Terex Corp (TEX) 2004 Q3 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Terex 2004 third quarter earnings release conference call. (Operator instructions) I will now turn the call over to Mr. Ron DeFeo. Mr. DeFeo please begin.

Thank you and good morning. On the call with me this morning are Tom Gelston, Mark Cohen and Phil Widman from our financial organization. And, Colin Robertson, Terex Construction; Steve Filipov, Terex Cranes; Bob Wilkerson, Area Work Platforms and Rick Nichols from our Material and Mining business. So they will be available to take your calls and Phil will obviously be participating.

As is my custom and our custom over the years, I plan to make some opening comments and Phil will review the numbers in a little more depth. Following this, I will discuss specific segment performance and then open it up to your questions.

I would like to emphasis the one question rule and one follow-up, that allows everyone to fairly get their question. A replay is available at the conclusion of this call and can be accessed until Thursday November 4th at 6:00 p.m. The replay number is 1-800-642-1687 and the conference ID number is #1494759.

So let me start. Last night, as you know, we reported our third quarter results. For the quarter, we are pleased to report a generally strong business environment, with revenues for the corporation up 38 percent over the prior year quarter. Revenues in the quarter totaled $1.252b and on a year to date basis, that results in $3.6b of revenue, or a 26 percent increase for the nine-month period compared with September ’03.

I remain optimistic about our current business performance and the backlog associated with our current product mix. The backlog came in at about $825m or double what it was in the third quarter of last year. Net income for the quarter was $31.4m, or more than double the year-ago level, excluding the impact of some modest special items in both periods, net income was $33m or 65 cents a share compared with $16.5m or 33 cents a share in ’03.

A substantially better tax rate more than offset a flat margin performance. On a year to date basis, net income for the company was $102.3m, excluding special gains, or $2.02 per share versus $56.8m compared with a similar period of a year ago, or $1.20 a share.

I am encouraged by this overall performance for two reasons. First, fundamental demand is up, generally across our businesses. We are on a path to see our way toward a $6b target we set up for ourselves in 2006.

Secondly, about 35 percent of our overall revenues really had not participated significantly in the earnings increase on a year-over-year basis. This is due to several factors – some related to revenue, others related to cost that we have yet to offset with price increases.

However, looking forward to ’05, we expect these businesses to meaningfully contribute to year-over-year performance improvements. In other words, we still have forward revenue and profit runway, at least as it appears today.

I must emphasis that we do face unprecedented cost increases, with steel being most notable. We estimate, and it is an estimate, that cost increases in steel particularly have resulted in about a $31m year-over-year cost increase in the quarter alone for about 2.5 margin points. We are behind the curve in certain businesses from a pricing perspective, but we do have aggressive plans to catch up. I will cover this more specifically by segment.

As far as the Terex improvement process is concerned, we continue to move forward in the seven areas of focus with this past quarter having been focused on our human resource activity, which of course is fundamental to moving the company forward, where we concentrated on the development of talent and making Terex a more effective and better place to work. This will pay dividends for us as we get the right people in the right jobs and build a team and depth overall.

Let me now turn over to Phil, as he will review the performance of the company more specifically, and get into the specific details of the 8-K that I know you recognized that we filed yesterday as well. I will then come back and review the segment performance in some depth. 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 macro economic factors, interest rates, governmental actions and other factors. A more complete description of the factors that affect future expectations is included in the press release and our other public filings. I encourage you to read them.

You will note in this release that as a consequence of our Terex improvement process activities and human resource planning, and our customer drive in our organization, we have modified our segment reporting, forming the Material Processing and Mining segment reporting to Rick Nichols. Materials Processing was formerly part of the Road, Building, Utility and Other segment. We also moved the light construction and trailer businesses from the same segment under the Aerial Work Platform group, reporting to Bob Wilkerson, in order to better capitalize on the distribution synergies to an expanded customer base. The comparative figures have been adjusted for the historical periods in the release.

For the third quarter, we reported net income of $31.4m, or 62 cents per share, compared to the net income of $14.9m, or 30 cents per share in the third quarter of 2003. Excluding the impacts of special items, net income for the third quarter of ’04 was $33m, or 65 cents per share, compared to net income of $16.5m or 33 cents per share for the third quarter of 2003.

As Ron mentioned, our tax rate for the third quarter was 16 percent. This has 10 cents favorable impact over the 2003 rates for the comparable period.

Net special items for the third quarter was a net loss of $1.6m, including accelerated amortization arising from the early retirement of debt, and restructuring related activities with a partial offset from the gain on the sale of the facility in the U.K.

Net sales for the third quarter of 2004 increased 38 percent in total. Approximately 9 percent of the growth is attributable to currency translation and the inclusion of [Tatra] for the full third quarter over the prior year’s comparable period. Sales reached $1.252b.

The strongest year-over-year sales growth occurred in Aerial Work Platforms, Materials Processing and Mining and Construction groups, as they are all benefiting from the improving market conditions.

Third quarter income from operations excluding special items was $60.2m, or 4.8 percent operating margin. Compares to $45.7m and 5 percent in 2003. We continue to be impacted by steel cost increases, largely offsetting the leverage provided by the growth in our volume.

As Ron mentioned, we estimated steel cost increases negatively impacted income from operations in the third quarter by approximately $31m or 2.5 points of operation margin. This continues to have more of an impact in our U.S. operating companies that are international operations.

Actions implemented to mitigate the future impact of pricing in many of our businesses have not yet had their full effect in the reported results. as Ron will discuss further in the segment review.

You will note that our tax rate for the third quarter is 16 percent. This is mainly due to favorable resolution of a tax audit, and the release of valuation allowances given the continued strong profitability in related jurisdictions, which demonstrate the viability of the deferred tax assets. We believe that our annual effective tax rate will be approximately 25 percent for 2004, however effective tax rates fluctuate each quarter based on the differences on the mix of income by jurisdictions, changes in the assumptions on valuation allowances and the impact of statutory reviews.

For the fourth quarter of 2004, we expect the effective tax rate, excluding discrete items, to be approximately 37 percent. This is influenced by the operations which are in a losing position on a pre-tax basis, which we cannot benefit their rate. Our expected annual cash taxes should be between $15-20m, consistent with our earlier guidance.

Cash flow from operations for the third quarter was use of $9m, given the continued significant level of business activity, and the resulting impact on working capital. We still have progress to be made with our inventory levels and what we call lazy assets, as well as in the efficiency of our planning and execution processes. A key objective of our longer term Terex improvement process.

Working capital as a percentage of third quarter annualized sales was 21 percent, comparing favorably to the 28 percent in the third quarter of 2003. We remain focused on our target to end this year at 20 percent, with our 2006 objective to end the year 15 percent of working capital to annualized quarterly sales.

As part of the Terex improvement process, you will note our continued efforts to reduce our real estate, rental and used equipment and operating lease commitments associated with our rental fleet in the third quarter.

Our net debt for the quarter increased by $16m to $824m, however decreasing by $70m from the end of 2003. During the third quarter, gross debt decreased by $46m which included $53m pay down offset by an increase in the value of our interest rate swaps on debt of $7m. Such that our 2004 cumulative debt reduction would now be at $142m, excluding the change in interest rate swap value. Well on our way to our $200m objective as we enter the year.

Our weighted average interest rate increased in the quarter to 7.2 percent on total debt. At the end of the third quarter, approximately 63 percent of our total debt was at fixed rates.

I will now turn to the 8-K released yesterday, with regard to our prior period inter-Company accounts review. As part of the Company’s continual review process of our accounts during the preparation of our interim financial reports for the third quarter, we focused on resolving an imbalance in certain inter-Company accounts. To reconcile the accounts, we commenced a more detailed examination of inter-Company transactions that may have given rise to the imbalance, and have identified several entries that require reclassification in the Company’s financial statements. It is a fact that several of these entries occurred as long as 10 years ago, the process of verifying the entries is still ongoing.

While the examination is continuing, at this stage we believe that the potential for adjustments to our financial statements primarily relates to periods in 2002 and earlier. As of September 30, 2004 the net imbalance in the subject accounts was approximately $11m. The ultimate resolution of the items comprising the net imbalance of $11m could have impacts greater or lesser than $11m on individual line items of any impacted financial statements.

The significant items identified to-date that have contributed to the imbalance include accounting for inter-company notes associated with the [Shape] business and its resulting impact on goodwill; currency translation adjustments affecting the imbalance; and adjustments to certain balance sheet items, mainly working capital and warranty related to our O&K mining business from the period of 1998 to 2002.

Other items indicated some deficiency in the reconciliation of working capital and other accounts, mainly in the periods from 2000-2002. As noted previously, until the examination is concluded, the amounts in the related period for any adjustments cannot be determined. In addition, until the review is completed there can be no assurance that additional adjustments to the financial statements will not be identified. Any adjustments to the Company’s financial statements as a result of the examination of the accounts in question are subject to the completion of audit and review procedures by the Company’s independent auditors.

The Company is continually reviewing its financial controls and internal processes to ensure the accuracy of its financial reports. In the latter part of 2003, an improved financial reporting system was put in place, allowing for a more detailed and thorough review of accounts on a timely basis through analytical report writing functions as well as automated back office functions.

Additionally, internal controls are being modified to require, among other things, monthly activity balancing and the requirement that any reconciling item not resolved within a specified period of time be expensed to the income statement. This is intended to deter this type of situation from occurring in the future. You can refer to the 8-K for further details on this topic.

Ron, let me turn it back to you to discuss the segment operating performance.

Thank you, Phil. First, Terex Construction. The Terex Construction revenues increased to $418.5m, or 36 percent ahead of last year. Excluding the effects of currency, this is a 28 percent organic growth. Overall this business contributed $20.7m of operating profit, or about 5 percent of revenue compared with $15m of operating profit in the prior year period.

This business is a good example of our company overall. Generally, margins remain flat year-over-year, despite the fact that we have had significant revenue increases. Margins were off in some of our businesses, particularly those businesses that got ahead of the curve relative to pricing – most notably, our crushing and screening businesses.

In our heavy equipment segment, we have been behind the curve somewhat in pricing, and this business has also been significantly affected by a strong British pound, so therefore the margins in this business have struggled as a significant portion of the revenue gets shifted back to the United States.

Compact Equipment business, we had a very strong quarter, and this business contributed quite nicely to overall performance being up somewhere close to 50 percent. We are effectively engaged in cross-marketing our products with other parts of the company, and in particular North America as we are moving toward a customer first focus. We did not see much of the affect of this in the quarter, but expect to see benefits from this activity going forward.

As we look at the margin issues for this business overall, we do expect to continue to expect currency and some margin pressure from steel and other cost increases, however cost savings initiatives as well as supplier rationalization opportunities still exist, and we are aggressively pursuing these, as well as meaningful price increases in the near term. We expect that this will allow us to benefit from margin expansion in the near future.

Turning to Terex Cranes, net sales for the Cranes group in the third quarter increased $35m to $269m or approximately 15 percent. Excluding currency, the organic rate was a 9.4 percent growth. The Terra Crane business in particular had a strong quarter, as did our boom truck business. In this business, our operating margin in the cranes overall was only 1.6 percent, reflecting the soft summer period with European shutdowns, as well as increased cost pressures from our suppliers. Steel in particular hit this sector hard as a good portion of many of our large cranes that we produce at [D-Mag] in Germany contain a substantial steel component for counter weight.

Effective the first of November, we have initiated several pricing adjustments. Depending upon the market, our pricing will increase from 4-6 percent from a base model perspective. In addition, we are adding surcharges for certain components such as counterweights, where we have seen a 50 percent or more increase in prices from some of our vendors. These surcharges will take place effective immediately.

In November in North America, we have already announced surcharges on all of our products up to 8 percent effective the first of November. This will include orders that we already have in the backlog. So effective this coming month, we expect to implement that surcharge plus a base price increase in North America.

Turning to our Terex Aerial Work Platform sector, revenue in this group for the third quarter increased $85m to $235.8m from $150.7m in the third quarter of ’03, or up 56 percent. This was driven by strong growth in our sales to rental customers who are obviously seeing improvements in fundamental demand and rental rates. There is also a replacement cycle at work here, as many of our customers have fleets that have aged somewhat and they will need to be replaced over the next several years.

Not only is our revenue up substantially versus the prior year, but backlog is at $118.5m compared with roughly $20m in the year ago period. So we continue to see strong revenue potential within this business.

This business has, though, been affected by supplier cost increases, quite noticeably. Although margins are only down one point from the prior year period at 10.7 percent versus 11.7 percent in ’03, this obviously reflects an erosion as we were unable to leverage the volume for greater margin improvement.

However, and importantly, we did live up to our obligations to our customers to honor our pricing agreements with these customers for 2004. These are agreements that we negotiated in good faith back in the fall of 2003. At this stage of the year, we are again negotiating pricing for ’05 with our customers, and we have initiated a 6 percent price increase, on average, for all products in our portfolio shipped on or after the first of January 2005.

The industry as a whole is dealing with margin pressures as a result of sharp increases in costs and we expect our relative price position to remain about the same. We’ve also added the light construction business as well as Load King to the Aerial Work Platform sector as Phil mentioned. These businesses fit in quite nicely with AWP and the telehandler business as the primary users of that equipment tend to be rental oriented customers. I know this causes the investor, at times, some discomfort, but we are moving to organize our business everyday better on the basis of its capability to perform in the market, and around our capability to manage the business.

Next I want to move towards to explain the Terex Materials Processing and Mining segment. Revenue for this sector increased 71 percent from the year ago quarter, reflecting increases in surface mining activity as a result of higher commodity prices. We had a solid quarter in this sector, but we can and we will do better. Operating profits came in at $9m, up from $4.4m in the year ago period. As a percentage of revenue, we were at 5.6 percent versus 4.7 percent margin in the year ago period.

As many of you know, we’ve announced the Terex LK, that this shovel product line will be represented in a number of markets through the Caterpillar distribution network. We are pleased with this activity. We think our prospects for additional business on both trucks and shovels for our mining operations remains high.

In the Materials Processing Sector, we continue to see strong demand for our track crusher and stationary vibratory screening products, so the overall backlog in the quarter was $125m, up from $56m in the prior year. Within this business, we have recently purchased a factory in Mexico that was producing our mining trucks on an outsource basis, and we expect significant cost benefits from this addition, not only to our mining business but longer term, this facility can and will be used as a low-cost fabrication source from other Terex operations.

Next, our Terex road building and utility products, revenue for this sector was $190m, or about a 58 percent increase versus the prior year. But a meaningful portion of this came from the addition of [Tatra] and the American Truck Company JV for our military business. Excluding this, our revenue increased 31 percent compared to a year ago, and a substantial portion of that increase came from our advanced mixer product line which had a great quarter.

Income from operations in this sector remains relatively depressed at $3m, or 1.6 percent of revenue, down from $3.2m or 2.7 percent of revenue in the year ago period. While [Tatra] had essentially a breakeven quarter, we do expect better things from [Tatra] in the near term as a result of significant improvements in the cost structure of this facility and this facility continues to make progress as we recently passed ISO certification again.

The Road Building and Utility Products group continues to struggle, though, as a result of some end-market demand softness. Softness for these product categories, as well as some internal issues that are being addressed. We have been able to increase our revenues modestly, but the additional contribution margin was offset with supplier price increases, as in our other businesses. We made meaningful organizational changes to these businesses in order to improve focus and get product weaknesses dealt with. These will remain our top priority.

Our expectation for the Road Building piece of our business in ’05 remains somewhat muted, as the industry still awaits passage of the six-year Highway Bill which we anticipate will happen in the spring of 2005 once the amount of politics attached to this bill is reduced, although we know it will never be eliminated.

Overall, these businesses will benefit from TIP initiatives as well as improvements in our manufacturing and lean product initiatives here.

A couple of last comments relative to the Terex Improvement Process, and finally our outlook. The TIP process at Terex continues to gain momentum. This is a change in focus for the company, as many of you know, and we are building a more customer-focused enterprise. We have several more years to go on this journey, and improvements at all locations are being made each and every day. We continue to improve in areas that will affect the way we interface with the customer, and we’ve announced a focus and theme for 2005 to be customer drive in 2005. We continue to try to quantify the benefits of our TIP program, and there are certain areas that clearly lend themselves to this measurement.

For example, we reduced idle and under-utilized assets mainly in rental related inventory and used inventory by $76m in the third quarter, bringing our year to date total for asset reduction activities close to $130m. Some of these reductions did take place from operating lease commitments that we have, but nevertheless, reduced the company’s lazy or underperforming investments or liabilities.

We continue to seek our way forward, and are focused on that vision of $6b in ’06 and a 10 percent operating profit and a working capital level of 15 percent. We think we can produce a 20 percent or greater return on invested capital through the cycle, and obviously higher returns at peak periods. We will continue to update you on our progress.

As part of TIP, we also began the introduction of the Terex Business System, or TBS. We had a high-level training session conducted recently for our executive team, but we have assigned several lean, trained executives to the staffs of our Cranes, Road Building, Utility and Aerial Work Platform business and we have expertise already in our construction business that we will be tapping.

Lastly, our 2004 guidance. It reflects a modest increase for the full year. We believe earnings will come in in the range of $2.40-$2.50 per share, excluding any special items which are gains for the year. Revenues will be better than expected, costs higher and taxes lower as we reflect on the year at large. We see no real change in our momentum, however, going into the fourth quarter of 2004 and into 2005. We have a lot of work to do in areas of pricing, in order to offset higher material costs, and we’ve obviously taken some risk that our competition will not follow us as we initiate several new pricing actions.

We do have a strong order backlog, however, so it is a good time to make these initiatives. Now I would like to open it up to your questions. As has been our historical custom and as I mentioned earlier, I would like to limit your questions to one and a follow-up and then get back in the queue if possible. Thank you, and operator, could we now open it up to questions?

(Operator instructions) The first question comes from Joel Tiss with Lehman Brothers.

Good morning, Joel.

How are you doing?

Good.

That’s good. Two areas, one just talking about pricing, can you give us a sense first what's happening on pricing to the rental channel? Also, can you give us also a sense of when all these collective price increases will be realized? Is what's in back log going to feel the price increase and all those sorts of things?

The second part of that question which I will address first, and then the first part I am going to turn over to Bob Wilkerson. Generally speaking, the pricing actions we've initiated will impact our fourth quarter a little, but we're really targeting to kick the year off strong with these pricing actions. I think it is our expectation that we will be able to offset the costs in 2005 that we've experienced and will experience through pricing actions, so therefore, our ability to grow the business will allow us to lever for our fixed cost and improve our margins in 2005 significantly. So, overall as a Company, we've taken a rightful shot at every one of our markets and our businesses and believe we've got logical pricing plans by business area as opposed to a corporate-wide pricing dictate from me. Bob, do you want to talk about the rental.

Yes Ron and Joel. Our pricing is in effect in January 2005. We are in the final negotiations with all of our customers presently to have the prices be effective as of that date and we will produce the backlog that we have in Q4 and then transition to the new pricing and new production in 2005.

Thank you, Bob.

Just my follow-up, can you give us a sense of free cash flow expectations in 2004 and 2005? Thank you.

Phil, you want to take that?

In terms of 2004, we would guide you to the 20 percent of working capital for the fourth quarter ending and again, some of those depended on the revenue obviously, that we have. But I would expect positive cash flow excluding any working capital change close to the earnings number that we have for the fourth quarter.

And we're not yet giving guidance for '05.

Thank you very much.

Your next question comes from Tom Klamka with CSFB.

Good morning.

Good morning, Tom.

Can you split that $31m steel impact by segment, so we can kind of better see what's happening in those businesses?

I would just give you a general flavor for it. I can't split it, we have the data obviously by segment, but I'm not going to give you a specific number though, I'll give you kind of directional numbers. In our Mining business, it's a couple of million dollars. In our Cranes business, it's kind of in the range of $5m. In our Construction business, it's in the same range. In Road Building, Utility and others, it's a little bit more than that. In our AWP business, it's probably over $10m.

Okay. And given the price increases that you've talked about today, I guess some are price increases versus surcharges and I'm not sure why you're doing which. Do you think that basically brings you back up to your desired margin with steel where it is today or are you assuming some kind of tail back in steel prices in '05?

We are not assuming a tail back on steel prices in '05. I think the increases we've announced will get us back to where we need to be, therefore, allowing the additional volume that we expect to drive our margin improvement in the future. The reason we've chosen surcharges plus price increase as a combination of both is because in certain product categories, our players have basically put us in a position where the only way we can recover is to take a price increase on our backlog most notably in the crane business, which we think makes a lot of sense for us to do.

Okay. And excluding steel, when you pull that out and it was 250 beeps, are there other things going on here that are negatively impacting margins mainly just sort of dealing with the ramp up in revenues and production? Is that causing a lot of inefficiencies that will change or are you dealing with that pretty well?

I think we're dealing with that very well. In general, if you pull steel effects out, we have a positive variance from most of our other suppliers. Yes, we have certain suppliers that we're struggling to get tires perhaps, in our crane business or in various other certain components. But if you just pull steel out and looked at our other purchasing capability, where actually we have positive variances as a Company overall.

The additional SG&A spending in Construction, is that an ongoing level or is that sort of a one-time level?

I think some of that is currency related and some of that will be an ongoing level.

Thanks.

The next question comes from John McGinty with CSFB.

Good morning, Ron.

Good morning, John.

This $31m in steel, is that a gross cost? In other words, you got no price increases, I mean -- is that $31m after whatever price increases you got or you got none?

No, that's a gross number. The customer pays a percentage increase on the whole product. We know what our cost increases are on the components we buy or the raw materials we buy. So, it is hard to give you a reconciliation of one versus the other. I would say generally though that we had only a moderate amount of offset in pricing from that $31m.

The follow-up question is, when we look at '05, can you give us – I mean, you had $80m of steel in the second quarter comments, $31m here, presumably the fourth quarter is going to be somewhat less. Can you give us a percent, in other words, the weighted average price increase across the Company? I know it is a bottoms up, I should put a rifle shot, but are we looking at a 2 percent increase, a 5 percent increase? What does it all average out to for '05, given the current mix?

Okay. I’m just going to give you a gross answer to that – but if you just bear with me for a second. We did say that the second quarter was $18m, the first quarter was about $3m, this quarter was $31m. Presume for a minute that the effects of steel for us are in the $80-100m range on a full-year basis. On a $5b Company, a 2 percent price increase will offset that. I think we can do better than a 2 percent price increase overall.

Thank you very much. I will get back in the queue.

Thanks, John.

The next question comes from Andrew Obin with Merrill Lynch.

Good morning. I have a question about the accounting review. How far along are we in the accounting review and when do we have to finish it to be in compliance with Sarbanes-Oxley?

Phil, you want to take that question?

Yes I will. Andrew, we are quite a ways through the process from a management standpoint. We still are working towards an objective of complying with our Q submission for the quarter that subject to Price Waterhouse review and agreement on any issues that we come up with.

As it relates to Sarbanes-Oxley, certainly the testing of processes from our independent auditors will occur in the fourth quarter and lapse a little bit over into January in terms of the testing. In this type of a process, you look at monthly tests. So, two months in a row, where there are no process deficiencies would be the review. So, we're implementing changes in our inter-company accounting processes to make sure that October, November, December; we've improved our processes such that we don't have those deviations.

I guess if I look at the four items that you specify, I guess this is prior to 2002, so I guess this is prior to when you started the Company, but is there a team, was there one person, it just seems there are these four disparate issues that are not that related and I know that you they net out to $11m, but for example on Schaeff acquisition, it seems this $26m is a substantial part of the purchase price? Is there one theme that sort of caused these issues or is it just sort of broad separate issues?

Andrew, I'd say that we don't believe it's any one issue or anyone person is responsible for the issues. It's more of a process change, and our focus on improving the process isn't long. From now on we are spending our time on gathering and looking at the facts and resolving the issues and corrective action on the matters. I wouldn't characterize it as any particular thing other than trying to improve our processes.

But you feel confident that you will be done with it by the end of the year with the review process?

Definitely.

Thank you very much.

Your next question comes from Robert McCarthy with Robert W. Baird.

Good morning, gentlemen.

Good morning, Robert.

Phil I wanted to ask you about the tax rate, I presume that the 25 percent number you have been talking about goes along with the 240-250 number? In other words excludes nonrecurring items?

Yes, that's right. But it would be the same rate for both rates calculated, special items going into the calculation of the rate, we just apply the same rate. It includes, Rob, the third quarterly year to date discrete items as well as the impact on the full-year rate of any valuation allowance changes, because they are more a full-year calculation.

Right. My sense is that with the couple of positive tax adjustments that you have had this year that all else equal, you would expect the tax rate to climb some in '05?

Yes. What I previously indicated is we would expect the rate in approximately a 33 percent range. And one of the key dependencies on that is to turn some of these units that are losing money at a pre-tax level to making money, so that we are not detracting in the calculation on losses that we can't benefit the rate climb.

And then for my follow-up, I hate to be a dead horse on raw material, et cetera, but Ron, I gather from what you are saying that you believe you are looking at essentially stable input cost today? In other words, do you think things have stabilized and consequently you have better predictability then you probably had in a while?

Well I think to characterize it as stable input cost, I think would be probably an incorrect characterization. I do think we have come to grips with the fact that we must and we will raise prices to more than offset our cost increases and our team is focused on that. I would also say culturally, this is a big shift for us because we are a Company that has believed historically that we can offset raw material cost increases through cost reduction and I think we have come to grips with that, that is not a go forward approach.

Furthermore, we have a management team like many management teams that is not used to managing in an inflationary environment. So, we have had some learning relative to that. So, I think what you hear from me and I think, you would hear from the operating team at large is that we may have gotten behind the curve in few places. We lived up to our commitments. We made some generally good decisions, thinking that steel and those increases might go down a little bit in this part of the year. They have not. We expect them to continue to be at this level and possibly higher, so now let's get ahead of the curve.

Did I understand you to say that in at least the Crane business that you are going to apply price increases to existing backlog?

That is correct. Steve, you may want to comment on that.

Robert, good morning.

Good morning.

Yes, we are going back to the backlog because of the inability to forecast, I did increase it going into 2005. So, we are going to go ahead and do that. Backlog is very strong in North America right now as Ron said earlier. We think it's the right time to do it.

You think that in terms of the competitive environment, that you don't need to worry about any kind of order cancellations?

If I said we wouldn't worry about it, I'd be lying. So, I do think we do worry about it. But as I said, backlog is good, so the time is right to do it.

Thanks a lot.

You’re welcome.

Your next question comes from Gary McManus with JP Morgan.

Hi, Ron.

Hi, Gary.

The 38 percent revenue growth in the first quarter, can you break that out by volume, pricing, currency, and acquisitions?

Okay, let me give you the first couple.

Thanks, Phil.

Currency is about 5 percent. Acquisitions, which is mainly Tatra and American Truck Company is about 4 percent, Gary. Those are the two pieces. I’m sorry, which was the other piece that you wanted?

Pricing and volume and anything else you think, you know – I think those are the other two.

I don't think I can give you that level of specificity on the areas.

So, I mean pricing, you are saying you didn't fully recover the $31m, so it's got to be less than 3 percent.

Yes, Gary. I’d just chime in here and say, of the $31m, I would be surprised if we recover $5m in pricing.

Are you talking percent, or?

Absolute dollars.

Okay, $5m, so very small. So most is volume. Do you expect pricing relative to raw material cost, is it going to get worse in the fourth quarter or better in the fourth quarter relative to the third? What's embedded in your forecast?

What's embedded in our forecast versus what actually happens at this stage we are going through. I think what we have seen quarter to quarter is that it was hard for us to predict the third quarter, fourth quarter relationship. We do believe that our third quarter was generally weaker from a cost point of view than what we expect our fourth quarter to be. Not that we expect suppliers to take prices down, but rather our ability to have price to recover some of those increases in some of our businesses in the fourth quarter would be better. So, where we at one point thought that third quarter generally would have been a little stronger than the fourth quarter, my instinct is to say that the fourth quarter is going to be a little bit better than our third quarter.

A follow up, I mean obviously, you had very good volume growth, it looks like what you just said, to be in the high 20 percent area in the third quarter. I'm just wondering, I’m suspicious that perhaps this volume growth is partly due to the tax law change regarding depreciation, and also I'm wondering whether customers are buying more equipment to beat the price increases they assume are going to happen because raw material costs are going up. Could you talk a little bit about what you see in the key end markets for the next few quarters in terms of industry volume growth?

Clearly, we have a little bit of that happening in the rental related businesses, where rental companies are releasing some orders in the fourth quarter and more orders in the fourth quarter than would have happened historically. That, in some respect is a good news situation, because typically in our Genie type of product line we would have an under-absorbed situation in the factory because of the very large dichotomy you have in quarterly revenues and given the fact they were a lean manufacturing organization, the fourth quarter would typically be our weakest.

We expect albeit, that the fourth quarter would be weaker than the third quarter at Genie, we expect that they will be a lot better than it would have normally been because people are buying in the fourth quarter. But I also think the expectations for the full year '05 are still quite strong from rental companies as we sit here today. I think that's a fair characterization. Bob, would you agree?

Yes. Our customers are optimistic. But I think, Gary, the primary driver is just equipment utilization. The tax rates are helping out there and there will be some orders placed in the fourth quarter as a result of that. But primary market demand is good, utilization is good with our customers.

Which is where I was going to go next with the Construction business, because I think what's driving the Construction business, yes there's a tax incentive in place towards the end of the year, but equipment utilization is up almost across the board and I think we see that in North America and I think we see that in Europe as well. Do we not, Colin?

Absolutely. I think it's a fair comment to say that the tax incentives certainly seem to be driving US demand maybe a little but we continue to see very, very strong growth in France, Germany, particularly the UK and in Spain also.

Okay, Gary?

One other thing. If I give you the $31m back in the operating profit, you still only have like 13 percent incremental margins, do you think that is satisfactory, we should kind of expect that or do you think that there are other kind of inefficiencies going on in the quarter?

I think there's pockets of our business, as I said, that didn't participate. 35 percent of our business really didn't participate in contributing to the profitability of the corporation. So, I think if we get those businesses to even a moderate level of profitability, which several of them, I'm highly confident, will get there, a few others will take a little longer. I think you'll see that leverage happening.

Thanks.

Your next question comes from Charlie Rentschler with Langenberg & Company.

Yes, good morning. I wonder if you could – can you hear me all right?

Yes, Charlie.

Could you give us a little bit of detail around the Crane segment? Can you tell us what's happening with towers versus the mobile hydraulics versus the crawlers and in particular, what you're seeing in the North American crawler crane business, please?

Steve, could you take that please?

Sure, no problem. Good morning, Charlie. Hydraulic cranes in North America is up slightly about 5 percent. Boom trucks is pretty strong, increasing at about 10 percent. AT cranes worldwide is basically flat and crawler cranes is strong in Asia. So, I would say that's pretty much a summary of the crane business. Tower cranes is up substantially, I'd say probably over 30 percent, mainly in Europe but also in North America and Asia.

Thank you.

Your next question is from John McGinty from CSFB.

Just a quick follow up. The actual level of the tax benefit, Phil? In other words, it's $0.10 if I go back to last year's rate, but if you say look you had the settlement, you had the valuation, what was the absolute level of those two factors in the quarter?

Taking it out, John, we would have been at that 33 percent tax rate level.

So that’s like, $0.14.

No, year-over-year it's about $0.10.

No, but I mean relative to what it would have been?

It's in that range. We would have been in the $0.51 range.

The fourth quarter, you are assuming that there is any more of this? In other words, is the change in guidance all related to the lower tax rate essentially?

That's mainly the reason for that, but also in the fourth quarter as I mentioned in the guidance, the 37 percent rate in the fourth quarter. As Ron mentioned, operating profits should improve but it's offset by that rate. There's no discreet items in the fourth quarter that we put in our plans, otherwise I’d take it in the third quarter.

Right, and then a follow up question. Ron, you keep talking about the 35 percent of the business that's not participating, could you just tell us which the big pieces are of that?

Absolutely, John. First, let's start with the Heavy Construction business and that's an area in Collin’s area. That's been impacted as I said, by both currency as well as some unusual cost increases and a little bit behind the curve on pricing. I think those actions are being corrected and we're seeing some progress as we speak. The North American crane business, our Waverly operations and to a lesser degree, our American Crane operations have really been performing below our expectations and one of the reasons we have initiated these price increases is because we need to, because we've been hurt pretty hard from steel increases in our supply base there. So, that's what we've done there.

The Road Building and the utility businesses, both are struggling a little bit from a couple of perspectives, some revenue related. The utility world, the light switch hasn't been turned on fully, and I think in the Road Building area, while the business is improving a little, we've got some work to do on a few of our product areas that Chris Ragot and the team are working pretty aggressively on.

So, those are the three primary culprits, if you will?

Yes. I think, you know, if you were to characterize it that way. Chris, did you want to add to that at all?

On the Road Building side, what we're doing right now is we're rationalizing our equipment line and we're also restructuring our businesses into business units to basically focus better on our customers and provide a higher rate of service. And obviously, we're all waiting for the Road Bill to be passed sometime in the early part of 2005, which will help our business in the long term to get the uncertainty out.

Speaking of Road Building, Ron, any thoughts on getting rid of any of the businesses?

You know, you are like a good fisher. You throw the hook in the water and see if anybody is biting. Absolutely not. At this stage, there's -- tomorrow will be better than today in this business and I'm not going to give up the hard work we are putting into this business because we will reap the benefits.

Thank you.

Your next question comes from David Simbrachi with Neuberger Berman.

Hi, David.

Hi, Ron, it’s Charles Kent here. How are you doing?

Well.

Good. I guess my question is more longer term in nature. You put out some pretty specific general targets for '05 and '06, and if you could just talk about what gives you comfort, the assumptions you made almost a year ago that's played out exactly as you had predicted? Do you have more confidence in what you put out, less confidence, the same amount of confidence?

And then from a secular basis, we've been hearing stories out of India, which suggest that the Road Building efforts going on there will be very similar to kind of the 1950’s in the US, where we went through kind of a major interstate build out, is it likely that you might participate in that effort if in fact that effort is true? Thank you.

Sure. I am going to ask Collin and Ray to comment on that in a minute. But let me answer your question. Talking about India, let me answer your first question for that. I think we all continue to learn as we run a business and what I continue to learn here is that I have more confidence today than ever that the targets I put out are within our capability to achieve. Not that they'll be easy or that they will be straightforward, but I continue to be very positive about that.

When we set those targets out, Terex was a $3.5b Company and getting to $6b in three years seemed like an impossible challenge. We're going to do $4.7-4.8b of revenue this year. We'll have a much better revenue year again I believe, in '05. So, the revenue side of the target I think, is within our capability to achieve.

We certainly have the product line to do it and we have the share potential to do it and many of our businesses, our products are good. Our ability to interface with customers and deliver the level of service they require to make that happen is improving.

So, from that perspective, I think I continue to see nothing but confidence in our team in our ability to achieve that. Obviously, the biggest challenge for us is to go from the 5 percent operating margin that we have today to the 10 percent operating margin that I'd like to have. And critical to that is the things that we have talked about already. Pricing and our ability to recover cost increases. So, this is why we are implementing the changes that we're implementing and I think that will be our test in 2005. If we can improve our margins a couple of percentage points in 2005 and continue volume momentum, I think we will be continuing to paint the story in the right way.

I don't believe our investment overall in the Company will change a lot. So, therefore, achieving somewhere in the 20-30 percent ROIC is in our ability to achieve. I think on a trailing 12-month basis, we are probably in the 14 percent range today, up significantly from where we were a year ago and probably still better than many of our competitors, if not the vast majority of them. So, I remain pretty optimistic about our ability to make those goals. I am fully cognizant though, that it is a big stretch for this team, but I think we got a good team that's getting better.

India has been a very strong market for Terex, particularly on the mobile crushing equipment in the last part of the year, and so much so, that really this year, we have hired a couple of local nationals working out of our own office in Delhi to really pursue some of the bigger contractors in the key infrastructure projects that are going on.

On top of that Terex also has a JV in India, just outside Delhi. We are currently ramping up a whole range of compact equipment, and the next phase would be to basically indigenize some of our own action products for Indian manufacturers, for Indian use. Again, they complement the crushing equipment and indeed the trucks. So, we do feel that is a significant potential and have invested quite heavily this year to go after that.

Rick.

Yes, I would echo Colin's words, Charles. I think we are also optimistic about the growth potential in India. I think, really from my sector we still have some work to do really get some products developed that closer meet customer requirements, and we need to continue growing and developing our distribution network over there. But we are seeing sales into the marketplace, and we continue to see a lot of opportunities arise both near-term and long-term.

Okay, and Charles, you remember of course, that one of things I said to to achieve our revenue growth we needed to do was to expand our geographic reach of our current product line and I think India, as well as China will be important markets for that.

Thank you and good luck.

Your next question comes from Andrew Obin with Merrill Lynch.

Andrew?

Andrew, your line is open.

Hello, just a follow-up question. Could you talk about changes you guys are making to your purchasing organizations? Because I think the last time I spoke with you, you had 14 separate purchasing organizations within the Company and I'm just wondering, given that you are seeing these impacts from higher raw material prices, do you feel like you need to make changes to deal with it better?

I think, Andrew, we do feel that we need to make some changes, not necessarily the creation of a corporate purchasing organization, but better communication through the Terex exchange process on purchasing on major items. Maybe Bob you could communicate, maybe you could comment a little on that because you are taking the lead as our chief change officer on a few of these areas.

Yes, Andrew, a lot of activities have taken place to try to create synergies in the major categories such as engines, tires, hydraulic fittings, electrical components et cetera. So, there is more cost sharing across the organization, more leverage buying and increased relationships and dual visits with suppliers, etc. So, yes we are starting to leverage the size of Terex, we are not there yet, but it is certainly a focus and certainly an area of increased opportunities for us.

Thank you.

Your next question is from Steve Volkmann with Morgan Stanley.

Good, I snuck it in. Hi, Ron.

Hi, Steve.

So I just want to try and understand what you are seeing out there? I guess, it seems to me like some of your bigger, yellow iron competitors have been sort of on the price issue for quite sometime here and have been a little further ahead of the curve than you are. I am wondering if that might be because you play in a little bit different pond. Are some of the competitors that you are seeing not taking price actions and that might explain why you haven't taken them yet or how do you see the competitive picture out there?

I think, Steve, what happens is in the competitive environment where you have franchise distribution, you can send out a price list and take a 2 percent price increase, on future orders, you begin to realize those price increases. In our situation, our business has played much closer to the vest, in other words, we are much closer to fundamental demand and we are not working off of six to nine month inventory, three to six months inventory is probably the better description of it at this point in time.

So, when the competitive environment puts out a new price list, in the yellow iron categories, their distribution is fairly well geared to handle that. We really do it and have done it on our deal-by-deal type basis. Basically, we are behind the curve in some of those businesses because some sales actually are direct customer negotiated transactions.

You are not seeing any competitors out there that are not willing to kind of take these price actions that are holding the market down as it were?

I don't think so. The one we worry about the most, and Steve you comment, is probably Liebair, but I just generally don't think so.

I think it's difficult to know what Liebair's strategy is but we'll see down the road.

Just to sort of follow up on that, several other folks in this type of vertical that we are talking about here have reported additional costs above and beyond steel, I think like premium freight and premium sourcing and overtime, and those types of things, I haven't heard you talk much about that. Is that not so much of concern for you?

Steve, it's a lesser concern, but it remains a concern. We are seeing premium freight, we are seeing in particular health care costs are up 15 percent per capita at least this year in North America, across the board. But we have had significant savings in other areas. I guess I would say, if I really wanted to focus on the primary issue, it would be metal related.

I think we got to remember that the reason steel is up is also the reason some of our other businesses are strong. Steel is up because commodities are in pretty short supply are having a good time, and because of China. So, on one hand we have a negative but, on the other hand we have some of the benefits.

Fair enough. Do you care to comment on what we should think about as kind of a normal incremental margin here once all this noise settles down?

I turn that over to my financial expert. I am not sure if he is ready to answer that question though.

I don't think so.

Okay, thanks guys.

All right, thank you Steve. Operator, we should be about done.

Yes, sir. There are no further questions at this time.

All right, well thank you everyone for your interest in Terex and we appreciate it. Please follow up if you have additional questions or comments for our team. Thank you.

This concludes today’s conference call.