Terex Corp (TEX) 2005 Q2 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator. At this time I would like to welcome everyone to the Terex Corporation second quarter 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Thank you. I would now like to turn the call over to Ron DeFeo, Chairman and CEO of Terex Corporation. Sir, you may begin your conference.

Thank you, Judy. Good morning, ladies and gentlemen, and thanks for your interest in Terex today. On the call with me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer; Tom Gelston, Director of Investor Relations and Corporate Communication; and available to answer your questions will be our operating team consisting of Chris Ragot from Roadbuilding and Utilities; Bob Wilkerson from Aerial Work Platforms; Rick Nichols from Mining and Materials Processing; Colin Robertson from our Construction Product Line; and Steve Filipov from our Terex Cranes business. As has been our tradition, I plan to make some opening overview comments, then Phil will follow-up and give you a specific summary of the financial performance, and I'll return and provide some additional details on sector performances. We will then open it up to your questions. I'd like to ask you to limit your questions to one and then a follow-up in an effort to get to everyone. We will try to limit this call to an hour or less if possible. Now, replay will be available shortly after the conclusion of the call and can be accessed until Thursday the 11th of August at 5 p.m. ET. To access the replay, please call 800-642-1687 or international, 706-645-9291 and enter the conference ID #8266315 or look at our website. So let me begin.

Overall Terex had an outstanding second quarter, excluding the impact of special items, earnings per share were a $1.58, and we achieved a net income level of $80.5 million in the quarter. This compares with the prior year of $52.5 million or $1.03 per share excluding special items in the year-ago period. We're pleased with this operating performance and we believe we continue to benefit from positive end markets and a maturing Terex Corporation reflecting a number of the initiatives under way and started over the past several years. Net revenue for the quarter was $1,764,000,000 or a 32% increase. Reflecting on revenue for the first half of this year, Terex had revenue of $3.2 billion, or said differently, in the first six months of the year we have achieved a revenue level of about 83% of Terex's entire 2003 revenue level. As many of you know, we established a goal 18 months ago to be six and '06 or $6 billion of revenue in 2006. It looks like we may achieve $6 billion of revenue in 2005. This really reflects two things. First, the strength of our overall end markets, which are more positive than I expected when we set this goal. And secondly, the continued development of the Terex franchise overall, which I think is right on track. Terex as a corporation has never been stronger. Our financial and market place opportunities, nevertheless, still have a lot of runway to improve. And with that, I'll turn it over to Phil.

Thanks, Ron. And good morning. Before I begin let me remind you that we will discuss expectations of future events and performance of the Company on today's call and that such expectations are subject to uncertainties related to macro economic factors, interest rates, governmental actions, and other factors. A fuller 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.

We are nearing the completion of the restatement process, audit and assessment of internal control over financial reporting. While no assurance can be made, it is management's current expectation that the financial statements for the year ended December 31, 2004, and prior periods will be filed on or before August 15, 2005. We expect the impact on our total stockholders' equity at December of 2003 to not be material. For the second quarter, we reported net income of $78.8 million or $1.50 -- excuse me, $1.54 per share, compared to net income of 59.1 million or $1.17 per share in the second quarter of 2004. Excluding the impact of special items, net income for the second quarter of 2005 was $80.5 million or $1.58 per share on sales of 1,764,000,000, compared to 52.3 million or $1.03 per share on sales of 1,336,000,000 in 2004. The estimated tax rate for the current quarter was 33.8%, compared to 19.7% in the comparable 2004 period. The 2004 rate was lowered due mainly to the strong performance of the Terex Fermec business, where it was determined that we would be able to realize the benefits of certain tax assets and, therefore, the valuation allowance held for this business was released.

Net sales for the second quarter of 2005 increased 32% over 2004 due to improving market conditions in most of our business segments. 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%. Gross profit, excluding special items, increased to $285 million for the second quarter of 2005 from 204.9 million for the second quarter of 2004, reflecting the impact of the 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 just starting to materialize in the second quarter of 2004 as they accelerated through the latter part of the year. Gross margin increased roughly nine-tenths of a percentage point reflecting these impacts over the prior year from 15.3% to 16.2%. SG&A expenses, excluding special items, increased to $140.4 million from 117.6 million for the second 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 business system efforts, as well as external professional fees to assist in the restatement, Sarbanes-Oxley, and audit processes. Overall, this achieves a level of 8% of sales, eight-tenths of a percentage point better than 2004 as we continue to focus on cost management.

Second quarter income from operations, a pre-tax measure, excluding special items, increased by 66% to $144.6 million from 87.3 million in the comparable period for 2004. Operating margin increased to 8.2% from 6.5% in 2004 and this represents an incremental margin improvement of roughly 13% on the volume change. Our net debt decreased in the quarter by $139 million to 733 million and for the six months to date, decreased by $47 million. This performance is ahead of our previous expectations for this time of year as we continue to focus on working capital management in a growth environment. We ended the second quarter with working capital as a percentage of second quarter analyzed sales of 16.8%, compared to the second quarter of 2004 of 18%. We expect to end 2005 at 18% level. Cash flow from operations is expected to be between 275 million and 300 million for the full year 2005. We will continue our debt reduction efforts this year targeting a $200 million reduction, plus positioning our balance sheet to retire high-cost debt; namely, our 10 3/8 notes that is callable in April of 2006. You'll recall that this represents $300 million of our debt portfolio. I commented earlier on the second quarter tax rate of 33.8%. We expect a full-year rate of 35% consistent with our prior guidance where we indicated that our rate would move closer to statutory rates, excluding the impact of the straight items. Our weighted average interest rate on total debt was 7.6% for the second quarter, up from 6.6% for the comparable 2004 period. Ron, back to you.

Thank you, Phil. I'd now like to start the discussion of Terex Construction. Our construction business had a strong second quarter. Revenues were $604.5 million or up 27% versus the prior-year period. The business was generally strong across the board, with the heavy scrap handling, and mobile crushing and screening businesses the strongest. The compact side of this business was a bit slower compared to the other businesses, but still quite positive. The operating margin for this business was 8% of revenue compared with 6.6% in the prior period. Backlog is also up versus the prior year at $232.3 million or plus 7%. We believe the positive impact of pricing actions earlier in the year helped us mitigate cost pressures from components and raw materials, such as, steel and we expect this trend to continue as the new pricing levels flow through our backlog. The programs initiated in 2004 and early 2005 continue to be working. We are implementing lean manufacturing methods and we are at the early stages of progress here. We are also benefiting from the Atlas restructuring that we completed in 2004. We now have a number of active projects in China and expect that as we enter 2006 we will see some of the benefits of sourcing from these initiatives.

The Terex Cranes business continued to make steady progress, also. In the quarter, revenue was up 23%, compared to the prior-year of $341.5 million at that level. On a year-to-date basis, revenue is up 32%. Leading our revenue increases were our tower crane and European-based businesses, mainly the business we export from Europe to the rest of the world. The operating profit in the quarter achieved a level of $15.7 million or 4.6% of revenue, which is still meaningfully below our goals. Contributing to this, from a positive perspective, was our Tower Crane business and on the negative side, we had some European employee profit-sharing costs, as well as some bad debt provisions that we needed to accrue in this quarter. Furthermore, the North American business continues to struggle to meet our profitability objectives. However, we have made a number of changes and we think that these will pay off in the near-term. We are sourcing a number of components and have proven this out at Terex's Acuna, Mexico facility, which we acquired in late 2004. These have significant cost reduction benefits on our sourcing.

Furthermore, we have increased our direct work force at Waverly by over 40% and as of the 27th of June, 2005, we started production on a second shift. These actions, we feel, will allow us to reduce the significant, and now higher-priced backlog that we currently maintain and meet the demands of a recovering market place while being more efficient overall. Starting next week, we also have a new leader of our North American Crane business joining the Company and reporting to Steve Filipov. We look forward to his leadership. We expect to continue the lean initiatives under way in Terex Cranes both in Europe and in North America. Opportunities for significant improvements and working capital management, as well as better customer practices are still in front of us in this segment.

The Terex Aerial Work Platforms Group had a tremendous quarter. Revenue in the quarter was up 46% and on a year-to-date basis up 52%. We are benefiting from a strong market overall, reflecting the significant changes that have taken place in the aerial work platforms market over the past five to seven years. Our operating margin came in at 13% of revenue down slightly from the 13.4% of last year and on a year-to-date basis operating profit was 11.4% down versus the 12.7% in the 2004 period. We do believe now that our pricing has generally caught up with our input costs, but we do expect additional cost increases, and therefore, are planning significant price increases as we look out to 2006. For product ordered now and shipped after January 1, 2006, we have begun to introduce a new greatly simplified pricing structure which is designed to ensure more consistent pricing across our AWP product lines.

In addition, this new structure better reflects the value that is in our products and makes it easier for our customers to do business with Terex. Some of the learning that has taken place at our AWP segment on pricing will also be applied to other Terex businesses as we have hired some consulting assistants to teach us improved practices in this important area. It is encouraging to note that our Telehandler business posted a 75% increase in year-over-year business and we are taking advantage of cross-selling opportunities with this product. Obviously, a backlog of $420.5 million is significant for this business and remains a positive statement for this business's future. We continue to work on implementation of the Terex business system at our Aerial Work Platform business and to utilize some of the learning historically from this sector to our other businesses.

At Terex Materials Processing and Mining, this sector had a strong quarter overall. Revenue was up 67%, then excluding the Reedrill acquisition, revenue increased 43% compared to the prior-year period. Operating earnings from this sector were $20 million or 9% of revenue. This is nearly two margin points ahead of the prior-year. We continue to expect strong demand from this sector in the second half and throughout 2006 and probably through 2007. The underlying fundamentals here remain encouraging. Obviously, what is driving this sector is a combination of both high commodity pricing and strong demand for materials processing equipment.

The last sector, Terex Roadbuilding, Utility Products, and Others had an improved performance. Nevertheless, the opportunities for improvement here remain significant. In the quarter, revenue was at $252.9 million up approximately 18% from the prior-year period. Most of these gains came from our concrete mixing truck business and Tatra. We are pleased with the operating profit improvement of 10. -- the operating profit improvement at $10.7 million versus $2.7 million last year. Nevertheless, this margin is still low at 4.2%. The change year-over-year is a result of operational improvements at our Roadbuilding business and solid performances in the "Other" areas, in particular, the Concrete Truck and Tatra businesses. We still have a lot of work to do in the Roadbuilding and Utilities businesses, but progress is clearly under way. We are improving our products, focusing on fewer products, implementing lean manufacturing processes in the factories, and improving our after-market product support. This is critical for our customer satisfaction levels. We are obviously encouraged by the recent passage of the Federal Highway Bill and think this will provide an overall positive environment for some of our asphalt and concrete plant products which have lagged. Our Asphalt Paver business, on the other hand, has had a very strong performance.

Now, let me turn our attention to the overall outlook for the Company. We remain quite enthusiastic about the prospects for this year, 2005. We continue to see strong order activity evidenced by both current revenue and our backlog, which is up 50% versus the backlog at this time last year. As you know, we have structured our Company to reward our leadership on the basis of return on invested capital and we think this is the most appropriate measure for value creation. At the end of this past quarter, our trailing performance was 17% return on invested capital, demonstrating continued improvement toward our goal of 20% for the full year. We're optimistic that we will equal or beat this target.

I'd like to stress again that we have a number of product categories that are just turning positive. This would be our Roadbuilding and Utilities businesses, and our Terex Train business in North America. So we are quite pleased at how our revenue position is stacking up for both the balance of this year and into 2006. We are also pleased with the operating margin improvement in this quarter to 8% and remain pretty focused on our goal established back in 2004 of achieving 10% operating margin. And lastly, of course, the debt reduction that has been achieved and we expect to be achieved in the second half of this year is also a pretty important area to remember. In the previous 2005 earnings per share outlook, we had increased the range to $3.50 to 3.70 a share, from 350 to 370. However, based on the current trend, we expect improved performance in 2005 with an EPS in the range of 3.90 to $4.10 excluding special items for the Company. So we're encouraged by that. So now I'd like to open it up for questions. And thank you.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of David Raso with Citigroup.

Hi, good morning.

Hi, David.

The question -- obviously, the margins were particularly important this quarter given how much they improved. The first quarter you gave some color on commodity costs versus price recovery. I think you noted in the first quarter the steel commodity costs year-over-year hurt you about 200 to 250 basis points or about $33 million and you recovered about half of that with price. What was the relationship this quarter and what do you expect the next couple quarters?

David, it's Phil. The cost increase year-over-year I think it is still in the 2% kind of range. We started to get some increases last year in the second quarter, but it still characterized the cost impact around 2%. We believe that we're about even on the price recovery of that 2%. And I would expect that we would see some favorability as we go to the back of the year.

The favorability, could we get as much as over a couple hundred basis points if your costs stabilize here and what you know about what's in your backlog already shipping at higher prices?

Well, I think our -- the backlog is moving toward higher prices clearly. I also think, David, you could get a beat in the second half of the year, but what we're a little uncertain about is what other commodity prices or other component prices may go up. I think that we're at the inflection point basically right now and that it's quite possible we'll have pricing that exceeds, in some of our businesses, cost increases. But as I mentioned on the AWP side of the business, we still expect some additional costs to flow through in 2006 and consequently this is why we're initiating some of the pricing changes now.

That's my related question. Aerials are still 35 or so percent of your total operating profit, so your comments about how you're changing your pricing structure is pretty significant. How should I be interpreting that when it comes to -- while the comment was about product line, more common pricing strategy, but when it comes to channels-to-market clearly there's a distinction general between selling to the rental houses and nonrental house channels. Is there a change in your philosophy on the pricing differential between those channels?

Well, I wouldn't phrase it as a change in philosophy between the channels, David, as much as I would say there's some clear things that we can do as a company to mitigate pricing leakage that takes place commonly across our Company and [indiscernible] probably across the industry. We as a company, as you know, have been pretty aggressive with our pricing and as a tactic in some of our businesses, that's probably going to continue. However, being more diligent and having better processes and at this time when the market is improved, there's a lot of pricing leakage that we think we can eliminate by training our organization and having more capable pricing planning across our organization than we've had.

The first place we implemented some of this was at AWP because it is a rental channel-focused business and the customers are large and also our pricing is quite pronounced between customers, one customer type versus another and we price off of a price list that we then discount. But this same approach takes place in virtually all of our other businesses, so we wanted to take some of that learning to those other areas.

The reason I bring up Aerials, of all of your divisions where kind of where the rubber meets the road on your comments a couple quarters ago about, you're more focused on margins right now than squeezing out every bit of unit volume growth. Is that still a fair statement when I looked at '06 trying to model out margin versus sales? Is this still a focus of, we're going to get the margins up even if we have to maybe forego a sale or two? I think aerials is where it's a great example of, are you going to focus more on the margin than the unit volume growth?

Bob, do you want to comment on that?

Yes, David. I think some of both. I mean, obviously, the market is quite buoyant and we're being prudent. I think our competitors are being prudent and we're making sure that we can get the additional margin from the additional volume to make sure it's worthwhile. So we're being prudent on our investment and prudent on our pricing.

Thank you very much.

Thank you.

Your next question comes from the line of John McGinty with CSFB.

Hi, good morning.

Good morning, John.

If we look what's -- let's look for a second at the Construction Group, we're looking at a 27% increase in sales and we're looking at that in businesses which traditionally in the mobile crushing and screening, the scrap handler, the heavy stuff, have been the higher margin businesses. You just answered David's question and said, you are more or less recovering the cost with prices. If I look at a 27% increase in sales and look at recovering your costs with a slightly positive mix and I see no improvement year-over-year in the gross margin, in other words, 15%, 15%, then I would be really disappointed. Is currency really hitting us or hurting us there? Or if not, I mean, look if the 27% increase with the costs recovered and positive mix and you don't get any gross margin leverage, are we not expecting any? I mean, is it all going to come in the SG&A? Why shouldn't we be terribly disappointed when we look at no improvement with that kind of a sales gain?

John, it's Phil. Some of the impact year-over-year is related to FX. The way we have our hedging program set up quarter-over-quarter we ended up with a transactional gain from our hedging last year and basically a slight loss this year.

How much is that swing year-over-year?

Approximately $8 million.

So, in other words, that last year's gain, this year's loss, the net of those is an $8 million hit?

That's right.

Okay.

And John, some of our European operations did experience a runoff of long-term steel contracts that really did hit us in this quarter as well.

So you're saying, when Phil talked about steel matching, prices matching costs, that might have been for all of Terex, but for example in construction, it might have been a negative and it might have been a positive somewhere else?

Probably, yes, John.

Okay. And then as the follow-up, almost the same question when we look at cranes, again, you see a 23% increase. You see only a slight increase in gross profit, 12.4 up to 13.1 and you see SG&A going up. Is the bad debt expense that you were talking about and the increase in the profit sharing, are those big numbers? Are we talking about 3 to 5? I mean, how -- can you give us some order of magnitude? Because again, at some point some of us are just going to write-off the Crane business and say it's never going to get better. But at least help us to understand how much of this was nonrecurring in that.

John, it's about 1 percentage point negative impact in the second quarter on the S&A items that you mentioned.

Those two items together?

Yes, that's right.

And I don't think you should write-off the Crane business because several of our overseas operations are really performing very well. And I think we're about to hit an inflection point in our North American business with the kinds of changes we have under way. We've had to basically change an entire supply base for our Waverly operations, and that's had a pretty -- it's taken time and it's been, you know, taken a while, but I'm encouraged by what I'm seeing.

Well, just as the one -- the final follow-up, you talked about new a management, you talked about sourcing, but then you also talked about going to a second shift. Is the problem in cranes that you're not getting them out the door? I mean because that's what's implied by a second shift. Or was it that you were working so much overtime that there were expense -- I mean could you -- I mean, it doesn't really square that the margins are no good so you're putting a second shift on unless the issue is you can't get enough product out. Could you kind of talk to that issue?

Well, it was a number of things. For a while it was lack of availability of the high-tensile steel, which was going to another place in the world. And our backlog has increased. We took price increases on our backlog. We changed our supply base to move it to a place where we could get material and get it on time at a lower cost. And now the backlog is high in North America and we believe that adding a second shift will be crucial for us to get the products delivered to the customers at a time when they want them.

Okay. Thank you very much.

Your next question comes from the line of Dean Cross with Hearts Care Medical Association.

Good morning. Could you comment please on your healthcare costs and increment between comparable periods last year and this year on what you're going to do in the future for minimizing costs and insuring high quality care -- healthcare for your employees?

No, we usually don't disclose our healthcare costs or that line item of detail relative to our cost structure. Obviously, healthcare is a critical issue for us and for our employees, and we have very good programs for our employees and have been continuing to improve them and examining every element of the cost. Obviously, all U.S. companies are paying attention to healthcare costs and we're no different. But we will disclose our trends to our employees at the time that we renew those healthcare programs each and every year.

Thank you.

Your next question comes from the line of Andrew Obin with Merrill Lynch.

Hi, good morning. Could you talk a little bit about the trend, I mean particularly sort of separate what's going on in North America, how much visibility you have in 2006 and also talk about Europe which is a key market for you?

The overall trends, Andrew? That's what you mean?

Yes, just the trends in construction and just separate North America and Europe.

Okay. Well, North America has been strong. We expect North America to continue to be strong. The heavy equipment is generally stronger in North America than the compact construction equipment as I've indicated. The rental oriented equipment continues to be strong as -- basically we're in a situation where rental companies need to refresh their fleets from significant purchases that took place in the late '90s, early 2000. So we expect over the next several years that the North American business remains very positive. We have an increasing population. We have a need to build infrastructure. In this country the highway bill is a good start. So, I think the underlying trends for North America remain quite positive.

Turning to Europe, I think Europe is a lot harder to handicap. I think we've got lower overall demand for products sold in Europe. We have slower growing economies as you well know. On the other hand, we have significant growth taking place on the Eastern side of Europe. We have increasing demand for products in that part of the world. We also have European operations at Terex that have done a good job in exporting their products outside of Europe to the Middle East. The Middle East is a general area, a strong consumer of construction equipment, and has places like Dubai that are having explosive growth. You have equipment that is supporting the activities in and around Iraq. So generally speaking, you have business from our European factories that have been strong, but a lot of it has been exported outside.

And, of course, we can't forget about Asia and that we're selling equipment in Asia. Probably we'd love to be selling more equipment in Asia, but it has been a good market for us. And Australia has been a great market. Australia is a great market for mining equipment.

How should I be thinking about the impact of the change in exchange rate sort of versus the weakness in Europe? Do you benefit net/net? Do you benefit more from the currency move? Or is Europe big enough just to -- because I have been thinking that if the currency continues to go down you lose the benefit from the currency move because you're selling to North America, will offset weakness in Europe? Or is Western Europe is big enough that it doesn't -- that that's what's really going to drive the performance of the European operation?

Well, for any particular unit individually, it probably has a meaningful change. But for the Company overall, I don't know -- Phil, it's probably less significant than --?

It's less significant given the way we weighed in our hedging program in terms of the transactional and that.

So basically, if I'm thinking about the European operation, it's the environment in Europe that will be driving it versus just the currency by [indiscernible]? That's going to be the primary driver because you're hedged?

Well, if you tell me what happened with the currency long-term I can tell you how to plan for it at this stage. But -- and I don't mean -- it is hard to handicap and for a particular factory or two, it will have a meaningful issue. Okay? If the pound weakens, then it will help our U.K.-based factories that sell into the United States, but on the other hand, it will hurt our Genie operations that sell from Redmond, Washington into the United Kingdom. And then at any inflection point because we have that hedged you're not going to see much change. Okay? So that's -- I think that's about the best answer we can give you.

No, no, that answers it. And just the final question, is the mining business, particularly the truck business, is it now sort of solidly, we just decided to keep it and -- or are we talking to outside parties about maybe different arrangements about that particular part of the mining business?

Hey, we've got a great truck. We've had a great truck. It has a customer following that's pretty significant. We have a cost structure in the truck that we'd like to see changed somewhat because we're dependent upon a couple of suppliers. We're working with those suppliers to help us lower the cost structure. But I think long-term we're committed to the truck business at this point in time from what we see. It's expected to be a strong market for several years and we're not going to walk away from that.

Thank you very much.

Your next question comes from the line of Todd Ousley with EIS.

Hello?

Todd, your line is open. There's no response from that line. We'll go to our next question. It comes from Gary McManus from JPMorgan.

Good morning, Ron. And great quarter.

Thank you, Gary.

Hey, I'm just looking at the backlog and while it's up 50% year-over-year, it was down about 13% or $200 million sequentially, looking at the first quarter '05 versus the second quarter '05. And last year between the first and second quarter the backlog actually went up 15% sequentially. So how should I interpret this? In particular, I saw construction backlog between the first and second quarters of '05 went down 32%. Are orders slowing? Was the backlog too high to begin with? Just give me some -- how I should be looking at that.

Sure, Gary. Look, I think the best way to look at it, given the fact that our business is seasonal, is our comparison year-over-year. The sequential issue is not a surprise. Our second quarter is almost always our strongest quarter. It is the quarter when rental companies want their equipment. It is the quarter when construction is highest in terms of its activity. It is the quarter where you have three full months of business, April, May and June as opposed to June, July, August, September where people are on vacation at different points in time, particularly in Europe. So we're not at all surprised by the decline from the first quarter backlog. But we're encouraged by the fact that it is this high. I could not imagine a backlog getting higher than this to be honest with you at this point in time because I think it would then mean that we wouldn't be able to supply. I mean, you just can't flex your business 50%. And if you think about the size of our Company today, where it is, we've done a remarkable job flexing our Company nearly 100% in a two-year period. So, backlog-wise, I don't think there's much to be concerned about.

Well, I mean, just looking at, let's say, construction in particular, sequentially between the first and second quarter was down 112 million. If I assume -- I don't know if that's nonrecurring. You're not going to be able to have the backlog drop by that amount indefinitely. I mean instead of doing 605 million in sales, if you take the 112 out, it would have been a lot lower and less growth year-over-year. I mean am I doing this wrong?

Well, your arithmetic is correct, but people order equipment and expect a lot of the construction equipment to be delivered in a short period of time. The construction equipment backlog -- and to be four to eight weeks. Colin, do you want to comment on that?

The only thing, I guess, I would add is that during basically 2004 our lease payments did continue to extend in some products and they were causing [indiscernible] greater than six months. And I think what that did was it forced many of our dealers and customers basically to make sure that they would get availability on and replaced [indiscernible] placed orders. And we've worked hard to reduce the lead time back into that six to eight week space. And I think there's a much higher level of confidence now that we can meet end-users' requirements, and therefore, I think that's why we're seeing it, if you like, a reduced in theory. But in practice we have a very, very strong level of activity, pretty much across all business units and most markets.

Okay. I think I got that. But I guess you don't think these orders are slowing? Because people are ordering in advance to price increases, and therefore, you had very strong backlog. Is that part of it?

Yes, I think there was certainly within the crushing and screening business, historically we have given notice of price increases and that again has tended to make our dealers place significant forward orders. Again, as we're looking at more common processes across the group, then I think that if you like buying behavior is changing somewhat, and as I say their level of -- as our customers have become much more confident. Particularly, in compact equipment, we [indiscernible] delivery typically needs to be within several days because we fill so much [indiscernible] to that [indiscernible] channel. And in the first place, they are now basically ordering their requirement versus ordering based on some theoretical demand in the future.

Okay, thank you.

Your next question comes from the line of Scott Mackey with Robert W. Baird.

Good morning, gentlemen.

Good morning, Scott.

I want to make sure I understood what was said about the financial statements, the 2004 financial statements being filed by August 15th. Do I understand that correctly?

That's our expectation, yes.

Okay.

2004 and prior.

I'm sorry?

2004 and prior. So the 10-K for 2004, the Q for third quarter 2004, and 10-QAs for first and second quarter 2004.

Okay. So that would include the Qs -- I'm sorry, what about for the first and second quarter of 2005, do you have expectations for filing those?

We will file those shortly thereafter. That's our current expectation

Okay. And then I want to follow-up on some of the commentary about price increases in relation to steel costs. It sounds like you're still -- even though it's a net -- about net parity, it sounded like in construction maybe still a little behind. Wondering if there are some other segments where you're still a little behind in terms of price increases in steel costs and then which segments might be a little bit ahead in that respect?

I think, Scott, you basically answered the question for me. I mean, that's pretty much where we are. I think generally speaking, we feel we're at an inflection point. We priced to recover our cost increases. We expect more cost increases, but probably less than our pricing overall as a company. So we expect our margins to improve. I mean, the bottom line here is if you put this in a continuum of about 18 months, what took place was the market place recovered faster than we expected. Costs went up faster than we priced to do recover. We reacted, taken our prices up. We think costs will come down or the rate of increase will slow and our pricing will have recovered and probably exceed the cost increases overall. And then we will be able to fully lever our increased size and achieve the 10% operating margin goal that we set out to achieve a couple of years ago.

Okay. And then one follow-up question, if I may. Previously, I think we talked about a 6 to 7% operating margin target for 2005. Are we still talking about that level of operating margin? And what do the sales increase forecast baked into the new EPS forecast range? Thanks.

We continued to -- to we continue to look at a 6 to 7% operating margin overall. We're probably a little bit above the midpoint of that and we expect revenue to be in the range of 6 to $6.2 billion. It's probably closer to $6.2 billion.

Thank you very much.

Your next question comes from the line of John McGinty, CSFB.

Yes, just a follow-up. If we look at Aerial Work Platforms, I'm a little bit confused because you said that -- in answer to that question that you were a little behind on construction and about where you wanted to be on everything else. And yet again we look at a 46% increase in Aerial Work Platforms and at the same time your gross margin actually went down. And again, you talk about cost pressures there. So is it in Aerial Work Platforms that we're also losing out on a cost/price or are they out of capacity? Have they passed the point where incremental margins are going up and they're actually getting detrimental because the fixed costs are rising faster? I'm just kind of surprised to see the gross margin on that kind of a sales gain, to see the gross margin go down unless it's a whole cost/price issue that's out of whack in Aerial Work Platforms.

No, it's not the whole cost/price issue, John. As we stated on our first quarter call, what we've done in AWP to keep up with this tremendous demand is we've hired an incredible number of people. The training and absolute level of productivity for those people we've had to invest in. So obviously we had some start-up costs associated with that that contributes to that.

The first quarter gross margin at AWP was slightly below our expectation as we carried over 2004 pricing into 2005, but we think that was clearly behind us. And, in fact, if you look at the margin quarter-over-quarter in AWP, we went from about a 9% operating margin to a 13% operating margin in our AWP business. The facts are, though, that this business still has some productivity opportunities because of the large number of employees that we've added. And we expect some additional costs to take place as we look out through the end of this year given the strong demand in the sector, which is why we're making the adjustments to our pricing plan and simplifying our pricing as we look at 2006.

So are you saying, though, that on a year-over-year basis, I mean, because as you said seasonality makes sequential somewhat tricky. If we're looking at a year-over-year basis, that cost [masked] prices and the point and a half deterioration in the gross margin is all a function of the lack of productivity because of the training? And is that a good measure, a point and a half of sales as a measure of the costs of training? And if so, as those people get trained and everything else is constant, you should get that back in the second half. Are you expecting that?

Well, why don't I ask Bob to comment on that.

John, I think we still have not fully covered or caught up with the costs that have come through. And as we look forward in the six month -- next six months, we still have some increased costs over the comparable periods of last year. So we should get some productivity gains as we grow over 700 new employees are integrated into our system. But we still do have cost pressure and we do see some deterioration of margins going forward for the rest of the year on a comparable basis versus last year, which we're trying to get back in terms of pricing and price adjustments going forward for the start of 2006, as Ron said at the start of the call.

And then just as a follow-up on that, you talked, Ron, about leakage and it's pretty easy to understand price leakage when you're selling through distributors. It's less easy to understand leakage when you're selling to a large rental company. In other words, that's a price that's negotiated and whatever price you negotiate are set. Where does the leakage come in there? Is it at the negotiating stage that they can't hold the price or how does -- I mean, how does leakage work when it's a direct sale to a large rental company?

Bob, do you want to comment on that?

Yes, a lot of the large rental companies have annual agreements, so the leakage would come at the time of negotiation of the annual agreement. But then there are -- a significant amount of our business comes from both international customers, as well as smaller companies. So there can be some price leakage. And what we're trying to do, John, is take out a lot of the complexity out of our pricing and some of the individual negotiations of transactions that take place in our industry with a more simplified common approach to the pricing philosophy of the business. So there is transactional leakage. There is situational leakage. There are opportunities that we think we can improve on and do a better job of serving our customers and being consistent in our pricing across all sectors

So in other words, to put it simply, if two of you have 80% of the market, the point is you're going to put your prices up and hold them and in answer to the question earlier, if that costs you a little bit of share, which it shouldn't because both of you should want that, you should be able to get the prices if you just stop giving it back?

John, we're not speculating about what our competitors are going to do.

Well, no, I'm spec -- asking what you're going to do.

Exactly. We have said what we want to do and I think you understand it very well. I also wanted to come back to the guys here that have given me kind of some commentary about manufacturing spending at our AWP business. And manufacturing spending was up like 59% and our absorption was up 23%. So we lost probably 2 points in just the catch-up cost of having to get those factories up and moving and training new people. So that's part of the opportunity in this business, also.

And then one final question. On the Asphalt Plant business, lovely business that it is, it's all well and good to say that your customers have been -- buyers are waiting for the recent passage of the highway bill. I mean, they've been waiting for 30 years for that. But I mean the point is, do you actually have people that have either placed tentative orders or said they're going to place orders or are you just hoping that the asphalt plant business is going to pick up?

Well, we know hope is not a strategy. That much we know. But I think -- well, why don't I let Chris Ragot answer that. He's closest to what we have heard from our customer base.

Yes, John, what we're seeing domestically in the North America market, it's quite stagnant right now. But we are encouraged with the recent developments in Washington on the highway bill and we do feel talking to our customers that this was psychologically very important for them. So we do see the future being brighter in that arena in the North American market. But we are seeing, and we have been seeing some growth in other areas of the world, in Latin America in particular, we're seeing significant growth in our asphalt plant business there. And we've seen some opportunities overseas in other parts of the arena with our batch plant business. So, although, domestically it's been stagnant, as of late, we are seeing some growth opportunities, and particularly, outside of the North America market.

Which you're making it in Oklahoma City and exporting or you're building them overseas?

We're building it -- some of those asphalt plants down in Brazil. Where we have an operation.

Thanks very much.

Your next question is a follow-up from the line of David Raso with Citigroup.

David?

Can you hear me? This is David.

Yes.

A couple quick questions. On capacity, I know it's a hard number to really pin down. But let's say you are at 6.2 billion of sales this year, just hypothetically throw out a 20% growth rate next year, I know it's a big number. I'm just trying to get a feel for where you think you are in serving potential demand the next year or two. How would you characterize the Company's ability to serve, say, a 7.5 billion revenue base?

I think, give us a few months and we'll get there. This is a company that is extremely agile. We have the fixed plant to be able to handle it. We would need a little bit more work force in a number of places. And we would need a supply base that would support it, which I think generally has happened. So I think a 20% increase is something that seems a lot more achievable from here than maybe if you were to have asked me that question could I get an 83% increase in 18 months, I would have been a little bit more skeptical, but I think we've gotten it.

Well, with that said, we haven't seen the CapEx numbers in a while. Phil, can you give us an update of where we stand on CapEX?

Sure, yes, we're still trending towards the 1% of revenue range or less, I think we said 55 roughly for this year was our plan. And we're on that track through the first half of the year.

And probably that includes some of our IT investment, also.

And regarding the bank waiver, where do we stand on that? I know last I saw was through June 30th. What date has the waiver been extended to, assuming you have gotten a waiver?

August 15th, David.

Okay. Should I take that -- the reason I ask the question, because if you said September 30th, the August 15th date on the filings would have sounded a little softer to me. To have the extension that exact on the 15th, should I read into that a higher level of confidence in this date you've given to file than the other dates you've given in the past. That before you said maybe by the end of the first quarter, end of the second quarter. Is this August 15th date given that waiver date a lot higher level of conviction?

Well, look, that would be speculation. I think what you should take as our words precisely as we said they were, and that is, you cannot give assurance but it is our plan to file the documents before August 15th. I think from everything we know sitting here in the 4th of August, that's our plan. However, we still have 11 days between now and then and it's a complicated process and has been a complicated process. But I think the thing to take away from this is that we are really nearing the end. We wouldn't be saying this if we weren't feeling like we were near the end and that the conclusions are no different than what we had previously stated

And last quickie, tax rate. Phil, from what you said earlier about the statutory rate being near there, would it be appropriate to use 35% for the back half?

I indicated 35% for the full year, is what I've got, David.

So maybe a tad above 35 in the back half?

Potentially.

Yes, okay. I appreciate it, thank you.

Your next question comes from the line of Charlie Rentschler with Foresight Research Solutions.

Ron, what have the second quarter results done to your confidence about meeting the '06 goal of 10% operating margins?

Yes, Charlie, you and I should talk maybe in between the quarter, too, about this thing. [Laughter]. I think we're on track, okay? And just -- the second quarter is consistent with where I would expect ourselves to be. And as I said the last time, I can't really say at this stage whether 10% will be the full-year operating margin in '06 or rather we would achieve that rate during the year. But obviously, there's a big benefit to us. You would take the increased revenue and that rate and we have -- and a company that is reducing leverage and those are all nice trends for us.

And just a follow-up, the impact on interest expense next spring from refinancing the 10 3/8 notes -- well, I mean, are you going to refinance them or pay them down? Or what can we -- what do we need to assume about what will happen to interest expense?

Charlie, our expectation is that we pay those down with cash. So that would be a takeout as opposed to refinancing.

Thank you very much.

Your next question comes from the line of Joel Tiss with Lehman Brothers.

Hi, guys, it's Henry Kirn in for Joel. Question for you. With the Aerial Work Platform business, do you see the demand as currently being still replacement in nature or is there some fleet building going on on top of that?

Bob, do you want to answer that?

Henry, we're seeing the replacement as continuing to be strong, but we are now starting to see growth -- because people are seeing good jobs on a worldwide basis. So we are starting to see growth CapEx from many of the key accounts and companies.

Okay, thanks. I guess my unrelated follow-up question is for the Utility business, what does it take to see improvement in this business? I know you say you see improved order flow in the second quarter. What would you see -- what would we need to see for that to carry through into '06?

Chris, do you want to answer that?

Yes, Henry, operational efficiencies within our organization is a priority right now. I think from an external point of view, we also have the Energy Bill that is also enjoying some good times right now on Capitol Hill. And we're seeing -- we're hoping that that will be an infusion of money especially when you're talking about the electrical grid in North America and the amount of money it's going to take to upgrade that grid itself. So that is going to infuse some money and we're expecting some positive results in the market place because of that.

Okay. Thanks a lot, guys. Good quarter.

Thank you.

Your next question comes from the line of Robert Marcin with Defiance Asset Management.

Congratulations, guys on an excellent quarter. You would think from the tone of this call that we're reporting recessionary results. But excellent quarter. Listen, would you prioritize the use of free cash flow say over the next two years? I understand there's going to be significant debt paydown. But after that is there a predisposition for starting up the deal machine or repurchasing stock? And a personal question, I would like to request a moratorium on measure transactions until we hit that 10% operating margins. Any chance I can get that commitment out of you, Ron?

What you'll get is a commitment to me to make the best decisions for the shareholders and to try to achieve 20% return on invested capital across the business cycle. And I think in doing that, that becomes a metric for all business decisions that we make. I think it would be wrong to make an individual metric, the key measure for shareholder value creation.

I think the deal machine is a bit looking backwards, looking forward I would say you're going to find a company that wants to broaden its footprint; that can broaden its footprint; that will look at the alternatives between stock buyback, dividend and investment in new businesses as just that, business decisions that should be made with the shareholders' interests at heart. I do think we have a competency in acquisitions that has not gone away, and I think that this Company will continue to look at those acquisitions as a method of growing and as a method of enhancing shareholder value. So, I hope I didn't avoid your question. I didn't intend to, but I wanted to put it in somewhat of a context.

On a different topic, is it fair to say that the -- there's some consternation over the Aerial Work Platform business, so I think you're doing tremendously well and the margins are as high if not much higher than your main competitor there. Is it fair to say that that's the only business that is operating at what you feel is a normalized margin level because of all the issues? And regarding that division, over the long-term, are you seeing any incremental growth opportunities particularly in Europe and Asia as far as being able to pump Genie product through your existing distribution relationships? And could that business enter a period of secular growth because the rest of the world is far behind the U.S. in utilization of Aerial Work Platforms.

I'll ask Bob to comment on that in a second. I'll give you my two cents first. I think every business has its own dynamic. Its own competitive framework. And I think while that business, our AWP business is clearly performing very well, very well relative to the competitive dynamics and just very well relative to our ownership and we're happy with that, the potential for improvements there on margin and to offset cost increases are still pretty significant. And furthermore, you hit on an interesting comment about the relative development of AWPs across the world. As economies develop their ability to be interested in a product like the AWP product is clearly proving, so I think secularly, this business has good run way in front of us. But Bob, do you want to add to that?

Yes, Ron. Robert, we see good growth available on a worldwide basis. Most of our markets are strong to improving over last year, so we do see good growth relative to AWPs. We've also, as being part of the Terex family of companies have taken on telehandlers. So the cross-selling opportunities are a little bit in reverse where as we are selling Terex products, and other light construction -- Terex Light Construction, Terex Load King Trailers, Terex Telehandlers into the rental channel. And that's where a lot of the cross-selling penetration has come different than as you proposed cross-selling in AWPs into the Terex distribution system. So we're getting more penetration with a broader platform of products through our rental channel focus and sales approach.

And the level of working capital that we maintain in this business is really pretty remarkable. So the net/net is the returns on capital are pretty significant. And it's a good thing for the rest of the Company to aspire to.

Excellent. Thank you very much. Great quarter, guys.

Thank you.

Your next question comes from the line of Martin Sankey with Neuberger Berman.

Okay. A lot of questions have been answered. But I think one of the things that would be helpful to us might be to -- in the context of some of the numbers that you've given us, such as, revenues in the 6.0 to 6.2 billion range this year, the earnings guidance, and the fact that there's an awful lot of cross currents between the seasonal and the cyclical right now. Could you kind of give us a feel for how the third and fourth quarters are going to play out relative to past norms?

Yes, just in general, what I'd say is we expect both of those quarters to be about the same relative to earnings per share. So pretty much -- the tempo is a little bit different in that the third quarter ends up being all the action in September because of European vacations and the way the business ends up, so it's a bit hard to handicap tempo-wise. And the fourth quarter ends up being none of the action in December, at least that's Terex's history. Whereas the other construction equipment companies tend to sell a lot at the end of the year because we don't have a captive finance company, and distribution that can be loaded readily, we tend to have a weaker December than others.

Okay, but you would say the quarters should be about the same in terms of earnings per share?

Yes.

But rev -- and historically, revenues in the fourth quarter tend to be a little bit lighter than the third quarter.

I would say at this stage we're looking at pretty balanced revenues. Okay?

Okay. And getting into the margins, last year you had this huge headwind from materials, so we should you see significant improvement in the gross margin as we roll into the second half?

I think we've given you, Martin, our margin guidelines generally for the year. And that would play out with some improvements, but again, I can't give you a comparison versus the fourth quarter of '04.

Right. Okay. Thanks.

All right.

[OPERATOR INSTRUCTIONS].

I think we'll take one more question, Judy.

Okay. And we'll take that question from Alex Blanton with Ingalls Snyder.

Thank you. Could you go into more detail on what the increased costs are in the AWPs that you see coming up for 2006? What part of the income statement are they in? What are they?

Bob, do you want to comment on that? I think it's just general cost increases and -- but I don't think we want to be specific about any particular component types.

Yes, it's somewhat on the component side year-over-year Alex and some general things that we were able to negotiate longer term contracts on that are now coming due, so --.

We're talking of running off long-term contracts; is that it? On steel and this sort of thing that you've been benefiting from so far?

Yes. Some of those type of things, yes.

Rather than buying in the spot market, you've had long-term contracts and now you're going to have to renegotiate those? Is that what we're talking about?

There's a little bit of that, but just -- we're still seeing some general overall cost pressure and we have not fully recovered from pricing the margin year-over-year.

Well, I understand that. But you said your costs are going up so you're going to have to do even more catch-up.

Well, Alex, I think it's pretty simple, and that is, we're sitting here in the middle of the year, revenues are good. Backlogs are good. Our suppliers understand it. And they're going to be taking their prices up as they did historically. So, I mean, our suppliers are not foolish. And some of those suppliers supply both our main competitor and ourselves. So in the interest of sharing profitability, they will share increases and we will need to offset them. It is as simple as that.

Okay. Second question is, on the lean manufacturing you talked about in several of the divisions, could you just generally describe what you're doing there? What the structure of that program is? Do you have an overall corporate group that's driving it? Do you have a manufacturing czar who's out there training people and so on?

Okay. I'll give you a couple of sentence commentary on it. We introduced at the beginning of this year the Terex Business System. That system is comprised of a number of elements that lean manufacturing is one of the core principles of that business system, but it is not the only element of it. As you probably know, Genie, when we acquired it, had a well-developed culture of lean thinking and Toyota production style management. We have built upon that. We have hired tens of people that have that experience and placed them in each one of our different organizations. We have a leader here at corporate that is well-versed in the Toyota production system, and it's now the Terex Business System, that is coordinating that activity across all of our businesses. But this is a journey and it is the beginning of a process that will bind the Company together over time.

So I think it is important that we emphasize that it's a change, but it's also important to emphasize that it will take time. But I think it's based upon fundamental principles of customer intimacy, improved working capital management, superb human resource practices, better planning and deployment of annual activities, a new process for new product development, so it's a pretty significant undertaking as far as the Company's concerned.

Okay, thank you.

You bet. All right. Judy, I think we're done. I want to thank everybody for their interest in Terex and let us know if we can follow-up with anyone.

This concludes today's Terex Corporation second quarter 2005 earnings release conference call. You may disconnect at this time.

Thank you.

Thank you. Have a good day.