extemporaneously go through the markets. I will. Okay. I think as we look at construction equipment or, you know, and split it out between North America and Europe, our sense is that the North American market for construction equipment is improving. The industry information I've seen would suggest somewhere in the range of a 5% type improvement Europe would be slightly less, 2 to 3% overall and I'm reflecting on kind of industry data that our associations have kind of reviewed. The Asian markets will be up probably greater than that of China being the lead market. But Japan is a little bit hard to handicap. The Korean market is flat to declining after having had a good couple of years. So, overall, though, I think we've seen the worst of the construction equipment business and the attitude and expectations for 2004 seems to be in the several -- in the mid single digits for an increase in 2004.

Crane.

Turning to the Road building type products, I think we are looking at a flat 2004 with a 2003 and that's our view until we get greater clarity on in particular North America where we're dependent upon the reauthorization which should take place in February, March timing, that's the highway bill. So we don't expect 2004 to be any worse than 2003. Probably a little bit better, but there's no [inaudible]. We don't have the much in the way of rebuilding business in Europe so I can't comment on that.

Turning to the Crane business, we see North American Cranes in 2004 to continue to be challenging. There's some discussion underway within our company as to whether or not 2004 in fact is another down year modestly down from 2003. Certainly we are not handicapping that to be an up year. Turning to Europe, we see Europe to be, you know, about where we are this year, maybe a little bit positive, maybe 2004 will be a positive improvement over 2003 in cranes. Mining wise, I think mining looks to be positive finally, although I wouldn't be able to tell you whether it's 5% or 10% at this stage but I think, you know, following the general improvement in economic conditions, I think we're seeing that the mining business will follow that.

Turning to the rental related products, products like Genie, we're seeing 2004 to be slightly up but we're not expecting the major rental companies to have heroic increases in purchases year-over-year. I think the utilization is good in the rental companies. The rental rates are good, improving in their companies are good and the balance sheets aren't so good. Until some of the balance sheets improve, I think the rental companies will be somewhat hesitant to buy a lot of new equipment although we think that we’re well positioned with those rental companies as they improve. A slight improvement can be a nice improvement for us. Does that answer your question, John.

Yes. Absolutely. Let me ask you two specific kind of conceptual questions if there is such a thing. If we look at construction and we just assume that the fourth quarter results in construction are about equal to the third, it gives you about 65 million in operating profit for the year down from 75 million. Go back to the beginning of the year you pointed out back then that last year's 75 million had write off of doubtful accounts under absorption at tell, a loss at atlas and those things total about 10 or 12 million and you had planned restructuring savings of about 4 million so you basically had $15 million to the good. So you come in instead of going from S75 to S90 million you go from 75 to 65 it’s about a $25 million decrement on roughly flat sales in the aggravate. You talk about somewhat lower volume in -- but the currency gets a problem in there. I guess my question is when we look at the things like the Coventry, the Kilbargen other kinds of consolidations and so on, how much of the decline in earnings are things that will be gone next year, how much of it lower volume, how much of it is currency, just give us some kind of flavor what's hitting construction in '03 that won't be there next year or has it because the market deteriorated so much.

I think you hit a number of items that won't be there in '03. What we are not sure of at this stage what will be there in '04 that we didn't anticipate at this stage. I think there will be less problems in '04 than there were in '03 so consequentially I think some of that will flow to the bottom line as you suggested and because you can take three, four, $5 million charge relative to bad debt as well as the number of these other things but at this stage we don't anticipate having a bad debt problem in '04. So, you know, I think net net there's going to be less issues tomorrow than there are today but I am not yet ready to give you that guidance.

Okay. If we do the same kind of analysis on cranes, last question, and we make the assumption that the crane market, the fourth quarter, is even better than the third, you're like $30-35 million versus $39 million but of that $30-35 million Demag's got to be doing well over $20 million of it which means that the core business because of North American Cranes has to be in the high single digits versus something around 30 million, that he is a phenomenal decline and the question is do you shoot the crane business? Do you just say this is a bad business and going through a bad time? Or as you've pointed out fundamentally that so many of the crane customers or the crane rental companies are structurally had problems, what do you do about this business? Do you think, hey, this is a cripple or is there something unusual going on to get that magnitude of earnings decline?

I don't think this is a cripple but I think this business is handicapped at this stage and I think the crane customers are key to the change in North America. As, of course, is an improvement in non-residential construction. Today, for example, M-a-x-i-u-m Cranes which is a – one of- if not the largest crane rental companies in the world is in a difficult financial position and it will be restructured. The owner of that business has gotten some breathing space from the banks but eventually that business will be restructured and put in a position where they will be freer to purchase new equipment.

I think that is just a reflection of the way the market has come around. I think another problem that the crane rental business has had has been declining used equipment values and so in the area of what a bank would lend against, the asset valuations have gone down so, therefore, the balance sheets have needed to be restructured. I think that's either happening or will happen. I think that's what we'll see in 2004. What's our position relative to the structure? We have two facilities, Waverly, Iowa, and Wilmington. Wilmington is a big facility that is under utilized but frankly that a business that we didn’t pay a whole hell a lot for, so it’s not like we are sitting with a huge absorbed manufacturing operation.

Right

Waverly is a facility we just put our old cranes into and I think we've taken a lot of cost out and, Fil, you want to comment on that some more?

Yes. Can you hear me there, John?.

Yes.

We need to also not lose the fact as the market has been going down and in a short term the market has been going down for the last couple of years we continue to aggressively convert used equipment into cash. We have been reducing our dealer inventory on a way down the market is better to fix our balance sheet and to run for cash than just continuing to stuff the dealer network. And currently our North American business is sized, the right size, to two manufacturing facilities with imports of our Demag Cranes and we are just finish restructuring it.

Hey, Fil, how many cranes would you say we’ve taken out of the distribution channel this past year.

Over a hundred.

Okay. So that's 100 we could have produced and sold that we didn't just to give you a sense, John.

Okay. All right.

I think fundamentally the business is difficult but, you know, we're managing that difficulty and just as it is tough right now, there'll be a day when it comes back.

Final question, if next year's equal to this year, in other words, no improvement but no deterioration, do you earn more upon, in other words, were there costs that will be gone or is -- does it earn about the same amount of money?

Again, I don't want to give guidance for 2004. I would be disappointed if we have a 2004, though, in the crane business which is worse than 2003. In fact, I think it will be significantly better but let's see how it goes.

Fair enough. Thanks very much.

Your next question comes from Tom C-l-a-m-p-k-a from Credit Suisse First Boston.

Can you give us an update on the sale of truck business to Caterpillar.

Sure. Most of the due diligence processes have been completed. The issues that were uncovered are not surprising. I think that the next steps will be to resolve any of those issues with them and try to move towards completion as soon as possible. It is hard to handicap exactly when it will be. We would like to get it done before the end of the year but I don't think there's anything that we haven't expected that has come up and I look forward to completing a successful transaction.

Those numbers are pulled out of your numbers today.

Yes. The mining numbers that from the operations that we would expect to sell pulled out of our operations. One of the complexities of this of course is that we have a half dozen or so distribution points that'll be sold to independent Cat dealers. This isn't really one transaction, it is more like six or seven.

On the balance sheet as well, Tom, they don't show in regular working capital, assets and liabilities are recategorized

You guys have shut a bunch of plants down over the last few years and I guess historically been more of an assembly kind of shop. As the market get more competitive can you just talk about what degree of foreign sourcing you have, you know, especially from the Asian countries. I would guess there's [inaudible] What are you doing now, do you expect it to change somewhat and how does Daewoo figure into that at all.

Well, Daewoo we will jump on that subject. We are purchasing Daewoo excavators and wheel loaders as finished products, not as components and that is a product line that is complimentary to what we are doing. In a broader sense, we're constantly examining ways to improve our material acquisition costs. We have a team of people set up to address this, led by Fill here, centrally and then split out to concentrate on some purchased components.

Genie, for example, has historical done a good job purchasing certain components from Asia and searching the world for excellent cost on some of those components. We are sharing some of that information. With the acquisition of T-a-t-r-a we have a game plan to further enhance our eastern European sourcing activity. We set up a sourcing office for our Road building product in China so that we can bring into the U.S. some lower costs product really in some of the crushing areas as well.

So we've got a number of activities to take costs out of our system and I think that's an ongoing -- will continue to be as long as we are here.

Is that something now that given costs I think would be a very significant cost differential [inaudible] way and maybe to the extent of doing final production there maybe more some of the higher dollar stuff in transportation.

For sure, Tom. I mean, this is a reality of life. Capital is going to seek its most efficient level and we are looking to do the same in our company. You know, we're committed to our existing production facilities but not so committed that if they can't produce at a world cost competitive level we won't move production.

Last question, can you talking about acquisitions at all, anything out there interesting? I know you are always looking. Anything we should be expecting or anything that you need to fix a hole.

We’re really focused on running the company right now. Our existing operations are core businesses. We have completed the to T-a-t-r-a acquisition in the third quarter.Fil Filipov focused on getting that going. We have made a substantial investment of management time there. [inaudible] We think that will help us get increased military business, lower component cost and then some access to the Russian and other Eastern European markets.

Beyond that, we are going to continue to look at strategic acquisitions but under the condition that we can do anything where they are accretive in the first year and credit neutral or enhancing as well. So we put some tough conditions on things that we would do and I think those are the right things for us. And if you reflect on Terex overall, we have a 3.5 to $3.7 billion company -- billion dollar company, rather, but a product line that ought to be 5 to 6 billion dollars. So we have a lot of opportunity to grow our existing business within our existing product line.

Thank you.

Your next question comes from John Sykes [inaudible].

Good morning. Just two quick questions. One is the special items, how much of that is non-cash? Is that all non-cash or is there a portion that's cash?

I would say that cash is the large component of it because these relate to things that you don't typically accrue. Period costs related to these activities in the third quarter. 2.8 pre-tax sales. Let's say about 2 cash related.

Okay. And just sort of, you know, more of a big picture question. How sustainable are the working capital improvement that you have made? I mean you have done a great job in managing that but how much further can you go?

I think I won't give specific numbers in terms of the future. I have talked somewhat about this in prior calls that I would say a world class company can get in the 15% of revenue at a level for working capital. That's a general statement across a lot of industries. But at 26% and given the volume in the second quarter I think we're down to 23% because that was our peek period. But there's still room there and I think we get it more by process improvement in the future as opposed to what I'll call a little bit more brute force. Your initial reduction still tend to come from a specific management actions, the sustain ability that you are talking about is what I would like to see applying some of the Genie best practices in some of our other businesses but also getting more responses to changes in market demand. [inaudible] It is going to be a long term journey but we still have opportunities.

Okay. Great. Thank you very much.

Your next can he comes from Charlie [inaudible] Lamberg & Company.

I wonder if we could go back to the crane area. What will it take for the North American crane business to turn around? I know you mentioned non-residential construction but can you [inaudible] what's driving that or not driving that?

Let me answer that and then I'll ask Fil to comment as well. I think one of the principal things that will happen for the crane business is that first the first line crane rental company must get a stronger balance sheet themselves. So somewhere along the way they are going to have to go through a process of improving their balance sheets. And that's started. Okay. And until that happens, institutions that would typically lend capital to those companies aren't going to lend capital. So that has to happen.

Secondly, there's probably three primary users of cranes, non-residential construction is a big issue but if you take that a little bit deeper, you'd have industrial applications such as the Petro chemical fields, you have bridge and road construction and, of course, you have basic building. Today bridge and road construction is down and basic building such as offices, etc, is also down substantially. Perhaps the Petro chemical area is flat. We haven't seen the up tick that we might have expected. I guess it is improving a little bit but not a lot. So we need a little bit of help from end use as well. So those two areas when I say two meaning the financial health of the rental companies coupled with the end use applications, are going to have to happen and, you know, some of that is the a classic financial turn around. Fil you want to comment on that.

There's a third thing happening in the North American market. The 30 ton cranes and truck cranes are really going away and being picked up by an alternative method, whether it is a telescopic [inaudible] that are picking some of the market or whether it is a little bit of higher boom trucks that are picking up the truck cranes. Also the higher truck cranes are being transported mid to the all terrain. So we are seeing that the volume of the market as we know it back in the 1999, 2000 year that we had hydraulic cranes over 2,000 per year it is certainly going to finish in the 7 to 800 this year and being really replaced by the larger tonnage machines reflecting the construction and the modularity of the construction habits in the United States.

Okay.

Thank you.

You're welcome.

Your next can he comes from Robert McCarthy of Robert W. Baird.

Good morning, gentlemen.

Good morning, Robert.

Ron, now that you have owned Demag for a year I wonder if we could get a report card along the lines that you used to talk about at the first couple quarters you owned it. In other words, it was a $160 million investment have you taken that much cash out of the business to date? How much is working capital comes down? And could you tell us how much of the revenue performance that we are seeing now is still reflective of use cranes.

Ok I am going to ask Phil Widman to answer the financial aspects of it. There's a lot of enter company movement so I want to be careful.

Sure.

But, we’re really pleased with how this has gone but given the fact that it is pretty well integrated with our operations, the exact numbers hard to tell you.

Robert, I don't want to get into exact numbers either in terms of Demag but I would say if we paid $160 million for it I would say the cash generation is in excess of approximately $100 million since acquisition just kind of ballpark. It's been significant as well as contributing to the overall picture for cranes.

Right. And are we being relative to other comparable parts of the company? Are we satisfied where the working capital position is there now.

I think there's still some potential. We've got some activities going on in terms of rearrangement and the facilities in Demag to improve efficiency and flow and I think, you know, continual focus on responsiveness to the end market changes there's still some more there. But I think very significant progress thus far and they've done extremely well I'd say on the receivable side and on the payable side and inventory as I mentioned all of our companies is the area kind of where you get the sustainable process improvement but they've done quite well.

Inventory Demag has to be down below 100 million now.

I am not going to comment on it.

We don't want -- I would tell you that I think there's more room in inventory but we're very happy with what they've done. Okay. Otherwise, we are going to get into reporting in individual operation and.

Okay.

We do know those numbers, though.

Let me ask you about Genie. The operating margin performance has been particularly impressive there. Helped, of course, by having a North American production base and selling product into Europe.

Correct.

I'm wondering to what kind of level that's made it. Has that contributed as much of a point of margin, a couple points of margin? Do we know?

Yeah. I think it's contributed to a point of margin probably and as much as that's also I have to say if we are going to give Genie that credit, we have to comment that our European businesses in particular some of our construction business and cranes have suffered margin wise on product they've shipped back to the United States. So we have kind of had a natural hedge there. So while Genie has benefited, you know, I think the construction --

Overall on foreign exchange, it's a slight negative impact overall I guess is the way I would put it on operating performance.

Okay. And a lot of discussion as there should be about the North American crane market and how it's performing, et cetera. Could you distinguish a little bit? It seems to me most of your comments have been focused on what's been going on in the RT market because that's where your biggest exposure has traditional been. Is there anything different that you would say about the lattice boom market than the way you've characterized the RT market.

Yeah. They took a bigger sleeping pill.

And.

Fil do you want to comment on that.

I think that the numbers are pretty much the same, Robert, the market is down from about 400 to 450 units down to about 200 units. The difference is – is that we did not have substantial inventory in the field and we continue to grow our market share. As you know our product is imported from Japan, core products imported from Japan and we do our boom and testing final assembly of the boom in Wilmington so we have picked up market in that class.

The all terrain market we have done much better in North American that includes Canada because Canada market is not down. Canada market is certainly somewhat up and from the products with Demag have benefited from it. We had a good show down in Mexico also with a few construction products and large 500 ton machines. So in the all terrain and into the markets of the [inaudible] cranes we have certainly picked up [inaudible] and didn't have to do the dealer inventory adjustments.

That's helpful but part of my question related to, Ron, when you went through kind of a preliminary view of what you thought markets might look like in '04, crane kind of stood out as something that in North America that you said you were debating, you thought there was at least a possibility that it would decline further. Is that really directed more at the RT market in part because of the structural changes Fil's talking about.

No, not necessarily. I just think that, you know, those comments I suggested about the strength of the customer base plus the Road building and those related areas are hard to handicap at this stage and, you know, from a planning point of view we are not going to plan for a stronger 2004.

Right, If I could, you know, sneak in one more. We don't see the mining truck results now except as a net number. Could you give us an idea of how the business performed in the quarter in terms of order intake, you know, as an indicator of how the market's doing.

I really don't want to comment on that. It's -- we have a very fragile discussion going on with -- I shouldn't call it characterize it as fragile but it's a good discussion going on with Caterpillar and we expect them to, you know, complete this transaction and I don't want to take -- give them the sense that we are trying to take business away from them.

I understand. Thanks.

Okay. Your next question comes from Cliff Ramsey of [inaudible] research.

Good morning, gents. I’m as cheap as you are. I was making a transition from a web site to a phone call. When you were talking to David Raso, you said there was an improving environment in the end user level but in what sector were you talking about when you were answering his question.

Construction equipment, particularly the smaller side of the construction equipment business.

Mostly rental.

Products that will be a crossover products, rental products, and you know back hoe, mini-excavators, those kinds of products.

Okay. Are we not seeing you made a passing comment about both rental fleet utilization. I am talking here on the AWP side, rental fleet utilization and day rates improving. Hasn't that been a very sustained trend for the last six to nine months.

Well, rental rates have improved in general for rental companies but for AWP's it is still lagged a little bit. Bob, do you want to comment on that.

Yes. Thanks, Ron. Cliff, we are seeing positive trends in the marketplace I think helped by the rental companies have disposed and turned their used equipment and off brand equipment so the fleets are in better shape, the market conditions have settled out and the operations of the rental companies themselves have settled out. And so we are starting to see both improve utilization and improved rate structure as well as of this utilization.

Without asking you for names. Do you think that most of the major financial turmoil, in other words of the ones that needed to die, died, if the ones that needed to restructure, restructured or we still going to have that for another year or so?

In the rental channel.

Yes, sir.

No. I think a lot of work's been done. There will probably be a few more things that will happen but certainly we believe that the customers are in better shape than they've ever been and I think they're focused on operations and moving forward now.

And I think I would add to that that most of them are learning the superior overall value proposition of a Genie product versus [inaudible]

Okay. I don't want to pick on language here. Next to the last question. You say the rental companies are in better shape than they've ever been. I would assume you mean recently.

Yes.

Right.

Yes, I mean clearly over the past couple of years.

Right, okay. The last question goes to the issue of overall working capital utilization. I'm not arguing a world class company in your kind of business world has world class as [inaudible] has 10% of revenues but let's use your 15% number. What major things do you need to do to shave that 10 points off your current level?

Well, like I said before, the major area for improvement is still in inventory as opposed to receivables and payables. Certainly we can always get incremental improvement in the receivable side but the dramatic change will still be in the area of inventory.

I think, cliff, to help, I would like Bob Wilkerson to comment about his lean manufacturing inventory and whip terms. I mean, I think that will give you a sense of what real world class is in the area of work platform business. Bob.

Yeah. I think overall I think our inventory, you know, is lean. It's affected by, obviously, doing business with international market. But raw material and web turns we are over 200 in most areas and, you know, so that means we have material arriving and leaving, basically, same day. Some items were up to three, four turns a day, Cliff. So the good thing that we are seeing is that Terex is really focused on sharing best practices across the company. We've had a lot of different groups in to learn from us and we have been able to go to other Terex companies and learn from them. We are sharing supply chain management techniques and really trying to work the inventory side of it.

The other aspect of it is forward planning with your customers to try to anticipate what you do need to build and where you need to stage finished products of inventories and we have been able to work with some of our affiliated companies at Terex to be able to help on that aspect, too. So we see it. I think everybody in the company is focused on inventory. Ron and Phil have pushed the operating units here to adhere to different standards and learn better practices relative to the inventory and I think we will continue to make improvements.

It’s not insignificant, Cliff that some of our best companies operate at very attractive inventory and working capital terms. And that Genie from lean manufacturing process is really the thinker and the best practice -- practitioner. I'd invite you to go out there and see it.

I look forward to it. When they were private they wouldn't let me get anywhere near them but it was clear that they bought some very interesting techniques. I have asked Kevin for some time with you. I will talk to you when I see you again. Thank you for being responsive today.

Okay. We will take a couple more questions.

Okay. Your next question is a follow-up question from John McGinty.

Yes, John.

Ron, just a couple quick follow ups. Phil you talked about the crane mark going from 2,000 units going to 700 - 800. Part of that's the recession, part of that is structural to the extent of structural, what will norm, 1500, a thousand, back to 2000. Not saying when it is going to get there but structurally what's norm.

Fil Filipov, that's for you.

Yes. John, I really think that the 2000 on a hydraulic is going to be far away from today but I would say close to 1,200-1,500 will be the equivalent of where we were in the year 2000 because the cranes will be higher in value.

Okay. And then, Ron, can you conceptually mining shovels are something people don't buy off the lot. Without giving numbers or anything, can you talk at least to the order of magnitude of the -- if not the orders the inquires or how that business kind of looks to you? That's one you have a lot more lead time than, you know, some of this other stuff.

Okay. I think we are going to -- we'll go ahead.

In terms, John, in terms of backlog, actually about flat over the third quarter last year in shovels --

Which was a good quarter, by the way, and we have a good --

In terms of backlog. I don't want to give exact numbers but maybe the quarter’s equivalent in revenue.

What about the -- I am talking about the inquiries as you are talking to people there's a lot of gold mines in Africa and kind of things that traditional would use your shovels that I would think that should be a fair amount of business you are looking at.

Our situation today is somewhat impacted by our discussions with Caterpillar, of course, because our selling organizations know that they will soon be part of another organization.

Okay.

So I think, you know, I'd revert the question back to you from the standpoint that, you know, I think you realize how effective the Caterpillar organization can be as an organization in selling and since they will be essentially getting out of their mining shovel business and putting all of that business through us, I think we are in a pretty good position there. I don't think that, you know, we can handicap the fourth quarter other than to say we think it'll be average or slightly better than average quarter but for 2004 I am actually pretty positive about it.

Okay. Final question, kind of a big picture question and maybe you don't even want to talk about it but you talked about the analogy of the quilt to the blanket. You make the statement in there this is in your release the journey we have begun and we are committed to as a management team. We talked about bringing in the excavators and wheel loaders and getting the Terex brand -- isn't in fact your success or at least we’ve always looked at your success because you don't have a Terex brand, it’s because you've had niches it’s because you haven’t and gone up against Caterpillars, the guys that have failed have been the Volvo, the Kamastu, the Deers, the Cases, that said here’s our brand we’re going to try and beat Cat and can’t you have gone to market in a different way. But, doesn't having a full brand and trying doing in that way run absolutely opposite to everything you've preached very successfully for the past five or seven years.

Absolutely not John. I think you are misunderstanding. Having a full brand doesn't go against it - it is what your brand represents. Okay

Okay.

We are going to establish ourselves as the best value construction equipment brand in the world. We believe people buy Caterpillar equipment because they buy confidence. We believe they buy some other People's brand because they buy technology. But when they want to buy value they are going to want to buy Terex equipment because the combination of price, residual value, service, and after market support we think will result in the best return on invested capital. That is going to take work to develop. But we think it comes about as a result of our outsourcing model, lean manufacturing practices throughout the organization all of which can work to develop the Terex brand, okay, but the brand will stand for best value.

All right. Thanks very much.

Okay. Operator any other questions?

At this time there are no further questions.

Great. Well, this has been longer than I expected but we are willing to stay as long as anybody wants so follow up with Kevin O'Reilly or Phillip Widman or myself and that'll be it.

Thank you. Candy, do you want to end the call.

I certainly will. This concludes today's Terex conference call. You may now disconnect.