Terex Corp (TEX) 2004 Q1 法說會逐字稿

Good morning, my name is Anissa and I will be your conference facilitator. At this time, I'd like welcome everyone to the Terex Corporation first quarter 2004 earnings release 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. If you would like ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2. Thank you. Mr DeFeo, you may begin your conference.

Thank you, Anissa and good morning to everyone on the call today. We appreciate your interest in Terex. With me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer, Tom Gelston, Director of Investor Relations, is in the office with me this morning. Also participating by telephone is Colin Robertson,President of Terex Construction, Steve Filipov, President of Terex Cranes, Bob Wilkerson, President of our Terex Aerial Work Platform business and Rick Nichols, President of our Materials Processing and Minings business. They will be available to support any of your questions following our remarks. As is our custom, I am planning to make a few opening comments and then Phil Widman will review the numbers in some depth. Following this, I will cover some of the highlights by segment and then open it up to your questions. A replay is available after the conclusion of this call and can be accessed until Thursday, April 29th, at 6:00 p.m. eastern standard time. To access the replay call 1-800-642-1687 and the conference I.D. number is 6683636. Let me begin. Overall we're pleased with the first quarter performance and the net income of $17 million or an earnings per share of 34 cents. This compares with the prior year period of 32 cents per share when you exclude year-ago special charges or on a like for like basis. We had no special charges this quarter. Most importantly, we feel is the momentum of our business given the significant increase of 73% in our backlog. Typically we've grown accustomed to operating with a very low backlog. This is obviously changing. And we're pleased to see this trend. This will allow us to better plan, improve efficiencies and achieve certain price improvements. Steel cost increases and currency have been a drag on performance, but we expect that we will be able to overcome these issues as we did in the first quarter. Frankly, demand has picked up more rapidly than supply. We've had some imbalances during the quarter that we were generally able to overcome. Just as there is a cost to lowering production, there is also a cost in the short-term of expanding. Nevertheless, this, we are confident, will be relatively short-lived. Today we have no major shortages that would impact our outlook. The Terex improvement process is on track and I will discuss this in some depth later in the call. We remain committed to building a more capable franchise, a broader franchise, achieving superior customer service across the company, delivering a superior return to investors as measured by returns on invested capital, frankly, being the most profitable company in our industry. And then delivering a great place to work for our employees. We feel we're on track to delivering substantially more in 2004. With that, I'll turn it over to Phil. Phil?

Thanks, Ron and good morning, everyone. 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 rate changes, governmental actions and other factors. A more complete description of these factors that affect our future expectations is included in the press release and our other public filings. I encourage you to read them. For the first quarter, Terex reported net income of $17 million or 34 cents per share compared to net income of 12 million or 24 cents per share in the first quarter of 2003. Although we reported no special items in the current period, excluding the impact of special items, the net income for the first quarter of 2003 was 15.6 million or 32 cents per share. Net income in the 2004 period would have been 35 cents per share utilizing the same tax rate as the prior year. Net sales for the first quarter of 2004 increased roughly 13% to 1.044 billion compared to the first quarter of 2003. Foreign exchange translation and the inclusion of Tatra in the results explains the overall increase. Strong year-over-year sales in portions of the construction segment, mainly crushing and screening and the compact businesses, and aerial work platform group offset the declining sales activity in cranes and mining. First quarter income from operations of $48.3 million or 4.6% operating margin compares to 47.2 million and 5.1% excluding special items in 2003. Net currency impact in both the euro and pound Sterling, where there was an appreciation of roughly 15% for the period comparison was a net negative for the company of approximately $3 million. This was particularly significant in the heavy truck business as a proportion of U.S. dollar denominated revenue was twice the normal level while production costs remain largely Sterling-based. The impact of steel pricing pressure was somewhat of a factor in the quarterly results, although more in our U.S.-based manufacturing units as pricing increases in Europe has not been a significant thus far. We estimate that steel pricing had a negative impact of 2 to $3 million on income from operations in the first quarter. We have launched actions to mitigate the future impact through pricing as well as alternative supply arrangements through the coordination of our sourcing strategies. SG&A expenses after adjusting for exchange and the inclusion of Tatra increased mainly due to the investment in additional sales resources in support of proposal activity as evident from the backlog increase, new product introductions and R&D efforts. Net interest expense for the quarter decreased $2.7 million over the comparable period in 2003 due to our aggressive debt reduction efforts. You will note that our tax rate for the first quarter is 30% compared to our annual guidance of 28%. While we believe our guidance is appropriate for 2004, effective tax rates tend to fluctuate each quarter based on the differences and the mix of income by jurisdiction, changes in our assumptions on valuation allowances and the impact of pending statutory reviews. You will note our expected cash taxes should be between 15 and $20 million in 2004. Cash flow from operations for the first quarter was a use of $64 million, in line with our expectations in light of the increasing level of business activity and the normal, seasonal pattern. Working capital as a percent of trailing quarter annualized sales was 24.6% in 2004, comparing favorably to the 29.1% in the first quarter of 2003. As part of the Terex improvement process, we are reducing the investment in working capital that we would normally see as the level of business activity accelerates. Our net debt for the quarter increased by $74 million to $968 million in line with the change in working capital. Net debt to book capitalization at the end of the first quarter was 52.3% versus 50.5% at the end of 2003, reflecting the above increase in working capital mainly. Our weighted average interest rate decreased slightly in the quarter to 6.36% on our total debt. Ron, back to you.

Thanks, Phil. Now let me discuss each segment's performance. And to highlight the segment performance, please note that seasonality is important in our business. But also, activities that are under way also contribute to quarterly performance trends such as new product introductions and product changeovers, facility and manufacturing process changes. This is why we continue to offer calendarized guidance because a number of other companies in our industry will have a slightly different seasonal pattern. We are different. We generally attempt to sell to demand and not to an anticipated inventory level at the dealer. That's a big difference in the way we organize ourselves and front up to the market. Let me turn to Terex Construction, specifically. Basically we had an on-track quarter with the crushing and screening in compact business strengths offsetting a moderately disappointing margin performance from our heavy construction equipment team. The heavy team includes articulated trucks, Atlas excavateors and cranes and the Fuchs material handling line. The issues here were with Atlas and artics. At Atlas we had a major model changeover in the quarter. This was anticipated and the prospects here look very promising as new products were introduced at the Bauma show and they were very well received. As you may know, our Atlas excavator line in Germany is one of the top brands in that market. Artics had a strong sales month, but a much stronger revenue level in the United States than anticipated and due to the changes in currency, this caused margin pressure. We have increased prices significantly as competition also faces these same issues and we feel that between hedging, pricing and some resourcing this situation can be significantly mitigated. The revenue strength is important as it confirms the marketplace's acceptance of our new generation 7 product line plus a recovering construction market. Also, please remember that our arctic product line, that any artics, have a relatively short life compared with other construction equipment. So, we feel this is also about equipment replacement and the replacement cycle. Income from operations in our construction business was $16.2 million, up from 14.2 million in the year-ago period, reflecting the comments previously made. Revenues were up 22%, about 60% of this revenue increase came from currency and about 40% from real growth. The margin here was only 4.2% of the first quarter. However, even with the current currency situation we feel the margins will improve by several points in the near-term. This is the foundation for our longer term target of a 10% operating margin in this segment. A couple of further comments. We have successfully started our crawler excavator launch in the U.S., selling all available near-term supplies from our source in Korea. We also introduced a fully upgraded loader backhoe line at Bauma to great reviews and the mini excavator line had some significant product improvements and is doing extremely well in Europe. This is the former chef product line. At a visit I made last week to our South Haven parts center, I was able to confirm significant progress that this facility is making in our operations and customer service areas. As you may know, we made major changes here and we've taken the lean operating approach from Genie as well as the customer service disciplines that they have had and we know that these improvements are being noticed and appreciated by our customers. This is a critical example of a process improvement that's fundamental to the Terex improvement process. These changes embody the kind of activities we're working on across-the-board. The backlog increase of 140% in this segment reflects the tempo of the market that we're in. We are having to make choices about markets and production levels. These are good issues to work. We are not going to overreact as on some products and build excess capacity such as on scrap handlers, only to find out that the market will soften by the time capacity is added. Let me turn now to Terex Cranes. Despite what looks to be a disappointing quarter, the numbers here reflect continued progress and we believe the operating performance that has been holding us back in North America is improving. Currency had an impact but to a lesser degree than in construction. We had a very strong quarter in Europe and a challenging quarter in North America. We had some bad debt issues in North America and the crawler market is still slow in North America. Customers, frankly, in North America, and rental specialists are still having a difficult time securing financing for new purchases. We think this will change over time, but this is the point in time we are right now. We're making progress at our Waverly operation and getting production levels more efficient. We believe we're turning the corner here. If you factor out the used equipment sales that we had last year that were at breakeven margins, the 2 point increase in gross profit is encouraging. We had a great Bauma show, we also won a patent suit in Germany against Leebear(ph), giving us a competitive advantage on certain, large crane applications. This demonstrates the excellent technology and innovation of the Demag product team on the super-side lift product, which allows us to lift more with a smaller crane than competition. This will be a nice competitive advantage over time and we are very positive about the patent protection we have. The backlog overall in the crane business is about 26% ahead of last year. We recently had some excellent success selling large cranes China. Overall revenue was off 12% from year ago in the first quarter, reflecting the used cranes sales strength of last year and, frankly, the fact that last year we were producing and selling off some of the excess backlog that we had inherited when we purchased this business. The SG&A increase was driven mostly by currency and the operating margin of 3.1% was impacted negatively on the issues mentioned from North America. We expect the solid second quarter here reflecting the seasonality of this business and the diversification of our business outside of North America. Turning to the Roadbuilding utility and other segment, our overall revenues were up 37%, mostly related to Tatra, in that Tatra was not in our year-ago numbers. In this segment, we feel performance was mixed although generally even here these business groups tend to be looking at a more positive economic environment. Our roadbuilding business was slightly profitable despite a disappointing quarter in the large permanently installed asphalt planned business. In our Roadbuilding area, our mobile products, such as milling machines and pavers, turned in a relatively strong quarter when compared to the year ago period. Advance mixer had another strong quarter, backlog trends at Advance are quite strong and we are pricing to recover the steel increases that were meaningful here. It is too early to report much about our rear discharge mixer product introduction. As you may know, we acquired the technology for this product in the first quarter. But we are hopeful as this product line opens up about 75% of the market that was not available to us previously. On military vehicles, we've made good progress for a future result. This is the nature of the business and we are living mostly with expenses today at our American Truck JV. However, as previously announced, we were selected as one of the two finalists on the future U.S. Marine Corp. LVSR program. We will be working hard for this business although we realize that we are the underdog. The Terex Utility business made progress at the revenue line. What we were unable to convert as much as we'd like to the bottom line as we faced some steel increases and also when we faced these steel increases in this particular product area, the customer lead times are typically pretty long and we don't think we can price to recover in the short-term those increases. Also, we're implementing aggressively the lean manufacturing process at this business and there's been some start-up costs attached to that. Nevertheless, we think our value proposition to customers today is better than it's ever been and we think we will have a stronger second half in this business. Tatra was a positive contributor and is responding to the changes under way in this Czech Republic factory. We're making dramatic changes such as closing buildings, tearing them down. When you tear down a building, you can't hide inventory and you don't have to heat it anymore. At this point I'd like to say that we're ahead of plan and optimistic relative to the potential to continue to improve this business. Lastly, our light construction business had a solid quarter and backlogs are strong here, as well. Turning to the mining business, we had what appears to be a weak quarter, but I'm very pleased with what's happening here. There's a renewed spirit of competitiveness and the market is strong. We expect to see this in the numbers later this year. Take our shovel business. We had a great Bauma show as we exhibited our new RH 340, we expected to sell only a couple of these this year, they sell for close to $5 million or in that range. We will sell probably three times this number. We are having to meaningfully increase production and think that the prospects remain solid as the customer is recognizing the leadership of our products here. Furthermore, as you may know and recall, we were out of the truck business in the second half of 2003. This gave us a chance to rethink a number of things and talk with our customers in depth following our failed discussions with Cat. We expect revenues to build dramatically in this business, given the fact that we are working on a number of great opportunities and scrambling, frankly, to build to the anticipated volume. We are moving some production now into our underutilized Cedar Rapids facilities. Some of you may remember our ability to increase production from the 1999 period when we produced 238 mining trucks compared with a prior year production of only 17. While we will not have to increase production that dramatically, we are confident that we can improve production and deliver on the new demand that we are being offered the opportunity to secure. Frankly, we're pleasantly surprised by the customer reaction to our staying in the business, we have a great product line and feel we've improved our local service meaningfully. Finally, we are all obviously pleased with the performance of our Terex Aerial Work Platform business. This business is basically Genie plus the Telehandler product line. Revenues are strong. Margins are excellent. And the backlog has improved, as well. The aerial work product segment revenues were $168 million or up 14% from prior year. Operating profit was up 26% at a 12.4% margin level. Importantly, the backlog increased to $77 million versus $19 million in the year-ago period. Our customers are positive about near-term prospects. The rental industry is improving. Revenues per store are improving. Rental rates are improving. And generally the environment for this business is excellent. The Genie team remains upbeat about our current performance. We feel the consolidated nature of the Aerial Work Platform business, please recall that at the least peak there were somewhere close to eight or nine manufacturers and today there are only a few as the business has consolidated. We feel this will help and obviously keep in balance the fact that the customer base has also consolidated. We also feel like we are serving these customers well with a responsive manufacturing effort and also a very responsive marketing effort. This is a business where we have a lean manufacturing process in place and don't keep a lot of excess inventory around the Company and we feel we are increasing our production to demand and doing a great job there. We are anticipating a very strong second quarter from our Genie team. A couple of comments about the Terex Improvement Process. We are continuing to gain momentum with this initiative, as you may recall it focuses on seven areas for the long-term and really for a transformation of the type of company that Terex is. The seven areas are talent development, better place to work, easier to do business with, margins, assets, marketing and the brand. Each one of our nearly 40 business locations is developing specific, local action plans in these area. This is to compliment the current corporate-wide initiatives. The corporate-wide initiatives were quite apparent at Bauma as we reflected well in the marketplace our branding and marketing strategies. We were proud to be able to show the consolidated nature of our company. I think our customers were very, very impressed with the way we presented ourselves. I think the opportunities for growth here are pretty significant. We have active projects on supply chain consolidation initiatives with both steel and engines and we expect to continue to make progress in the asset area as we're making this a near-term priority. Turning to the outlook, we are right on where we expected to be. As previously provided, we expect the first half earnings per share to be in the 55 to 60% of the full year range. For reference, the full year is expected to be 30 to 50% above the 2003 level excluding special items. I want to confirm this outlook. In summary, we remain committed to delivering substantial value in both the short and long-term to our investor base, to our customers and to our employees. I think you see a Terex company that continues to improve with lots of opportunities in front of us. We are confident that we can make our commitments as previously communicated and hope to provide you with solid news as the year progresses. With that, I'd like to open it up to questions. Anissa, could you open it up to questions, please?

Absolutely. If you would like to ask a question, press star and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Robert McCarthy with Robert W. Baird.

Good morning, Ron, Phil.

Good morning.

Hi.

Ron, when you were talking about construction segment and the variety of challenges that you faced in the first quarter, you made the comment that you expected operating margin to improve by several points in the near-term. I think I can figure out what several points means. What does near-term mean?

You know, like today. [ Laughter ]

Like second quarter and sustained at significantly higher levels thereafter?

Well, I think we always see some progression in margins in the second quarter. We expect to see it in the second quarter here. We think we have addressed some of the issues, not all of the issues. And Colin, would you like to comment about that?

Sure, Ron. Obviously, last year we had raised a lot of the structural cost issues and basically the early part of this year and we have been investing significantly in growth, whether it's been put in physical resources and new markets for us, going after, for example, the fuel excavator market in territories like the U.S., regaining share in Germany and France and the non-German manufactured products. We have been feeling aggressive going out and giving extended warranty and service support packages to one new customers and we're seeing a lot of benefit there at the top line and starting to hit the bottom line, also. You said earlier, Ron, between the TF 2 Bicore, the new 0 Teo(ph)(ph) Swing excavateors, the generation 7 artics and the 05 series Atlas excavateors, there is a phenomenal demand. The Bauma show was extremely good for us and we anticipate having a strong second quarter.

Okay.

Once again, if you would like to ask a question, please press star and then the number 1 on your telephone key pad. Your next question comes from Ryan Watson with Stanfield Capital.

I'm just a little bit new to the Company, but want I to know if you could maybe explain to me the dynamic between the end markets for construction and cranes and maybe give me a little bit more insight on how those play off each other as to the correlation between construction being strong and cranes being weak and particularly in this quarter, or is it more seasonal? Thank you.

Okay, sure. We will take a shot at it. It is not a simple answer, but I will give you a couple of things that should help. The construction products typically pattern themselves closer to demand whereas cranes are a product that has a much longer lifespan. The typical crane may last 15 or so years. The crane business is generally much more cyclical and it is a product line that purchases can be postponed on. And furthermore it is quite dependent upon the health of the customer base, which is consolidated and typically the customer base are rental specialists. In the North American market, there is probably 20 or 30 rental specialists that control the majority of the business. These rental specialists had tremendously positive times in the late '90s and led by a few have probably overpurchased cranes, probably also over acquired some of their other companies and got into some financial difficulties as the end market slowed down. End markets for cranes tend to be both roads and bridges and petrochemicals and some industrial applications. So, what we're seeing is a crane business that is lagging the recovery of, in North America, of the construction equipment business. We think this will change but typically the crane business both lags the recovery but also hangs on a little bit longer in a recovery than some of the other businesses. Whereas the basic construction products tend to pattern themselves more after end demand.

Okay. Do you see any boost to the crane business based on recent legislation on the TA 21 that was proposed by the House?

Well, the TEA 21 bill is still up for grabs. The House is at 275. The Senate is at, and these are simple numbers, at 318 and the president is at 256. I think once that gets resolved that will be helpful but frankly I think just the economic improvements that are taking place in North America will help the crane business as the customer base gets better utilization, gets better cash flow from their existing fleets and importantly, finance companies get more comfortable lending to them as used equipment values solidify. Key to their health is the value of the used equipment product line, which did fall in the last slowdown, unlike what it had done in previous slowdowns.

Thank you.

Okay.

Your next question is a follow-up from Robert McCarthy with Robert W. Baird.

That was kind of unexpected! [ Laughter ]

Yeah, we thought you just walked away from us!

I did have more, actually. Ron, the tenor of your comments about the impact of steel costs in the quarter and the steps that you've taken to mitigate that suggests to me that you don't expect the impact to be as large as the 2 to 3 million in the second quarter and probably a nonissue in the second half of the year. Is that a fair interpretation?

Well, go ahead, Phil.

I was going to say, Rob, the effect on the supply costs in the first quarter, I would say, is less than what we would expect as the higher volume and the impact of the procurement that may have been done in the first quarter when the price increases and quotes was the main period. So, I would say dollar-wise there could be a larger impact in in the second quarter. The actions we've done in terms of pricing would probably tend to lag a little bit the cost side as you roll it through the backlog, with our big backlog increase, how much of that really was affected in terms of what we realized in the first. So, it doesn't go away. It's still there. We're trying to mitigate it as best we can. We haven't sized a specific number, though, I guess is the exact point.

If you look at what's happening with scrap prices today, it's an ever changing situation. And scrap prices are a good leading indicator of what will happen with steel. Scrap prices are now coming down.

And most of our impact, Rob, as I mentioned in my comments, were in the U.S. Some constraints on supply and specific grades of steel, but we're working through each issue.

That's the other thing I wanted to ask you about is what kind of commodity or product categories did you have supply issues in the first quarter?

Not necessarily in the first quarter that impacted our results, high tensile, high strength steel is one area that we're a little concerned about. Again, affecting the large truck business and cranes.

I think we were able to solve all of our problems, okay?

Yeah, it's just what's tight relative to other pieces.

Okay. Fair enough. A couple of minor things. Can you give us an idea of how much currency contributed to the top line in the Aerial Work Platform segment?

Just a second.

Yeah, about $5 million.

Yeah, about $5 million year-over-year, Rob.

Okay. And what does winning this patent suit with Leebear really mean? I mean are they going to end up paying you some kind of a royalty? Are they forced out of being able to offer their version of the super side lift, what?

I may ask Steve to comment on this, but we don't want to make any conjectures about royalties or any kind of things like that. I mean at this point in time we won the patent. It's important and that means that no one else can offer it, at least that's our interpretation, that no one else can offer it without getting some kind of relationship with ourselves. Obviously other people may have a different point of view. Leebear has the opportunity appeal this in the short run. But I think it's a pretty important patent and Steve, you may want to just comment as to specifically what the super side lift application is and why we think it's important.

Yep. Yeah, Rob, basically the super side lift technology increases larger cranes, 350 up to the 700 ton range hydraulic cranes, by about 30% compared to a normal or let's say a crane without the SSL technology. So, it's a pretty substantial increase in capacity. We have also appealed or sent a notification to Manitowoc because they have it on their 7450 crane.

Right.

So, we are in negotiations with the both of them.

And Steve, have you had situations where the ability to offer this product enhancement has actually made the difference in getting a sale or not?

Oh, yeah, it's pretty important. Probably I'd say about 30% of larger cranes that go out the door have the SSL.

With the SSL. Okay. All right, thank you.

Yep.

Your next question comes from Rick Dowldo with ARX.

Just a quick question on the SG&A. If you could just comment on the absolute level in the first quarter, whether that's going to be sort of a sustained level or if you're going to return to sort of a let's say 90ish kind of numbers you saw last year?

Well, again, as I mentioned in my comments about the FX impact quarter-over-quarter of the change is roughly $10 million of the increase. The inclusion of Tatra, which we acquired the majority share in September of last year so it wasn't in the first quarter, is about $4.5 million. So, building to the sustainable level relates to those two, plus the increased sales cost associated with the new product introductions, there will be some level of -- let's say fall away as we go forward from that level. But those are the main components that are in there. So, again, returning to last year's level, the structure has changed a little bit and depending on currency that won't have an impact.

And which currency do you most sensitive to in the SG&A? Is that primarily the Sterling -

Euro and Sterling.

60% roughly of our business is outside North America.

Of our total revenue is outside North America.

So, as we translate SG&A spending, obviously, compared to the year-ago rates, it was pretty important issue.

Right.

Thank you.

Yep.

Your next question is from Joel Tiss with Lehman Brothers.

Hi, guys. This is actually Henry Kern sitting in for Joel.

Hi, Henry.

Hi, Henry.

A question for you on the crane market. You're saying that in North America that we're at the end of the drop-off. What gives you confidence to be able to say right now that the trough is coming to a conclusion and things should start looking better shortly?

What we would tell you is we expect 2004 to continue to be the year where we probably trough and begin to improve, okay? But it's experience. We've looked at the crane business for the past 20 to 25 years and the situation that we've gone through over the past several years, frankly, is not a whole hell of a lot different than what the market has been through historically. So, that experience, we think, makes us a bit more confident. Also we know there is increased activity in the marketplace and we also know that there's been some rationalization of fleet that has taken place. And used equipment prices today are stronger than they've ever been. I think Steve, you'd confirm that, wouldn't you?

Yeah, at a recent auction in Chicago last week, prices were up about 10% on used equipment. So prices are coming back up and I would just reiterate the same thing that 2004 for North America will be flat but we'll see an increase in 2005.

Has the increase in prices on the used side translated to a little bit better pricing on the new side as well?

Not yet.

No, not yet.

Okay. Thank you very much.

Yep.

At this time there are no further questions. You do have a question from Eric Brovick with UBS.

Okay.

Good morning, just a couple of quick ones. If you mentioned it, I apologize, I missed it. Did you reaffirm guidance for net debt to decline by $200 million for the full year?

Yes, we still have that plan. I hadn't mentioned it, but we still have that plan.

How much of that is working capital?

What we've said on working capital is we're going to hit 20% of the trailing three months annualized because the growth is what I'm trying to manage on working capital.

Okay.

So I'm not going to give you a specific on that one, but you can calculate an estimate.

Fair enough. And then secondly, just wondering if you can give us an update on the acquisition front? Some old rumors resurfacing earlier this month that you might be interested in a company, a (inaudible) company. I wondered if you could comment on that or if you're still sort of more of digesting --

Well, what we have commented on relative to acquisitions in the past is we don't comment on rumors and we have said, and I just want to re-affirm, that Terex is committed to as a priority, building internally and growing internally but we don't rule out acquisitions, either. There are companies that we have looked at historically and will continue to look at where we think it would make sense for our owners over the long-term. The acquisition criteria that we have emphasized is that we believe the acquisitions have to be EPS accretive in the first 12 months of ownership and generally credit neutral to credit enhancing wherever possible. We also recognize that we have some geographic weaknesses and some product weaknesses and where those geographic weaknesses can be addressed and product weaknesses addressed, would add further dimension to an acquisition plan. So, while it would be wrong to say that we're out of the acquisition business it would also be wrong to say that we have an acquisition right around the corner. But we're going to continue to focus on our internal opportunities, which are significant, but not rule other things out where we can achieve what I just mentioned.

Great, thank you.

Your next question comes from Barry Haines with Sage Asset Management.

Hi, I had a quick question. Obviously, the steel and other material cost increases have been an issue and, as you mentioned, I think you're trying to put through price increases to offset that. I'm just wondering if there are any product lines where demand is sufficiently weak that you're having trouble pricing through some of those cost increases? Thanks.

Well, I think we said that, just a second ago, that we are really not in a position to take price increases in our crane business, particularly in North America. Although I know we have some new model introductions where we will be getting some moderate increases. I think we are not taking an across-the-board company approach on steel and saying, okay, we have to take a X % increase on all of our products. What we are doing is we are pricing to the market and we are pricing to the customer base and where possible we're offsetting some of the steel increases with price increases or other cost reductions.

Great, thank you.

Okay.

Once again, if you have a question, please press star 1. Your next question comes from Jamie Cook with Credit Suisse First Boston.

Hi, guys.

Hi, Jamie.

On the Aerial Work Platform side, can you talk a little about what you're seeing over in Europe, whether you're seeing any type of increase in demand over there? And the reaction at Bauma? And also your biggest competitor instituted a price increase on March 15th and sort of your reaction to that?

Okay. I'll ask Bob Wilkerson to answer that.

Jamie, we see stronger market in Europe than we had anticipated going into the year. People are generally optimistic. The fleets in Europe are in good shape and we're seeing not great primary demand in the marketplace but steady demand from the end customer users of our rental companies. So, overall positive. We're continuing to monitor our cost structure, steel is one factor. And we're continuing to monitor whether or not a price increase is going to be necessary as the year progresses. At this time, we've made the decision that, based on our efficiencies and other cost savings we've been able to generate across our system, that it has not been necessary for us to implement a surcharge at this time.

Okay, great, thank you.

Your next question is a follow-up from Robert McCarthy.

It's a bad penny thing, guys! If your tax rate was above target in the first quarter on relatively low earnings levels does that necessarily imply that probably it's going to be below normal in the second quarter with seasonally high...

No, it's not that simple, Rob.

Yeah, sorry! Wish it were, right? What's your expectation?

Well, I'm not going to do it by quarter because if I know then I've got to do something in the first quarter, for example, but the things that impact specifically the quarter are, I'll call them event issues. In the first quarter I will use an example. We had a case with a state tax authority that we would have provided something for previously that we were able to resolve to our satisfaction and was able to reduce tax expense and that happened in the period, as an example. The mix of businesses that are making money or losing money has a weighting swing in terms of the quarter, as well as the reassessment of any valuation allowances that we have. And largely our valuation allowances are related to our foreign operations. So, as we see a sustainability of profitability in the jurisdictions where we have these, we will end up to being in a position where we would adjust our assessment on valuation allowances. Those can be very lumpy in the quarterly period, obviously. But again, I can't predict exactly which quarter we will have those types of changes.

And the pending statutory change that you refer to in the release?

Yes.

What is that?

Well, that would be similar to other if we've got reviews going on by the local authorities regarding some of our tax assessments and we resolve them or we have new ones, that could reflect the tax provision that we would create or release.

I think, Rob, you're going to see this across many companies that instead of using an effective tax rate, are being obligated to examine every quarter, examine the situation, as Phil described, by sources of income, sources of change and make adjustments by quarter.

Yeah, we've already seen some of that so far this earnings season, Ron.

Yep.

In the crane business, one of the issues in profitability was a bad debt issue. How significant was this? And do you think that's likely the end of that issue?

There was a filing, I won't mention the specific customer in the U.S., in the first quarter that has to work its way through the core process, I took a provision that was let's say in the 5 to 600,000 range.

Okay.

And it's not yet resolved so I don't want to really comment on how that will end up.

Total at risk?

I'm not going to comment on a specific number there.

Let's just say we think we've got --

We were prudent in terms of what we put aside for it.

Right.

All right. And lastly, you've got apparently a lot more on your plate in mining than you thought you'd have at this point in time. Can you talk a little bit about what geographies/commodities appear to be the biggest source of the surprising level of activity that you're seeing and maybe also where you've had particular success with the new RH 340?

I'm going to turn that question over to Mr. Nichols. Rick, you can cut your teeth on that. Okay, Robert. Commodity prices are really fairly positive across-the-board. Where we're seeing the largest, at least order quote and opportunities is around copper and coal and steel. From a geography standpoint, we're working fairly decent size quotes right now out of Indonesia, out of the German group and out of the Russian Republics. So, it's kind of outside the U.S., although there are a couple of large U.S. orders on the books in the Powder River Basin area.

You're not specifically identifying the U.S. iron ore sector as in particular --

No, not necessarily. The U.S. iron ore sector is not as large as like a CVRD out of Brazil, which is the largest iron ore producer in the world. There are some moderate growth in the U.S., but it's primarily coming, the iron ore is Brazil and Australia.

Australia.

Australia. Okay. And the shovel?

The shovels are going to primarily Australia and Indonesia, both iron ore and coal.

Rick, what kind of reaction, customer-wise, did you get to the 340?

Well, the 340 is really a great, new launch for us. It allows us to effectively forpass the 240-ton trucks that are in the marketplace. No one today has that ability in the hydraulic excavator market. It's viewed very positively from the mining community. It allows the efficiency increase in the mining organizations to really run a 240 at its maximum capabilities. So it's a great, new product. It was viewed very favorably by two customers, one is Venitia out of South Africa and the other one, Latens(ph), out of the Australian market. And Latens actually purchased the one on the stand at Bauma.

Copper is not typically a key commodity for you guys, have you won some new penetration in South America?

We are actively bidding in South America. We really are stretched in capacity with the 360-ton truck. We're basically competing against Cat and Leebear to a large extent. We're effectively quoting, a lot of deals have not gone down yet. But the increase is really what we're seeing in quote activity is mine expansion versus fleet replacement right now, which has really given us a feel for the optimistic market conditions we're looking at through the rest of the year.

I would imagine that if you're getting a lot based on potential mine expansion that that might actually be a better indicator of what business might be like next year.

Well, I would say most mine expansion activities or quotes that are going on right now, people are looking for very short lead times, trying to take advantage of commodity pricing as it stands today. So in the dirt-type deliveries are still being requested within this calendar year.

Okay.

Thank you.

At this time, there are no further questions.

All righty then, Anissa. We're at an hour and I think we want to thank everybody for their interest in Terex here this morning and appreciate any questions, olease call Phil, myself or Tom Gelston.

Thank you, ladies and gentlemen, for your participation in today's teleconference. This concludes the conference. You may now disconnect.