Terex Corp (TEX) 2005 Q1 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference facilitator. At this time, I would like to welcome everyone to the Terex Corporation 2005 first-quarter 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. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Ron DeFeo, Chairman and Chief Executive Officer.

Thank you, Kimberly, and good morning to all that's on the call. Thank you for participating in Terex's first-quarter earnings call.

This morning, with me is Phil Widman, Senior Vice President and Chief Financial Officer; Tom Gelston, Director of Investor Relations and Corporate Communications; and representing the operating segments of our business, on the phone is Bob Wilkerson, President of our AWP sector; Colin Robertson, President of our Construction business; Rick Nichols, President of our Mining Materials Processing business; and with us in the room is Steve Filipov, President of our Cranes business. They will be available later in the call to help answer and comment -- answer your questions and comment on our business. As is customary, I will begin with a brief overview, followed by Phil Widman, who will discuss the financial results in more depth. Then I will comment on each segment and open it up to your questions.

A replay will be available after the conclusion of this call and can be accessed until Wednesday, June 8 at 5 PM Eastern time. To access the replay, please call 800-642-1687 or if you're dialing from international, 706-645-9291 and enter the conference ID #671-8652, or just check on our website.

So, let me get started. Terex had a record first quarter and we believe the market environment for our company remains strong. Sales increased over 39%. Net income was $30 million, or an increase of 78%, and our backlog is nearly double what it was in the year-ago period at $1.57 billion.

We started the year in a positive way. Although we have a lot of work to do to continue to meet our longer-term objectives, we are quite pleased with the way the year has begun. Earnings per share were $0.59 on a GAAP basis, and this compares with the year-ago level of $0.34. The year is unfolding better than we planned at this stage.

Our first quarter still reflects an imbalance between our input cost and pricing to our customers. We are confident that we're moving through this period and that our pricing will match and offset the cost increases that we receive. The cost increases were received mostly in the second half of 2004 and partially in the first quarter of '05. We continue to expect full-year operating margins to be in the 6 to 7%, as previously noted. We also have not given up on our 10% target for 2006. We will have a better fix on this, of course, in about nine months. Revenues may be stronger than previously planned.

We appreciate the patience our stakeholders have shown us as we've diligently pursued the Company's intercompany imbalances and related issues. While the issues here were deeper and more complicated than we initially expected, we do believe that we're nearing completion of this review. We continue to expect that the total impact to our 2003 stockholders equity will be immaterial, although the ultimate outcome is not yet finalized. We've learned a lot in this process that we will utilize to make our company better and stronger in the future, and we are moving to implement these improvements right now.

Now, let me turn it over to Phil, who will give you the overview of the numbers, and I will come back and discuss short -- the first-quarter performance.

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 rates, governmental actions and other factors. A fuller description of these factors that affect future expectations is included in the press release and our other public pilings. I encourage you to read them.

For the first quarter, we reported income of $30.3 million, or $0.59 per share, compared to net income of $17 million or $0.34 per share in the first quarter of 2004. Excluding the impact of special items, net income for the first quarter of 2005 was 30.8 million or $0.60 per share on sales of 1.449 billion, compared to 17 million or $0.34 per share on sales of 1.044 billion in 2004. In 2004, we had no special items.

Net sales for the first quarter of 2005 increased 39% over 2004 across most of our business segments due to improving market conditions. Foreign exchange impact on revenue accounted for approximately 3% of the increase, while the acquisition of Reedrill at the end of 2004 added roughly 2 percentage points in the quarter.

Gross profit, excluding special items, increased to $207.4 million for the first quarter of 2005 from 160.3 million for the first quarter of 2004, reflecting the impact of increased volume and pricing actions, dampened by the impact of material cost increases, mainly steel. You will recall that the increases in steel costs were minimal in the first quarter of 2004, as they accelerated through the latter part of the year. Gross margin declined roughly 9/10 of a percentage point, reflecting these impacts over the prior year, from 15.4% to 14.3%. We estimate that steel costs impacted gross margin by roughly 2 to 2.5 percentage points.

SG&A expenses, excluding special items, increased to $135.6 million from $112 million for the first quarter of 2004. The increase is split between sales costs, which are a function of the volume increase, and administrative costs, which have increased in support of the Terex businesses system efforts as well as external professional fees to assist in the restatement, Sarbanes-Oxley, and audit processes. Overall, this achieves a level of 9.4% of sales, 1.3 percentage points better than 2004, as we continue to focus on our cost management.

Income from operations, excluding special items, increased to $71.8 million from 48.3 million for the first quarter of 2004. Our operating margin increased to 5% from 4.6% reported in 2004. Our net debt increased in the quarter by $92 million to 872 million, consistent with our normal seasonal pattern in anticipation of the strong second-quarter volumes. We ended the first quarter with working capital to trailing quarter annualized revenue of approximately 21%, compared to the first quarter of 2004 of approximately 24%.

Cash flow from operations is expected to be in the range of 250 to 300 million for the year, and we continue our debt-reduction efforts this year targeting a $200 million reduction plus positioning our balance sheet to retire high-cost debt, the 10 3/8, which is callable in April of 2006.

We also reiterate our objective to achieve a return on invested capital of 20% in 2005. Remember, we calculate this as operating earnings, excluding special items, divided by average net debt plus equity.

Our effective tax rate for the first quarter is estimated at 35%, consistent with our prior guidance, indicating that our rate would move closer to statutory rates, excluding the impact of discrete items. This rate may vary somewhat as we complete the restatement periods what we don't expect materially (ph). The effective tax rate for the first quarter of 2004 was 30.3%. Our weighted average interest rate on total debt was 7.4% for the first quarter of 2005, up from 6.4% for the comparable 2004 period.

Ron, back to you.

Thanks, Phil.

Now, let me discuss our performance by segment, first starting with the Terex Construction business. This business generated $468.5 million of revenue, or up 20% from the prior year. The sales increase here was driven primarily from heavy construction and our crushing and screening business. Growth in our margins, however, was under some pressure as continued high costs for raw materials and components were not fully offset by price increases during this quarter, and there were some negative transactional impacts from currency. Overall, the operating profit for this business was $16.1 million, or 3.4% of revenue, down from 4.2% of revenue in the prior-year quarter. Our backlog was up $55 million to 343.5 million from the prior-year quarter also.

While we can say we are disappointed with the margin performance in the first quarter of the construction business, we do believe that cost and pricing imbalance is now mostly behind us, as we continue to see relatively strong demand in this business. The crushing and the screening businesses were most affected by increased steel pricing and the delayed impact of our price increases in the market. Frankly, we sold a lot of products of the year and that carried last year's pricing (sic), but at higher costs into the first quarter. As we look at the current state of the business and for the balance of the year, we actually are excited about the prospects for an improved margin in this business.

Operationally, we have experienced some difficulties in the first quarter as we finished the closure of our UK-based Atlas facility and now moved it into Germany. This is completed, and we are at a substantially higher production level in this new facility and meeting increased demand. Our 2005 price increases will be fully in place for the second quarter and for the balance of the year. I think you'll see meaningful margin improvements in this sector.

Turning to Terex Cranes, this business had a very strong revenue performance, up 43%, ahead of the prior-year period at $299.5 million. Operating margin remain below our expectations at 2.1%, mainly as a result of less-than-satisfactory performance from our North American operations, mostly our Waverly, Iowa facility. The key issue here was a five-week strike that we had, which negatively affected our ability to produce and ship at the higher prices the cranes that we had planned, as well as absorbing the one-time costs associated with increased security and the negative variances of a shutdown facility. At Waverly, we have now added a second shift to production and production is improving. We have hired a number of new workers, and the successful agreement with our union, which was for three years, will allow this facility to run with a more modern labor agreement going forward. Our backlogs in both North American and Europe have remained relatively strong for all cranes, all types of cranes in this segment. Total backlog was up 29% at $307 million.

Our tower crane business had a very good first quarter with -- (technical difficulty) -- continuing to be strong in the second quarter. Our European-based crane business was mixed, the performance there, with the French operations having a strong quarter, our Italian operations also doing reasonably well, and our German operations missing somewhat as steel costs exceeded our ability to price to recover at least in the first quarter. We were unable to take increases in the backlog -- price increases in the backlog -- in this business, but we have implemented price increases going forward and think our margins will improve here nicely.

I think the prospects are generally good for a strong crane business overall going forward, as we have seen some meaningful increases in margins and expect to see more from this business segment. I think, if we reflect on the crane business at this point in time, it has been a later-cycle business and we expect to be entering the uptick in this cycle now.

Turning to our Terex Aerial Work Platform business, we had a terrific first quarter with revenues up 59% and total revenues at $295.1 million compared with the $185 million in the year-ago period. The increases in sales were driven by the strong order activity from the rental segment. Backlog was at about $500 million or nearly six times the year-ago level. Gross margins did dip from the prior year, as a meaningful portion of our first-quarter revenue went out at 2004 pricing. We also had some meaningful cost increases continue to flow through. This has since been -- that is, the pricing changes -- have been completed and we will no longer be shipping at 2004 pricing. We expect the margins in the second quarter to improve, although we have had some difficulty in hiring and training new workers to produce to the level of volume that we are experiencing in this business.

In total, we hired about 540 workers and netted retaining about 339 of those workers. As you might imagine, in the first quarter, this represented a substantial investment in increased labor so that we could produce at the rather large increases in revenue that we are experiencing. We think we're through most of these issues and that our second-quarter margin will be in the range of 12%. We remain bullish on this segment. Not only is our AWP business doing well, but telehandlers are generally strong and the light construction and Load King businesses being added to this segment should please our customer base as they deliver increased value to those customers.

Now, let me turn to the Terex Materials Processing & Mining segment. This had a very strong quarter. Revenues for the business were virtually double the year-ago level at $196 million and the operating profit came in at 12.2 million, or 6.2%, compared with $3 million, or 3.1%, in the year-ago period. Please remember that this information, this performance, includes Reedrill, which added about $2.2 million of operating profit in the quarter and approximately $23 million of revenue. We continue to believe prospects for the Mining & Materials Processing segment to be strong. Our business had a solid backlog at $234 million, compared with $100 million in the year-ago period, and we believe there is additional upside potential in the margins from this segment also.

The last segment, Terex Roadbuilding, Utility and Other had a solid quarter with revenues at 218 million, compared with -- or up 25% compared with the year-ago period. Income from operations, or operating profit, was $11 million or 5.1% of revenue. This compared with $3.2 million in the prior year. Several other businesses in -- of our businesses in this group had solid improvements and at this point really are not operating at 100% yet. The Utility business had a positive improvement but they started from a bow base, as did the Roadbuilding business, which had a nice turnaround but again starting from a low base.

The Tatra products had a very strong first quarter. We expect passage of the Transportation Bill, which is now in the U.S. Congress. This will add some confidence to this segment, but frankly, we think the general trends are pushing this segment toward a recovery and we expect Roadbuilding and Utility products to have a stronger '05 and an even stronger '06 than we've experienced over the past several years. Time is helping these businesses, and we are at a point where I think the recoveries will happen for both Roadbuilding and the Utility segment.

Now, a few comments about our outlook. We continue to be positive about our prospects for 2005. Our first-quarter results indicate strong demand in the marketplace. We remain on track to achieve our goal of a company with revenues of over $6 million in 2006. We remain committed to delivering improved margins, both in the near term and throughout the 2005 and 2006. We believe input costs will begin to slow and the environment for holding onto price increases looks to remain solid. This will be key to improving our margins in a more rapid pace. We also believe the environment will shift, and we will have some more purchase in the next one to two years than we've experienced over the last twelve months.

So as we look at the balance of this year, we now expect earnings per share to be in the 3.50 to $3.70 range. As we move into the year more completely, we expect enhanced performance from a number of our businesses that haven't fully recovered, and we continue to expect to reduce debt, as Phil mentioned, thus improving Terex's overall financial strength.

I again want to thank you for your patience through the period of working on our restatements. That is not yet complete, but we expect that it is nearing completion, as I previously indicated. I now will open it up for questions and look forward to addressing any of your questions or comments. Thank you. Kimberly, could you open it up?

Yes, sir. (OPERATOR INSTRUCTIONS). Charlie Rentschler with Langenberg and Company.

Yes, good morning, Ron and Phil. Ron, several times now, you have tossed out the 10% operating margin goal for '06 and especially in light of the quarter just ended. It seems awfully ambitious. I mean, certainly the Caterpillar machinery segment has trouble reaching that level. I just wonder. I mean, it's almost tantamount to throwing out guidance to all of us. Isn't that awfully ambitious? You know, we are obviously now, what, eight months away from '06 starting, and you know, I've heard you obviously state reasons several times, as you went through your report here, why you think margins are going to improve. But why do you keep tossing out 10%? Wouldn't it be better to say 8%, or 8.25%, or some such number? Do you feel so strongly about this?

Well, Charlie, as I said before, this wasn't intended and has never been intended to be '06 guidance. We're not at the point where we're giving '06 guidance. I do feel very strongly about our ability to deliver a 10% margin, and it is little bit disquieting for me to ask our own organization to deliver 10% margins in 2006 but yet report to the Street an 8% margin. All of our people listen to these calls, everybody focuses on this information, so I want to have one consistent and commenting through our company.

I did indicate that we would get closer to this issue in the next nine months. Obviously, our ability to deliver margins in the 6 to 7% range, up from 4.5% to 5% or so from 2004, begins to suggest that progress has been achieved. I also think we will get some benefit from a changing environment where we will have greater purchasing -- (technical difficulty). Whether I achieve the 10% operating margin in 2006 or maybe end the year at that run-rate is yet to be determined, but frankly, we have the ability with our company. We have millions and millions of dollars of purchasing savings opportunities still in front of us from having a nonintegrated purchasing leverage environment; we have millions of dollars of savings to come from this company but implementing some common systems and from perhaps more focused shared services throughout the Company. I'm not sure we will get it all done in 2006; it could very well be that 2006, we have greater revenues than the $6 billion. Clearly, if the environment continues this way, that's what it looks like. We have operating margins that are less than 10% but still delivering an extremely positive earnings per share performance and return on invested capital.

I think most of the financial markets thought I was a bit extraordinary when I came out with this longer-term goal about two years ago and said that we could take a $3.5 billion company and make it a $6 billion company; we could take a low-margin company and make it a normal-margin company; and that we could take a return on invested capital and make it in the 20% average across the cycle and 30% at the peak of the cycle. You know, I think it's my job to stretch the organization, and I think it's the financial markets' job to figure out and handicap whether they think I can achieve that goal. This is not guidance but this is really where I'm trying to take the Company. If we do those things, I think we will have a much stronger franchise from which to build, Charlie.

So, I understand your point and your concern, and clearly, the path of least resistance would be to establish a goal of a slightly lower margin. I just don't think that's the right thing for our shareholders for us to aspire to and for our organization to work for.

Thank you, Ron. I think that was a very eloquent reply. I appreciate it.

Gary McManus with JP Morgan.

Good morning, Ron. I continue to be amazed on the strong revenue growth you're showing pretty much across all statements. Can you talk about how you think you are faring vis-à-vis the industry? You know, for example, in the Aerial Work Platforms, I don't think the industry grew 60%. Can you talk about to what degree you are outperforming the end markets in each of the different segments?

Okay. It's hard for us to have that as a perfectly quantifiable conclusion on the end markets, Gary, but I'll give you my best shot here and then ask for some help from my team.

I think Aerial Work Platforms across the board are pretty darn strong. Whether or not the segment grew 59% or 49% is hard to determine, but it was up nicely. I think we've positioned ourselves pretty well with a number of major accounts in the AWP segment to be the supplier of choice in part by the way we handled 2004, in part by the way we handled the beginning of 2005. So I think we may have given up a little bit of margin, but we've gained a lot of respect in the marketplace. I will come back to Bob and ask him to comment on that.

With regards to the crane business, I think our crane business is generally a bit sporadic, to be honest with you. I think we're pretty positive about some of the big orders we get in Asia that get shipped out of our German operations. The U.S. market is remaining pretty -- is encouraging in the smaller end of the product line but still pretty lagging in the lattice boom, large lattice boom segment. The European business is a mixed bag with Germany still not in a recovery mode, and we've got a pretty good business in Germany. So, I think we are probably performing in line with the market in the crane business, certainly nothing better than the market in the crane business.

Turning to the construction business, I'd say, in certain product categories, we are performing better than the market and in a couple of areas, we are not. We are performing better in crushing and screening; we are performing better in the heavier product areas, such as articulated trucks; but in the compact products in North America in particular, we are not because we are still struggling with a UK-based cost structure and the currency has gone against us in products like loader back hoes, and the mini-excavators we have are sourced out of Germany. So I think we are probably lagging the market in North America somewhat, but we are probably doing better than the market in Europe because our guys have put together a Terex selling proposition in the compact equipment business. I think that's gained us some momentum.

Roadbuilding and Utilities, early stages of recovery -- we're doing pretty much in line with the market in Utilities, probably lagging the market a little bit in Roadbuilding as we're still recovering and improving some of our product issues that we've had over a number of years. The Tatra business had a very strong first quarter but on the basis of some Eastern European part sales, not military sales.

The last segment is Mining, and mining is hard handicap because it is so strong. Our shovel business has done extremely well. We are beginning to penetrate and work together with the Cat distribution network. In addition to that, we are selling mining trucks and we have a good backlog of mining trucks, but you should also be aware that, when you have a good mining environment, it's a little bit of a tiered philosophy on the part of the buyers. If Caterpillars build up, if Kamatzus build up, then they will come to us. We are kind of the third one down the rung, so it's critical, at this stage, that, when we deliver on those products, that we delight our customers with the product quality they get, such that when the market does slow down, they continue to view us as a credible supplier. So, we're benefiting from a really strong mining environment.

I don't know, does anyone of -- Bob, do you have anything to add?

Thanks, Ron.

Gary, I think the growth for us and our competitor, primary competitor GLG (ph) is similar in the period. They were up 59% in the February-to-April period. I think both of us are being very prudent about trying to focus on margins. The growth is there; primary demand is there, both from a replacement cycle period as well as a growth cycle in our primary customer groups, and the both of us are focused on margins here to try and improve our performance.

Just as a follow-up, I think Phil said steel costs hurt gross margin by 2, 2.5 percentage points; that's like 30, 35 million. That doesn't -- is that a net of pricing or is that an absolute steel price increase? Because I assume you got a couple of percentage points of pricing as well, so you know, it still suggests that we're not getting the kind of margins you would like, and again, the steel -- I assume steel was a net negative. Do you still expect to get 1.5, 2 percentage points of margin improvement in 2005?

Phil?

Gary, the figure I quoted was a cost figure year-over-year and we estimate that we got about half of that recovered in price from the first quarter. I would see that, as Ron indicated, as the backlog turns and the pricing actions continue, changing to a positive impact. You know, our costs have tended to stabilize, not decrease but stabilize with the actions that we've taken.

So I think there's an opportunity here, going forward, but let's get to it as opposed to project it at this stage.

One last thing -- I mean, you've said in the past, Ron, you expect earnings -- 50 to 55% of the earnings to occur in the first half of the year. If that happens this year, you're suggesting maybe $1.30 second quarter. Is that how we should look at it?

I have given that information historically and I don't think you are out of the ballpark but I'm not providing second-quarter guidance specifically.

Cliff Ransom with Ransom Research.

Hi, Cliff.

A quick question, well, first of all, the numbers on overall U.S. nonresidential construction, the rebound in it, have actually been moderated a little bit. The progress is there. How do you think that's affected your customers? I'd like to make specific reference to the crane side of the house.

Steve, do you want to comment on that?

Sure. I think we are seeing some progress, Cliff, in the housing and construction, but there is some skepticism whether it's going to flow through into additional market growth in the crane business. So, in North America, I think it's a little bit early to say. We are seeing improvements but as I said, I'd just think it's a little bit early.

Nonresidential is a little bit skeptical on the part of our big crane customers today, at least in North America.

How about on the crawler crane business and the utility and chemical area?

I think we're seeing growth in petrochem business, in the smaller lattice boom cranes, seeing some pickup, but in that 300-ton bridgework machinery, you know, there's still an overcapacity of cranes in North America that are on standstill, so still a bit of growth to be seen in that range.

Then the last thing would be for Bob. I'd like you to correct me if you think I'm wrong. My impression has been that the upswing in Aerial Work Platform business for the industry, you and your competitors, or maybe I should say competitor, has been largely due to the drive by the industrial rental fleets to reduce the average age of their fleets, not yet to hit an expansion phase, i.e., that they are buying to lower the average age of the fleet, but they are not yet adding incremental units. Can you talk about where you think that breakpoint is going to be?

Well, I think we're very close to it, Cliff. I think we are probably past the replacement cycle demand and with the growth -- and you can see the growth in our backlog. We're getting into some pure growth in most of the rental places. Look back since 2000 or 2001, as they really did purge their fleets pretty dramatically, so it depends a little bit on where you pick the starting line, but we are starting to see growth CapEx from our key customers.

They are talking growth CapEx now, yes.

I got it. Okay, thank you very much, gentlemen.

Joel Tiss of Lehman Brothers.

Good morning. This is actually Andrew Kaplowitz. I have a quick question about Terex Mining. Obviously, you doubled this quarter and I'm just trying to think about the future. We know it's very strong, but can you sort of maintain these levels? Can they get even better than they got in the first quarter? How capacity constrained is the industry?

Well, I think we have the potential to do better, but Rick, why don't you comment on that?

Yes, Andrew. I think we really believe, through the balance of this year and really into next year, that the primary demand in emerging markets and the increase that the producers are trying to go after to reach capacity levels will drive, to a large extent, continued strong performance in buying bulk (ph) for capacity and for replacement. So we believe that strong performance definitely has a possibility to increase through the balance of this year and really continue on into next year.

Yes, I don't think the first quarter will be our strongest quarter.

Now, that's great. Back to cranes for a second, the Waverly strike, are you guys willing to tell us sort of what the impact was on revenue or earnings and you know, how much better it can get in, like, a little more specifically in the next few quarters? That is kind of the specific question.

Well, I think it will be hard to handicap how much better it can get in the next few quarters. We do have enough orders and we do have enough backlog so that it can get meaningfully better, but Steve, why don't you comment on the strike impact?

Yes, Andrew, the strike costs in the ballpark of about $1.2 million for the five-week strike in Waverly. Moving on down the road, I think it's positive. We're putting on a second shift; we are adding additional workers. We do have a strong backlog, and we are shipping more machines out, so I'd say the outlook is fairly positive.

It cost us, on one hand, the $1.2 million, but on the other hand, we were unable to ship product for five weeks of any meaningful amount, so that also had a cost.

If I can break down, it's out-of-pocket costs of about $650,000, which included temporary workers and just additional costs. The rest of that was lost margin on machines we could not ship.

Right, okay. Thank you.

Okay, great. Thank you.

Sarah Thompson with Lehman Brothers.

Sorry, I guess I should coordinate my questions with our equity guys because I was just going to ask you the same one. What I'm trying to figure out is you guys have obviously always been pretty high variable costs. When you're looking at your volume improvements right now -- and I realize there's lots of one-time items in there in terms of steel costs, the Waverly strike, etc., but what are you guys looking at as your variable contribution margin?

Phil, do you want to comment on that?

Well, I would expect, Sarah, thinking of operating income, that if you took out the steel costs, we would be in the midteens in terms of incremental operating margin.

As an incremental operating leverage, really.

Leverage, right.

Okay. When you guys are then looking at your -- I know you are not giving guidance for your second quarter specifically, but if you're looking at the workers that you've hired on the Aerial Work Platform side, do you feel like that will kind of be a wash in the second quarter or just a little bit of a drag on your profit?

Bob, why don't you comment on that?

Yes, I think, Sarah, we've gone through the hiring and training process and we would expect -- and that's pretty much done for the year, so we would expect the efficiencies to continue to increase month-over-month as we go through. But pretty much the bulk of it is through the system and the great hiring and training curve is completed.

Okay. Then last question -- I think I heard you right when you said the price increases you think will hold despite the fact that you think raw material prices are kind of stabilizing to potentially going down in the future. Is that -- what is that based on? Is that based on the fact that you feel like -- (technical difficulty) -- hit when the prices were going up, and so you'll be able to hold them, or is it just your end-market demand is so strong that you don't think there will be a giveback? I mean, why do you feel so comfortable about that?

I guess, Sarah, I would say experience -- this is where experience in the industry has a little bit of a bearing, and I have seen this before. I haven't quite seen the demand quite as strong as it is right now in some time. I do think that the leverage will shift somewhat in our favor, and I don't think we're going to see a tremendous amount of near-term price competition.

Okay. I appreciate it. That's all I have. Thank you.

John McGinty with CSFB.

Good morning. A couple of questions -- the net steel cost, net of the price -- in other words, you got about half of it -- (technical difficulty) -- 20 million. Would that be proportional across the businesses, Phil, or -- I mean, I'm just trying to understand. Did somebody get hurt worse on that 18 to 20 million or do we pretty much balance it with -- you know, because that's a function of where the steel was and where the prices were, so is it proportional or would you --?

It's going to vary by segment, John. I'd say, on the cost side, last year, our European operations did not get as much of an early-period impact as the U.S. operations did, and that's not this first quarter; that's later in the year. So ,we're starting to see the roll-off, particularly in the cranes business in Europe with some of the long-term contracts, the year type contracts that we had rolling off at the end of 2004.

Certainly, our U.S. businesses, the Aerial Work Platform business certainly was maybe disproportionately on the costs side from a numbers standpoint, and I'd say the crane business as well in the U.S., but it tended to be more geography than by product line.

Construction's impact I think we started to see toward the end of the year in our UK operations and into the first part of '05.

Was pricing pretty much then -- I mean, was the recovery -- in other words, if the costs were that way, was the pricing recovery the half that was recovered proportiate (ph) or did somebody like, I'm not sure who looking at the margins, but somebody must have gotten most of it back, or would you say that --?

I would say, John, that we have a feeling that, you know, when we go through this business, that we've got about half of it back in the first quarter.

Everywhere?

Just about everywhere. I would say, in North American cranes, we would have gotten more back had we shipped the product, okay? In Demag, we didn't get much of it back at all because we had a backlog at the old prices of the new costs.

At the AWP business, it was split about 50-50. We got about half of the increase as still left about half to come in the second quarter.

Okay. When we look at the construction business, in the past, you've talked about the impact of the exporting from the UK. What was the currency hit that construction took in the first quarter?

Well, on a transactional basis, that's where we've seen approximately 3 to $4 million impact year-over-year. (multiple speakers) -- transactional. Translation was a little bit favorable, so the net unfavorable.

The Atlas, you talked about the costs of moving the Atlas -- you know, you've cited the Atlas UK into Atlas Germany. Are we talking a couple of million there, or what are we talking about?

Colin?

Yes, John, year-over-year, we are looking a couple of million dollars (indiscernible) basically Atlas in Q1 last year in the UK lost money and Atlas Germany made money in Q1 this year. Basically not only did we benefit from the consolidation of two plants into one, but as part of the (indiscernible) negotiated an extending working week was the IG Mattau (ph) union from 35 to 38 hours. We really (indiscernible) factory (ph) out to make it basically a much more logical and linked flow. Both businesses, last year in the first quarter would have produced somewhere close to around 600 machines. This year in one side, (indiscernible) up only around 730 to 800 machines per quarter, so starting to see significant benefits from our consolidation.

We really didn't see it in the first quarter but we're going to see it in the second quarter, and we're also going to see the impacts of the 38-hour workweek versus 35.

Okay, so it's a couple million dollar hit but a real significant benefit as we move into the remaining nine months?

Yes.

Conceptually, you mentioned a couple of things, Ron, and I just want to make sure whether or not you are just mentioning them or are we supposed to pay attention to them. For example, in cranes, you mentioned really the particular strength in the tower crane business. When we add back the cost of the strike in Waverly, the margin is still lousy; it's still down. Is that because, did that tower crane business have a significantly lower margin? Did mix hit us there? The same thing over in our good friends at Roadbuilding, Utilities and so on -- did the strength in Tatra and Advance -- did that hurt the margins as well or could you just speak to those mix issues?

Yes, it's always difficult to try and report margins by individual, discrete business units. I mentioned some of those things not just to get you to pay attention but to give you a flavor for the business. So, to answer your question, John, our tower crane margins are actually very, very good. And the weakness in the margins in Europe really came from Demag, as I previously indicated, where we had the high cost but not the pricing.

Going forward, we expect -- you know, when you're shipping very large cranes and they're going to China and they were ordered nine months ago, you know, those are the kinds of things that impacted our margins. We actually -- and you're one of the longest history guys following as. We actually had a very good performance out of our French crane operation.

I was shocked when you said that!

I figured you would have been shocked when I said that, but that's one of the reasons why I wanted to say that, John, because it gives you a little bit of a flavor for what's happening in our business.

When you turn to the Roadbuilding side, what we have is a little bit of a mixed bag through the businesses with the CMI operations and Roadbuilding in general actually making a moderate profit, CMI as a business unit itself basically breaking even with a substantial gain coming from our paver business and a reasonably nice performance out of Brazil.

Our Advance business had a very strong quarter and a pretty strong margin performance also. Tatra had a strong margin performance but not from military trucks but more from the parts businesses that it has to service the existing customer base.

Then just a final question -- getting back to the guidance, I just want to make sure I understand. You did not give specific quarter guidance but you gave, you know, you gave kind of ranges and midpoint percentages, percentages and percentages. If we took midpoint to midpoint to midpoint, you beat the first quarter by something like $0.15, $0.17; you're only raising the guidance on the midpoint to midpoint basis by $0.10. Should we in fact assume that you're bringing down your expectations for the second half, or are you just trying to be conservative at this point? Because the beat in the first quarter looked to be more like -- more than the raise in the guidance for the year.

Well, I don't view that I'm bringing down anything. In fact, I'm taking the year up. I think what you've sensed from me and as you should have historically, and that is I am long-term bullish and short-term cautious, and I think I want to be prudent and meet my -- you know, we are looking at things like 30% kind of increases in our business, and there's a lot of things that happen when you go through those kinds of increases, plus all of the extra effort we've put in to go through the restatement activities. That's been a major distraction for us. So, I'm bullish about the Company's performance; I just don't want to get ahead of ourselves.

All right, and then, I'm sorry, one quick one -- CapEx depreciation and the net change in working capital if you hit your percentage, if you hit your sales and your percentages.

CapEx about 1% of revenue, John.

Okay. D&A?

D&A in the 75 to $80 million range.

Tom will dig that out.

All right, and working capital? If you hit your sales and you hit the -- I mean, since we haven't seen the ending balance sheet, we haven't seen ending balance sheet, just are we going to use, what? 100 million cash in working capital?

I think you've got to work out the percentages, John, there because it's going to fluctuate with the volume that you anticipate. I would expect that -- you know, we are targeting 18% of the trailing fourth-quarter annualized.

Four quarters annualized.

Annualized fourth-quarter revenue targeting 18% at the end of the year and ending last (inaudible)? 19.5 I think was -- 2004 was 19.5.

Okay, so 1.5% improvement on whatever the sales gain we're looking at?

That's right.

D&A was 65 million, okay, John?

David Raso with Citigroup.

Good morning. Just a kind of broader question, I know with Bob there, maybe he can help in particular on this. Parts and service clearly has not a strength of the Company over the years, and the only grumbles you get in the channel is really supporting the product broadly. Now, it varies across your divisions, I understand that. I know you're revenues have been strong but I would have figured your SG&A would be going up in more of a parts and service initiative, maybe just showing up a little bit more on the cost of goods; it depending on how you account for it. I guess a question maybe more toward Bob then, given you're the Company guru on improving the businesses. Where do you think we are on an SG&A as a percent of sales, they way you brought you're Genie (ph) philosophy to the Company? Every division has their own nuances, but where are we in beefing up the parts and service support for the Company. What should I be thinking about SG&A over the next year or two? Obviously, the cost side, cost of goods, there's a lot of issues outside of the Company's control. But on the SG&A side, Bob, can you give us a little help on that?

Well, David, I think the key focus is that we are continuing to invest in improved service and improved backup parts support activities, but not all of those will drive costs up. Some of it comes from the efficiency of managing the right parts correctly through the inventory cycles. But we're trying to become more responsive as a Company and certainly, we view the support and service activities as being a critical component of that.

Phil, you might look at the SG&A percentage number and have a little bit of a reflection, but David, I think a little bit of it is clouded in terms of the overall growth the Company is getting and the investment we're making in it. So I don't have a specific answer on a percentage number, but I do state clearly that we are investing heavily in improving our parts, service and support infrastructure on a worldwide basis.

You'll see more from us in these areas in the next year or two.

I was also trying to balance. I want to be careful on assuming, say, in '06, a little less onerous cost environment, not to give some back on the SG&A because maybe there's been a little underinvestment in the parts and service now while you're struggling with material costs.

No, and I think that's a fairly reasonable comment, David.

Martin Stankey (ph) with Neuberger Berman.

Thank you. I have a series of questions. I guess, first of all, could we look at the backlog with a little bit more granularity, kind of go through the profile of the backlog, or the leadtime? Does it reflect lengthening leadtimes that you are articulating to customers? What kind of cost protection have you put in in case if steel does something crazy again?

Okay. Martin, I think -- let me start at that and get some help from our team as I go forward. I think the backlog lengths vary substantially by business; that should be fairly obvious. The AWP backlog at $500 million does push out some product lines into the latter part of the year. I think our communication to our customer base is that we have basically a need to get additional margin, and so we've asked our customers that -- we've told our customers that we will be looking at pricing as we go forward throughout the rest this year and expect to get some pricing additionally this year and probably next year. We haven't fully recovered, in our view, all of the costs that we have.

Now, if I turn to the mining business, I think that's always a bid business and we have the ability to take new bids at higher prices, but on the backlog that we have, those are at the prices that we quoted at the time.

If I turn to the crane business, I think I previously said that we are taking prices on new orders that we're getting from our Demag business and really that's the same story throughout Europe. In North America, we've actually just taken a price increase at the end of May, first of June, really, in addition to the pricing that we have had before. So, on new orders, we are taking additional pricing.

In construction, boy, that's a little bit all over the map because we go from bid business on one hand to every day routine business. I think Colin has implemented a pretty aggressive control process for making sure we get the pricing we are promised. I don't know, Martin, how much more you want us to discuss that. It's a pretty complicated question.

Right, but would it be fair to draw the general conclusion that your longer leadtimes, your customer leadtimes are lengthening -- that in general, you are not price-protected in your backlog and that you will be taking further price increases as the year goes on and perhaps maybe some of the backlog reflects the anticipation of that?

I don't know if I could say the backlog reflects the anticipation of that. I think the backlogs are always a bit of -- it's always a bit of a challenge because when somebody gives you an order, they expect that order to be given to you at a fixed price for delivery at a fixed point in time. I mean, in fact, Sarbanes-Oxley almost requires that we have a precise purchase order with precise delivery and term procedures. So, how you can price-protect that, I really don't know. The best way to price-protect yourself against cost increases is to be honest with your customers and when you have an issue, go back to customers and say, I've got this issue and could you help me out or I can get you the product sooner and have a discussion with them. I think that's the only way you can really deal with this.

I don't think we have, in the main, placeholder orders. Of course, there's a few of those, but I don't think, in the main, that's what's in our backlog.

Okay. Thank you for that good response.

On another subject, your interest expense -- you mentioned that your interest, your average interest rate is up 100 basis points. Could you discuss what's driving that and how you might be -- how your interest cost might unfold as the year progress?

Okay, Martin. I would expect that we are largely still a little more than 55% fixed in terms of our rate structure on our borrowings, so you've seen the impact of some of the variability that we've had relative to the prior year. Again, we are largely back-end loaded in terms of our cash flow, so our debt-reduction efforts are really going to occur in the third and fourth quarter as we take the gross down. That will obviously affect our interest cost in the back half of the year to a certain extent from the cash generation.

In the first half of the year, we tend to have negative cash flow or close to break even through six months, let's say, but during the quarters, we are borrowing to fund the working capital requirements. That's tended to be an average that's reasonably significant during the quarter, that's impacted our interest this year. So as the volume goes up, the funding of that working capital in interim periods increases.

That's mostly floating-rate?

That's right.

Which are up substantially versus last year?

That's right.

Okay, Martin, thank you.

Mike Kender with Citigroup.

Yes, just a couple quick of numbers questions. What was interest expense and CapEx in the quarter?

Interest expense, going from memory, I think it was 22 -- 22.6? CapEx stays about 14 or $15 million. Let me just check one. Hold on. Sorry, 10 million on CapEx in the quarter.

Okay, thank you.

Robert McCarthy with Robert W. Baird.

The first one is just a very quick number-oriented question. Can you tell us how much Reedrill contributed to backlog in the Mining Material Processing segment?

Rick, do you have that number at the top of your head?

Yes, it's 19.5 million, Robert.

Okay, a small number, thanks. Ron, I wanted to make sure that I'm sorting through all of the variety of different commentary on steel prices correctly. In construction, you think you're very close to having caught up with cost increases. In Aerial Work Platform, it sounds like that's an accurate statement as well. Mining, it's hard for me to believe you've got a significant issue there. Is it fair to say that it's primarily in Roadbuilding and Utility and crane segments, where you think you may have -- it may take you longer than the second quarter to catch up with cost increases?

I think that's a fair statement, and I would say more for the European cranes than for the Utility and Roadbuilding business.

Have you seen any of -- I mean, I gather your Roadbuilding business is a little bit better. You talked about improved confidence. Are you seeing an uptick in order rates across that business, or is it -- I mean, is it still very spotty?

Some products, we're seeing pretty strong order patterns. We're seeing very good performance from our paver business; we're seeing good performance from some of our small plants out of the Brazil operations; we are seeing very good performance from our advanced mixer business that we include in the Roadbuilding business. But the fixed asphalt plant business still is a pretty difficult business, and that's really a confidence-related issue in my view, and some of our own issues over the years, and I think we are addressing them. We've introduced a terrific new asphalt plant at the ConExpo show. We've got a lot of customer interest on it. We are implementing a number of other initiatives there to recapture some of the growth that we think is possible. I think the Road Bill will create an umbrella or a halo-positive attitude, but we've yet to really see much value from that.

My last question is in regards to Tatra. The strength that you had in the first quarter and, as you described it, nonmilitary parts components business -- is that something that reflects a strategic initiative that you expect to be an ongoing contributor in a significant way, or is this some kind of a one-off event?

Well, it's more than one off but it's not what I would call a continuing situation. We typically have a stronger first quarter that we do in the parts business. We supply a variety of things; we supply tooling to Scoda and Volkswagen; we typically sell some of that in the early part of the year and less of it in the latter part of the year.

I think the Tatra business continues to undergo significant restoration, reformation, and you know, we probably will be trying to sell an asset or two there in the next quarter or shortly that is non-strategic to that business. So a lot of good work has happened there. The military business is hard to handicap. The currency is down against us relative to the Indian military business, so we're probably not going to get the Indian military business that we once would've liked because the Czech crown really follows the euro, but we've diversified the business a lot.

It's operating above breakeven, isn't it, Ron?

Yes, it made a nice profit in the first quarter and is pretty much in line with the general trends of the Roadbuilding and Utility group.

Thanks, that's very helpful.

Andrew Obin with Merrill Lynch.

Hello, this is Jane Danziger for Andrew. I was just wondering if you could comment on what's changed between the beginning of May and now that enabled you to come in ahead of the preliminary expectations.

Okay, do you want to comment on that, Phil?

Beginning of May, $0.50 to $0.55 is what she's referring to.

Exactly.

Yes, she's referring -- (multiple speakers) -- $0.55. At that time, we hadn't gone through our complete close process and what we had. Obviously, the margin performance was good. Wrapping up our expense levels was one of the questions at the time, and also tax rate was an outstanding item as well. So again, working through the close process of that first quarter, which somewhat delayed, given our efforts and focus on the restatement process really what we had.

Okay, thank you very much.

Ron Scott (ph) with United Rentals.

I have a quick question concerning the recent (indiscernible) the industry's purchase of the controlling interest of Daewoo. (indiscernible) Terex Construction part of your conference call, any reference to the heavy loaders and excavators. I was just wondering what your comments would be concerning where you're going with the marketing agreement and is it going forward or just general information.

Okay. We have a multiyear agreement with Dusan (ph) Daewoo now, or as I think it's called, Dusan Entracore (ph). We are marketing the Terex crawler excavator under the Terex name with little or no reference to Daewoo. We're also marketing the wheel loader under the Terex name. We expect to continue to work with them on sourcing of that product for the midterm. We think those are good products.

We also have a European-based wheeled excavator that we're bringing into North America and have a Chinese-based support group for our European crawler excavator product that we're getting some experience with also. So, we're working hard to give our customers really solid options and would be happy to take any orders, Ron, from United Rentals on those products!

Okay, are you referring to shape when you say European wheel loaders?

No, I'm not, actually. I'm referring to the Atlas-based wheeled excavator. Okay?

A follow-up from Cliff Ransom with Ransom Research.

Yes, steel has been everybody's bugaboo, but so have components, and it strikes me of all the companies that I've talked to that use hydraulics and gears and bumps, you've really said very little about supply disruptions, particularly line manufacturing disruptions. Could you talk about that? Would you bring us up-to-date on tires with respect to large tires, whether that's a continuing headache?

Let's start with the large tires first, and ask Rick to comment on that and then I will ask Bob to comment on the hydraulics.

Yes, Cliff, I think, in general, the market is seeing a significant issue as far as tire and tire availability really throughout the balance of this year. We do typically sell our larger mining trucks without tires and the customers tend to supply the tires for them, but I think, in general, the market is tight, which is really pushing some orders out, I think, from a customers' standpoint, into the 2006 timeframe, which is also kind of referring to my earlier comments, why we believe that 2006 is going to continue to be a fairly strong year. But tires are affecting increasing capacity within the large mining segment.

I know you delivered the large mining equipment in what I call chunks, IN segments, but once it's assembled on a customer site, what does he do for tires?

There are a variety of -- you know, they are looking at how they can increase tire life; they are using retreads; there are some new tire capacity coming of Russia and China trying to support the tires in the customers' fleets, so there's some options but it continues to be a very tight market.

Okay, and then the components side?

Bob?

Hydraulic components, Cliff, have been challenging and will probably continue to be challenging the next two to three quarters here but certainly are improving dramatically. The suppliers have brought on additional capacity and each of us is working closely with them but obviously, in a just-in-time environment, you do have frequent situations where the suppliers' availability or ability to meet exact demand can be challenging. So, we've seen good improvement, though, in hydraulic component availability over the last two to three months.

It's mostly hydraulics; it's not an issue on gears and pumps?

There's some there. I mean, I would say it's a little bit there and there's some issues with gas engines, even.

Right.

You know, the supply chain out there is being stretched, as we are, to hit pretty dramatic rates of growth, but it's manageable. Everybody's working on it; the suppliers are doing a good job of bringing the capacity online and meeting the quality expectations for their deliveries.

Colin, do you have a comment on this also?

Really just echoing both sets of gentlemen's comments. Basically, from a component supply standpoint, we've seen a lot of additional capacity come online in the last six months. That's helping not just with availability of components but is also starting to normalize pricing, because some of these suppliers are hungry to fill that newfound capacity. As far as tires are concerned, again I would tend to agree with Rick on larger (indiscernible) truck and larger articulated truck tires. I've certainly never seen anything like it. Some customers have bought machines without tires; some have been prepared to buy machines on reload tires just to get them physically working out there. We believe -- our suppliers are telling us that that situation will ease at the end of this year as two companies bring on additional capacity, but realistically, I think it's with us through at least the middle of 2006.

Thanks.

A follow-up from Gary McManus of JP Morgan.

Two quick real questions -- you know, you've provided no revenue guidance as you've done in the past. The last time, I think you said in March, 8 to 12%. Is there a reason why you're not providing any revenue guidance?

Yes, I want to see how we do at the end of the second quarter to get a better sense of it. Obviously, our revenue is -- if I gave 8 to 12% guidance for the year and we did 39% ahead in the first quarter, obviously we're doing a little bit better on that front than I thought. So Gary, I just want to take -- I want to see how we end the second quarter.

Well, considering the first quarter is seasonally weak, I should take the first quarter, multiply it by 4 and then put a little bit more, wouldn't that be fair?

Analytically, that would be an accurate thing.

Okay. The second question is you are saying you are nearing completion of the internal review. Are we talking weeks or months?

I think we're nearing completion, and we have a bank waver through the end of June. I think that is a reflection of how we feel about the situation.

Okay, great. That's it for me.

Brandon Hawkin (ph) of Neuberger Berman.

This is actually Charles Kantor substituting for Brandon. How is everyone this morning? I have a more longer-term question, which is, as you review all of your business units and the business units within those, are there any businesses that you may think of divesting over time that just don't meet some of your internal financial characteristics or you may determine you can't compete in that subsegment, or as a way to improve the overall profitability of the business? Or alternatively, are you very happy with everything -- you know, with all of their sub units, and it's just a question of trying to find things to add onto there? Thank you.

I think, Charles, that's an open question for us. At this stage, obviously, we're going to look at each one of our businesses with a discrete eye, and we are always mindful that we are obligated to deliver value to our shareholders in the short term, medium term and longer term. So, we would be inclined to try to evaluate these businesses on the basis of how they deliver returns on capital as being the principle measure. Obviously, some businesses are at a soft spot; this is pretty commonplace in our industry. How these businesses perform from those soft spots is going to be critical to our evaluation of these businesses. You know, we're going to be disciplined in how we view the business. Obviously, we were disciplined in how we looked at our mining business and holding onto it and believing what the value potential was in that business appears to have been a good position at this stage. Other businesses which looked like they are challenged today as they improve, as they respond to some leadership changes and some initiatives such as the Terex business systems that are being implemented across the Company -- that will help us determine the longer-term position these businesses have in our portfolio.

Generally, I think we are builders. Historically, we have sold a business or two but we have been more acquisitive than we've divested. So I think the real answer to this question is can we continue to look at our businesses and have them be accretive to the earnings and in particular to the returns on capital that we're trying to achieve.

Okay, thank you. Just as a follow-up, I guess my question, to just be somewhat more direct, would be, as part of the ongoing Terex improvement process, I guess I'm asking -- my assumption is judgments will be reached over time, whether there are businesses that (indiscernible) full business cycles don't meet your financial characteristics. To the extent that you make those judgments, you know, I assume that will be part of what gets shared with shareholders over the longer term.

Yes, it certainly well.

Thank you, I think this ends the call. I think everybody -- we appreciate everybody's interest. This call has lasted a longer time, but please follow-up with Phil or Tom or myself if you have any additional questions. I will be traveling, visiting some customers in the next couple of days, but thank you for your time.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.