Terex Corp (TEX) 2005 Q3 法說會逐字稿

Good morning, my name is Crystal and I will be your conference facilitator. At this time I would like to welcome everyone to the Terex Corporation Third Quarter Earnings Release Conference Call. [Operator Instructions]. Mr. Ronald DeFeo, you may begin your conference.

Yes. Thank you and good morning, ladies and gentlemen and thank you for participating in our third quarter earnings call this morning. With me on the call is Phil Widman, our Senior VP and Chief Financial Officer, Tom Gelston, Director of Investor Relations and Corporate Communications and also available to answer your questions are members of our management team consisting of Chris Ragot for Road Building and Utilities, Bob Wilkerson for Area Work Platforms, Rick Nichols for Mining and Material Processing and Colin Robertson for our Terex Construction product line.

As has been our tradition, I'll make some initial overview comments then Phil will follow up and give you a specific summary of financial performance. Then I'll return to provide some comments on individual sector performances. We will then open it up to your questions. I'd like to ask you to limit your questions to 1 and a follow-up in an effort to get -- give everyone a chance. We'll try to limit this call to an hour or less if possible. A replay is available shortly after the conclusion of the call and can be accessed until Friday, November 4th, 2005 at 5 p.m. Eastern Time. To access the replay, please call 800-642-1687 for domestic access or 706-645-9291 for international. And the conference ID is #1733253. Thank you.

Let me get started. We're pleased with Terex's third quarter performance overall. There are a number of positive areas to highlight and as always a number of opportunities to focus on for improvement. Nevertheless we are making progress on our journey to build Terex into a premiere player in the construction and mining equipment business. Our mission remains the same. To earn our customers' business by offering them a more compelling economic proposition than our competitors.

And our vision is to be the most profitable company in our industry as measured by returns on invested capital, the most customer responsive as measured by research and the best place to work for our employees as measured by employee surveys. Which we believe will be -- we will be beginning -- we are beginning right now. These remain aspirational goals but we are making perspirational progress with diligent efforts on our Terex Business Systems implementation that we've talked about in the past.

In 2004, we began the Terex improvement process. Without recounting the thrusts of these initiatives in detail, we did set some stretch financial targets for industry-leading growth, 6 (ph) in '06 excluding acquisitions, a 10% operating margin and a 20% return on invested capital targets. The third quarter of 2005 is important because as measured by time, we are about halfway there and as I reflect on this point in time, despite numerous obstacles, and some end markets which are stronger than expected, we remain generally on track if not ahead to achieve our goals.

It's now clear to me -- and I think to our employee base -- that we will exceed $6 billion of revenue not in 2006 but in 2005. The markets are better than we expected and our franchises have held their own. Our pre-tax margin in the third quarter was 6.9%, a solid margin for a typically weaker summer shutdown quarter. This is encouraging as our year to date number is 6.8%, a little behind the path I would have expected to get to the 10% run rate exiting 2006.

This is not an easy target to achieve and as a number of cross-currents are at work to slow us down, this remains a key target however. I would prefer to think that it is a question of when and not if. We're facing some supply imbalances and also given the volume -- positive volume some rampup productivity issues as well.

We are on a path to achieve or exceed our full-year target of 20% return on invested capital as measured by pre-tax operating earnings divided by average net debt and book equity. This, we feel, is industry leading. And looking forward to 2006, we are building plans to make a meaningful improvement yet again in this area. The Tatra/ATC joint venture, and to a degree the road-building business in Oklahoma City have been a drag on our performance. I'll discuss this in some more detail following Phil's commentary.

A final overview comment. We remain at the very early stages of a pretty massive integration initiative for Terex. We are using the Terex Business System as a methodology but the foundations are being strengthened and built. We have successfully implemented a sophisticated human resource planning process. Having the correct people talent is fundamental to integration. Next, we are doing comprehensive executive leadership roadshows on business practices following a substantial amount of work on the restatement process and intercompany initiatives.

We will have personally spent a day with the top 350 managers across 10 different locations to personalize the Terex integration and common programs that need to be understood and followed by our management team. We are emphasizing transparency and Terex-first thinking. Our decentralized management history is giving way to a common Terex standard and a set of processes. I think our team is up for this journey, as the benefits are wide-ranging.

As part of this, we are announcing today the promotion of Colin Robertson as Executive Vice President of Operations headquartered here in the Westport office effective January 1, 2006. Colin will lead many operational initiatives ranging from manufacturing to supply chain. There is no better person within Terex that understands both our history, facilities, and opportunities. I congratulate Colin. Now, let me turn it over to Phil, who will cover the quarter in some depth and I'll speak to you following up on that and on the segments. Thanks. 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 macroeconomic 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.

For the third quarter, we reported net income of $54.4 million or $1.06 per share, compared to net income of $46 million or $0.89 per share in the third quarter 2004. Excluding the impact of special items, net income for the third quarter of 2005 was $56.1 million or $1.10 per share on sales of $1 billion 528 million, compared to $47.8 million or $0.93 per share on sales of $1 billion 252 million in 2004.

The estimated tax rate for the current quarter is 34.8%, compared to 6.9% in the comparable 2004 period. Utilizing the 2005 rate for the 2004 period would indicate a 69% improvement in earnings per share excluding special items. The 2004 rate was lower due to discrete items, mainly to the favorable resolution of a jurisdictional audit the release of valuation allowance of certain businesses as their profitability indicated that the deferred tax assets would more likely than not be realized and the impact of a full valuation allowance on the U.S. deferred tax assets not being released until the fourth quarter of 2004.

Net sales for the third quarter of 2005 increased 22% over 2004 due to improving market conditions in most of our business segments. Foreign exchange impact on revenue was insignificant while the acquisition of Redrill at the end of 2004 added roughly 2% to our revenue. Gross profit excluding special items increased to $244 million for the third quarter of 2005 from 187 million for the third quarter of 2004, reflecting the impact of increased volume and pricing actions somewhat dampened by the impact of material cost increases.

Gross margin increased from 14.9% to 16%, reflecting these impacts over the prior year. This represents an incremental gross margin improvement of roughly 21% on the volume change. SDNA expenses excluding special items increased to $138.5 million from $114 million for the third 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 and human capital investments. Overall, this achieved a level of 9.1% of sales, the same percentage as the comparable 2004 period.

Third quarter income from operations, a pre-tax measure excluding special items, increased by 45% to $105.9 million from $72.9 million in the comparable period for 2004. Operating margins increased to 6.9% from 5.8% in 2004. And this represents an incremental operating margin improvement of roughly 12% on the volume change. Our net debt increased in the quarter by $30 million to $763 million, and decreased for the 9 months to date by $17 million. Given the continued strong demand, working capital has increased on a dollar basis.

We ended the third quarter with working capital as a percentage of third quarter annualized sales of 21% which is similar to the third quarter of 2004. We are still targeting to end 2005 close to the 18% level. Cash flow from operations for the year is expected to be in the $200 million to $250 million range. But will be impacted by the variability in working capital due to the continuation of robust market demand.

We will continue to position our balance sheet to retire high cost debt to 10 and three-eighths that is callable in April 2006. I commented earlier on the third quarter tax rate of 34.8%. We expect the full year effective tax rate to be slightly below 35%, consistent with our prior guidance where we indicated that our rate would move closer to statutory rates excluding the impact of discrete items. Our weighted average interest rate on total debt was 7.8% for the third quarter, up from 7.2% for the comparable 2004 period.

Ron, back to you.

Thanks, Phil. I'd like to cover a few initiatives and general business summaries by segment. First, our construction. Revenue was generally strong at $481.2 million, up 15% compared with the prior year. Year to date revenue was up 21%. Operating profit for the quarter was $26.6 million or up 28% versus last year. And on a year to date basis, operating profit was up 34% compared with '04.

The business was strong across virtually all our product groups, with the possible exception of the North American Compact business, where we have de-emphasized this business for the time being due to the strong Euro and pound, making the right business decision to sell these products in more of their home currencies. As you know, we manufacture these products in Europe -- both the UK and the continent. The articulated truck business continues to be strong as well. And since most of the competition is European based, the issue has been less pronounced on shipments to the U.S.

With construction, progress has been made on pricing as we more than offset material increases but we are still not able to overcome currency generally. There is a building process taking place within this segment, and we've made initial steps to merge marketing organizations in both France and Spain between our compact and heavy product lines. Ultimately we believe we can secure better distribution by doing this.

On the product and operations side, we are testing a new crawler-excavator in Europe. And we think that will be ready in the year 2006. This will be a significant product addition done internally via the Terex Atlas team in Germany. Each of our business groups are focused internally on product upgrades and reliability improvements. We've started a process of supplier open houses across the construction business in Europe, demonstrating to the supply base the massive opportunity they have to do more business with us. This should lead us -- this should lead to consolidations and technology sharing.

It's also pulling together Terex as trained team members and other members of the Terex organization are working together to share materials, to share suppliers with the construction team also. This is a start to a multi-year initiative. Turning to the cranes business, Terex Cranes had a positive quarter despite the typical European drag due to summer shutdowns. Revenue was $289.7 million, up 8% versus last year in the quarter.

On a year to date basis, we had revenue of 930.7 million or up 23% versus the nine-month period. Operating profit was $12.6 million or up 59% versus prior year. We've seen a strong tower crane business, a solid all-terrain product line and an improving North American business with current issues more about production and supply than order levels. As you can see, the backlog is solid here at $385 million or up 58% versus last year at this time. Our issues are getting the order out the door.

The Waverly Group in North America faces the largest supply chain and material availability issues within the group. We've added to the leadership team here in a meaningful way, hiring a new general manager for both North American operations -- that is the old American Crane operation as well as Waverly. Doug Friesen comes to the company, most recently from JCB, where he built their U.S. factory. But prior experience included key operational responsibilities with Toyota and General Motors.

Doug is a LEAN-trained executive who in a short time has attracted a new materials leadership team and proved factory management in particular at Waverly. We look forward to his impact on the North American business. At Demag, we have a lot of work to do on supply, where the majority of our suppliers remain from higher cost markets and Germany in particular. We are engaging a supply leadership consultant to help us rework our supply base here.

We've also built a solid Terex business systems team that is just starting to make a difference with LEAN initiatives at the Demag facilities. Overall the crane business is at the beginning of a solid, multiyear recovery. Our biggest challenge is to meet the rising demands, to raise prices and deepen the management talent to truly be able to offer customers a better value proposition.

Turning to the area work platform business and related products, they truly had an outstanding quarter. Revenue was at a record $370.4 million, up 57% versus last year. Year to date revenue was $1.0418 billion, or up 54% compared with last year. Operating profit was $49.8 million or nearly the full amount of the 2003 operating profit -- the annual operating profit was obtained in the third quarter for comparison.

Year to date operating profit at our AWC business is $126.3 million or up 48% versus prior year and as you may recall, we added the Telehandler business, the light construction business and load king trailers to this business segment from our other Terex operations. We are struggling to keep pace with demand in this business and expect this issue to continue well into 2006 as the market is also expected to be strong. Genie has been and continues to be our laboratory for the Terex business system and other process improvements that we are working on for the balance of Terex.

Turning to the mining and materials processing business, they had an excellent quarter also. Revenue was $217.2 million and $636 million for the nine-month period. Compared with last year, it was up 35% in the quarter and 63% year to date. Some of that came as a result of the Redrill acquisition, as you may recall. Probably about 10 points of that year to date improvement came as a result of Redrill. Importantly, the margins have improved nicely in the business, also. Operating margin was 8.8% and the year to date margin 8.1%. Trends for these businesses, we expect to continue to be positive.

The most difficult sector we have is the roadbuilding and utilities and other group, which basically broke even at the operating profit line for the quarter while holding on to some of the meaningful gains that were achieved in the first six months of the year. The basic problem here remains our Oklahoma City operations, where we had a reduction in force in early October of about 70 people. We have not done well on asphalt plants and I think this will continue - and continue to be a challenging operation for us for some time.

We have recently promoted Dale Jones to run this business, and he's done an excellent job with the advanced mixer product line since coming to the company a little over a year ago. We also promoted George Ellis from our South Haven operations to run our Terex Utilities business. Some of you may have met George. He comes from Genie, initially, GE prior, and a number of other areas. He is a lean expert and we look forward to his leadership to help us combine our distribution elements in the Terex Utility business with the manufacturing operations in Watertown.

Also within this sector is the ATC joint venture, which successfully completed the IMOD transaction. That's the Israeli Ministry of Defense transaction. This operation had a loss in the quarter. The financial results of the ATC joint venture have not met our expectations and the compatibility with our JV partner has not worked out. Accordingly, we are evaluating the viability of this venture and this operation may be discontinued in the near future.

Lastly, Tatra had a difficult quarter, as the military business with India has dried up due to currency and cost issues and we expect this business will be slow for the next several quarters. We are examining a few possibilities to implement improvements in the coming months, and we will advise you as we finalize any material plans.

So in closing, we had a strong quarter, but we have so much more work to do at Terex as a company. Our revenue is strong, the backlog is up 56%, margins are improving, and the returns on capital are becoming respectable. As you know, we've taken up our full year outlook again from the $3.90 to $4.10 range of earnings per share to $4.15 to $4.25 per share for the 2005 period.

We've also now disclosed a lot of detail on the restatement process that I would encourage investors to read. A number of material weaknesses have been identified with plans to remediate and they are detailed as best we can in the Q&A section that you can access through our website. We obviously still have a lot of work to do to complete and respond to the SEC which we think will take some time.

Nevertheless, we continue to manage the company for the future and to try and focus on operations and build the solid franchises that we believe are possible. We are, after all, still a relatively young company. Many of you have heard me characterize Terex as an adolescent. We think we've got capability to do good things. Talent development is a fundamentally important area of focus for us. So overall, we're pleased with the quarter. A lot more to do.

And now operator, I'd like to open it up for your questions.

[Operator Instructions]. Your first question comes from the line of Martin Sankey with Neuberger Berman.

Hi. Good morning, Ron.

Good morning, Martin.

Okay. Very strong quarter. Very positive results, but I am curious about one thing. In reviewing the third quarter news release for last year and comparing it to this year's results, there seems to be a differential of about $14 million with respect to gross margin between 2004 as originally disclosed and the current disclosure. Could you give us some insight as to what that consisted of, please?

Hi Martin, it's Phil. I'll give you the answer to that one. We indicated earlier in our disclosures in 2005 that as we were working through our results that we expected operating profit to improve in the third quarter and taxes would be another impact that would be less than what we expected and the rate would be lower in 2004, mainly due to capitalization of variances related to cost on steel. That really started to ramp up in the third quarter time frame, fourth quarter last year. And that's the main difference between the previously reported numbers, I think. I can't remember exactly the date that we disclosed --

I think it was March '05.

March '05

Okay. So this is the quantification of that?

Yes.

Is there anything else, while we are on the subject, that we should be aware of that is starting to be documented now in the accounting review process and sort of reviewing the third quarter of last year?

No, there's nothing else that's significant impacting the third quarter of 2004, last year.

Okay. Thank you.

Thank you, Martin.

Your next question comes from the line of Gary McManus with JP Morgan.

Hi guys. I'm -- kind of along the same lines, what is the fourth quarter a year ago comparison and have you made changes in the operating profit by segment results?

The fourth quarter '04, again, the period is still open. We're not really going to get into more detail on that until we complete the process.

So we don't have a year ago comparison? You can't provide a year ago earnings per share comparison?

Well, we've indicated in our prior guidance that expectation that we had at the time, excluding special items in the 2.40 to 2.50 per share range and also the impact of the tax valuation allowance reversal is very significant in the fourth quarter of last year, which we said is about $196.5 million positive. We're sticking with that disclosure.

Okay and the Q&A I thought was very helpful, but one thing I was hoping to get answered is, when do you expect to get audited financials? I mean I think a few times this year you were expecting, I think the words were nearing completion, and you're going to file in the near future and I think in early August you said it was going to happen on or before August 15, so where do we stand with this?

What we're doing as we've disclosed is we're reviewing certain areas, in particular that are disclosed in the Q&A with a thorough process going back in particular to earlier years in our five-year period that would be in our 2004 10-K. We believe that the agreement we have with our banks provides ample time for us to complete that. It's a thorough process we're going through and we try to disclose as much as we can about the issues that are related to that.

So I guess my question is, in August you thought you would be done with this process in two weeks and now it's still open-ended. What has happened to change that?

Gary, as we've disclosed, we voluntarily met with the SEC. We reviewed where we stood -- Phil did. And I think a number of questions were asked, including certain transactions that had taken place in prior periods and we as a team are going back and diligently looking at those prior periods across a range of topics to make sure we have full confidence that what was done at the time, given the fact that Phil is new to the company effective the end of 2002. It's just prudent that we go back and review those materials, including a whole range of topics.

So we're doing our best. It will get done when it's done. It will get done when it's right.

Okay. Great. Thanks.

Your next question comes from the line of Charlie Shuler (ph) with Foresight Research.

Charlie Rentschler. Good morning, everybody.

We would have figured that our Charlie.

Just to beat the horse just one more time and then I'll go on to a second question, but I believe the end of February 2006 is the new deadline for having completed the restatement process. Is that a date - I mean does that relates to some work plans that there's some detail behind that there's timelines that all come together at the end of February? Or is that just kind of a guesstimate?

That's our agreement with the bank group and it's mid-February is the, I think, time frame.

But I mean is it based on some substance, that there's this amount of work that's got to be done and it's going to take you 3.5 months, that kind of thing?

No. It's based on -- previously we had month-to-month arrangements with our bank and we felt that it was prudent, given that we have an internal work plan to work through -- not necessarily tying out to that date, but to complete it by that time frame or earlier is the way we structured the bank agreement.

And we'll want to do it as soon as we can and I think that will be determined by the work that we are undertaking. I think there's a lot of work being undertaken, but I don't think it's work that can't be done effectively within a reasonable amount of time.

Okay. And then as my follow-up, not to overlook the wonderful job that's being done, but the roadbuilding utility was one segment that was disappointing to us and I know you talked about that in some detail Ron, but in your press release there is four or five things that you cite there as being problems. Can you tell us what are the one or two things that if fixed would really help? I mean, give us some priority there of the problem?

Okay, Charlie, I'll do my best on it. It is a little bit more complicated than one or two things because within each of the pieces there is good news and bad news. I would say, in general our Oklahoma City operations have been struggling, but they have been making progress. And we have got that team focused and I think year over year, they've done significantly better.

So the progress we've made there and the progress we've had at our utilities business has been somewhat offset in particular in this quarter with some of the issues we had on that American Truck Company or ATC joint venture and at Tatra. So the progress on one hand for the actual roadbuilding and utility business is offset at both Tatra and ATC. I think Tatra had a reasonable first half of the year and the back half of the year there is slow as their historically dependent markets of India and Russia to a degree, have not been that positive, as this is a business headquartered in the Czech Republic.

I think we are matching our production rates with demand and I think the ATC JV will not last. We're not happy with our JV partner, so the losses we've had there will not be sustainable looking into the future. So I think we will be able to realize some of the real gains we've had in roadbuilding and utilities, probably more like in early 2006.

Thank you.

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

Good morning, gentlemen.

Hi Robert.

Can you update us on how you came out in the quarter in terms of the net impact of the various price actions you've been taking across the company versus increased component costs, and then could you do the same thing for the crane segment specifically? And then I have a follow-up.

Okay, Rob, I'll give you some highlights related to that. I'd say on a total basis, pricing in Terex, about 1.3 to 1.5 points improvement overall and I'd say supply costs, this is quarter-over-quarter last year to this year --

Right.

-- about an 0.8 of a point decrease. So maybe we gained about 0.5, roughly, total company. On cranes we had a little bit of the opposite. We had pricing that affected about 0.5 positive, but material costs approximately 0.9 negative. So we haven't quite caught up. We've taken several pricing actions that need to flow through here on the back log. Do you want the other ones as well?

Well, as long as you have them, sure.

I think the other one's -- significant one I'd say construction, about 1.0 improvement on pricing and about 0.3 or 0.4 down on cost.

And AWP?

I'd say about 0.5 on price increase and about 0.4 down.

Roughly break even. Okay. And then my other question. You have a very interesting --as I'm sure you're aware -- statistic in your press release in the crane segment, where you note that you have now shipped, have I got the number right from memory, 300 IHI produced Terex cranes since that relationship began in the under-300 ton category?

That's right.

Can you give us an idea of what the geographic distribution of that business has been? I'm under the impression most of it's in North America. And what share of that market you think you are now capturing that or would be represented by that position.

Okay. Well first of all, Steve would normally answer this question, but he's just on a plane actually coming back from Japan having participated in a recognition ceremony with the Japanese of that 300th crane. B ut those 300 cranes have virtually all been in North America. There's a few that have probably found their way to some other markets, but it's virtually all North America. We don't usually talk about individual parts of our product line in market share, but I would say I think we have a very meaningful share in that size class.

Okay. Thanks.

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

How you doing guys?

Hi Joel.

I'm wondering if you could talk a little bit about the free cash flow outlook for 2005 and to the extent that you can give us any ranges to think about for 2006?

Sure. Again, as I mentioned, I'll do cash from ops in the commentary that I had of 200 to 250 for the year. In terms of our CapEx, we're at a roughly 1% or slightly less of revenue in terms of our CapEx position. Cash taxes continue to be in the range of $10 million this year and I think that will give you a feel for the performance this year.

The working capital change is the one that has been dampened from our original plan for this year as our volume is considerably higher than our expectations. I think for 2006 what we've indicated is we're shooting for our 15% of annualized sales at the end of the year and I think our assumptions regarding CapEx spending would be similar for next year. I'm not at a point where we're going to get into earnings guidance.

I think we would also like to just say that we've made a commitment to Oracle as an enterprise system for the company. We think that will add a meaningful amount of CapEx over the next several years. I think we've previously disclosed that, but it's a big job to implement Oracle over a period of time. But we think the benefits will be very strong because it will give us much better visibility to our business across a wide range of areas.

And then the follow-up. Can you talk a little bit about what sort of pricing you have in the backlog, just so we can gage the operating margins for next year or at least have an idea and zero in on the North American Crawler crane business, the outlook for that? Thank you.

I think the North American outlook for the Crawler crane business is probably asked to our competitors, Joel, because they have a bigger share in the larger market in the large Crawler cranes and we have a very small share. But my sense is that the market is generally improving. How much it's going to improve, it's hard for me to handicap.

On the pricing net that's kind of contained in our backlog, I would say the pricing that we have is probably somewhat offset by some of the costs that we expect to get. Although I think we're beginning to turn the corner in a number of our businesses, but we've got a lot of work to do still in this area. Each one of our businesses is taking a hard look at 2006 costs and because of those costs we're implementing some price changes, whether that's area work platforms or -- every one of our businesses.

So I don't want to handicap it at this point in time. I think the '06 margins will be better than '05. How much better? Obviously I've said they're going to be on our way to try and achieve that 10% exiting 2006. But I also said I think it's going to be a really hard target for us to make and it's going to be very dependent upon the kind of cost increases that we get. So better anticipation of margins in '06 than '05. Don't want to ballpark that, though, too precisely yet.

All right. Thank you.

(Operator Instructions). Your next question comes from the line of John McGinty with CSFB.

Good morning, Ron.

Hi John.

Let me follow -- or let me ask the question to follow up on Joel's question with regard to margins in '06. You said you don't -- obviously, I'm not asking for a forecast, but there's an implicit assumption that margins are going to improve somewhat in '06 over '05, particularly if you're going to hit your target of exiting '06 with a 10% margin. And yet you just said that prices are up somewhat but on the other hand you expect costs to be up.

Clearly you had very significant volume improvement throughout '05, you had pretty good incrementals, but nothing that's going to get you to those kinds of levels. So I guess my question is, is currency a major negative or how -- has currency begun to turn around as a negative in that or how do we see -- what factors, other than currency? Obviously that's one question. But then what factors caused margin improvement. I'm not asking you to forecast it --

Okay.

-- quantify it, but what factors are going to be there in '06?

You want to take it?

I think, John, on the currency side and again just to give you a little character year over year, it didn't have much impact on a translation basis. We did have some transactional negatives year over year third quarter versus this year, mainly in the construction segment, but it is starting to --

Can you quantify that, though? A couple million, 2, 3 million?

About $5 million.

Okay.

And, John, now to the real part of your question, a lot of work has to be done within our company at managing our supply base. One of the reasons we have promoted Colin Robertson to Vice President of Operations and placing him here in January is to help not just on the supply base, but also on operational planning, on integration activities, and I think there's a tremendous amount of margin opportunity sitting in front of us.

Not that all that work will get started when Colin moves here because a lot of work has already started and I would welcome, Colin, if you want to comment on your supplier open days that you've had because that's where while we expect general trends of cost increases, we expect to be able to leverage our business better by integrating the company. Colin, you want to comment on that?

Yes. John, your question's a good one and it's well timed. When you look at the underlying year over year performance in construction, then it would certainly lead towards thinking that we haven't made any significant progress in the areas of end marketplacing or, indeed, getting our commodity costs under control. We had the benefit last year in Q3 of a significant currency hedge, which we haven't had this year. And despite that, we have still been able to basically expand our end user pricing and also work hard really through Q2 and Q3 at getting our input costs under much more control.

Ron spoke about the supplier open houses. Clearly, roughly two-thirds of European business for Terex is manufactured in Europe. And basically between end of the first quarter and literally just in the last week we've had the best part of 500 suppliers through three events. And basically from that, not only have we had significant dialog in terms of commodities and anticipated cost reductions or volume leverage potential as we go forward and work smarter together, but also working much lower closely now from a product platform standpoint and how we not only go after volume leverage, but go after technology and other innovative ways of making the Terex and supply chain work much more smartly together. And there's a massive amount of value basically that still can be unlocked between the boundaries of each of our operating business units. And I'm certainly excited and looking forward to it.

Colin, what was the statistic you shared with me we have in, let's say, North America? Like 6,000 some-odd suppliers and only --

Yes.

What is that?

Exactly. And we have -- in Terex Corporation we have somewhere over 6,000 suppliers. We have only around 400 suppliers. We have -- we spend more than $1 million with any one of those single suppliers. So clearly, there's an opportunity to rationalize our supply base. Some of our suppliers have 27 -- the worst one has up to 27 different accounts and different ways of dealing with Terex because they consider Terex not as one company but as anywhere up to 40 or even 50 operating entities. And just by pulling that information together, understanding where we spend the money and who we spend it with gives us the opportunity to have much more meaningful discussions with our suppliers and how we partner going forward.

Okay. John, I hope that gives you a sense.

Absolutely. That was very helpful. As my follow-up question, Ron, you mentioned Terex being an adolescent. I think that's kind of a good way to think of it. One of the things that you have to do at some point is make hard choices. Things are in really good shape and it's all very well and good to say that the ATC joint venture might not be working out and Tatra might be rethought. But how about the bigger issue, which is the asphalt plant business is just basically a lousy business. And why not, when times are good, just acknowledge that okay, not every acquisition is a good acquisition and just kind of like clean house and get rid of all three of them?

Well, John, I have made hard choices in the past and if those are the right decisions in the future, we'll make those hard choices. But I think at this point in time, there are elements of good progress taking place. It is yet an open question relative to our ability to compete and win on the asphalt plant business. And if we come to that determination, then we'll make that choice. But at this stage, we'll take them one at a time.

Thank you.

But I respect your point of view.

Thank you.

Your next question comes from the line of Kent Grain (ph) with Boston American Asset Management.

Yes, just kind of following up on John's question, which is a good one, why don't we broaden this a little bit? First of all, does -- the new highway funds, does that help this division out? And then you might discuss that geographically, too, is this geographically in, say, the growth areas of the country where we see highway and road building?

Okay, Kent, I'm going to let Christ Ragot answer that.

Kent, good morning. Just real quickly regarding the highway bill. Obviously, the future for us on that seems to be very positive. But we will not see that spending at a local level and a state level for quite some time. When that will happen will probably be in the latter part of 2006, but certainly in 2007 and '08 and '09 we will see that money around the country and at that point we feel we will take advantage of it.

Regarding the asphalt plant business, we do have somewhat of a new strategy moving forward and more small portable plants we feel has the ability to reinvigorate our organization a little bit and the marketplace itself. Let's not forget also that we do have a business down in Brazil and they are enjoying some significantly good times right now in the Latin America market. So in North America we're struggling, there's no doubt about that. In other parts of the Americas we're enjoying some positive benefits to the asphalt plant business.

Okay. My follow-up question deals with more theoretically going forward, we're talking about this joint venture. It appears to me that most of the construction companies that I've followed over the years always have problems with governments, foreign governments, et cetera, et cetera, et cetera. They always have a little more clout than the more typical corporation. Does this mean that you will avoid these types of businesses, go into more businesses where you don't get involved with governments?

Well, Kent, this was a complex JV from the very beginning. It's really not the government, but this was dependent upon selling the product to the Israeli Ministry of Defense. And we had an Israeli selling organization called STV, combined with Terex, combined with Tatra. And it's an attractive combination, but all three parties have to see the world the same way. Now that we own Tatra, it's easy for Tatra and us to see the world the same way. But the way the JV was put together, there was a level of equivalency between the three that causes us to have to work as almost in 100% concert. And so we just can't continue to operate that JV that way.

It does call into question somewhat our ability to compete for the LVSR business, which is a big U.S. Marine Corps business, but so be it. If we can't make money on LVSR, we can't make money on it. I think we've got a great product, I think the U.S. Marine Corps would like the product, but we're not going to push this forward just to generate revenue.

Would closing down this joint venture be a material financial impact on the company in any way?

There's not a significant investment in this venture. There would be some impact, but it's not significant.

Thank you.

Your next question comes from the line of Greg Hyde with Wachovia Securities.

Yes, good morning. Most of my questions have been answered, but just harkening back to one area we touched on a little bit here already this morning having to do with the supply base. You mentioned and I sort of gathered from the commentary that focus in that area really relates to trying to work on your costs -- relates to coordinating with your suppliers. One of the things that I wasn't as clear about was the availability of product and the degree to which your suppliers are stretching to meet your heightened volumes and the degree to which they're sort of having a difficult time delivering components that you need in a timely fashion. Could you just speak to that for a minute?

Sure. I'm going to ask Bob Wilkerson who probably has the largest volume increase in our company to comment on that and maybe Rick also. Bob?

Hi, Greg, it's Bob Wilkerson. Yes, the supply base is -- we're optimistic. They have done a good job of expanding their business over the last 1.5 years and I think they're able to keep up. So, I don't think the supply base will be as limiting going forward into 2006. A lot of the capital investment has taken place and people are more optimistic about their businesses (audio break) for the capacity to (audio break).

Okay, Rick? Rick has a different -- different mix on that.

Hi, Greg. I think from a supply base standpoint we are seeing some selective commodity shortages and we're also seeing some selective pricing. But I think in general, I think the pricing that we're seeing out of our supply base is not what we've seen in the past and I think supply, as Colin talked about, 4,000 different suppliers, our supply base is fairly spread and not concentrated in specific suppliers. So I think we have some leverage there with our mix and how we leverage our supply base.

But at the same time, commodities such as tires will continue to be an issue in the supply chain. Bearings tend to be an issue today, although some capacity is coming on line from a bearing standpoint. And some casting steel supply is still critical and being rationed, but in general our divisions tend to manage through it very effectively. So I think we're optimistic that we can meet the sales and the sales that we're seeing in the business. But it will be a challenge to continue to manage our supply base.

One thing I would like to just say is that because we're not vertically integrated like some of the other larger manufacturers, it gives us a little bit more options because we can source things from a variety of places. Having said that, our opportunity will be to leverage that. And also -- I must also remind you that because we're not vertically integrated, we don't have the same higher or a higher gross margin, okay. So there's a benefit to it and then there's a negative and, as many of you heard me say over the years, we're trying to manage the company with a lower investment overall because we recognize the cyclicality of the business.

Great. Thanks very much. I appreciate it.

Thanks, Greg.

Your next question comes from the line of Steve Volkmann with Morgan Stanley.

Hi good morning.

Hi Steve.

Hey, Ron, I think you said in your comments that you were going to de-emphasize the compact equipment in the U.S. Can you just expand on that, if I heard you right?

Yes, for the time being. We have taken some steps to pull back on that business a little bit, not that it's pulled back a lot. But when you have a choice as to shipping product in North America where the currency is not against you versus shipping to demand in Europe where you're in your home currencies, you'll -- those are good choices to make from a short term point of view. Colin, you want to add to that?

Thanks, Ron. Basically, Ron's explanation is right on the money. We're certainly not walking away from any opportunity from any customer. We have invested significantly, I think, as most folks know, particularly in our North American infrastructure over at Memphis or even Mississippi operation. And year over year, our relative sales numbers will be very close. But where there has been a tradeoff, we have basically been allocating product to customers and to territories where it's made good business sense for Terex.

But there's no risk that you alienate your dealers that way?

We've been very, very supportive of our dealers and we've made significant concessions. We've basically eaten up pretty much all of the currency hut(ph), if you like, Steve, in the last year to two years and we are aggressively working with the dealers to go after the business that will make sense for them and make sense for us. But we're at such an outrageously clear loss-leading proposition of where perhaps there is an opportunity to sell and to grow that maybe the credit profile isn't what we would like, then we're taking decisions to walk away from business like that.

Okay, great. That's helpful. And then, Ron, just on pricing, it seems like you ought to be able to do fairly well. I think you mentioned both cranes and area work platforms you're kind of struggling to keep up with demand and that would seem to be a pretty supportive pricing environment, and yet I think Phil said about 0.5 point positive in both of those segments. And I'm just wondering, is that a function of just trying to get price increases through the backlog or is there something in the market that's keeping you under sort of where we think you might be able to go?

Well, in the crane business, it's a large backlog and the information Phil mentioned was really just in the particular quarter. And in the area work platform business, we have done a lot of pricing work and we'll be -- as we mentioned I think on our last call, we'll be implementing a much simpler pricing approach to the marketplace. McKenzie has helped us study our pricing strategies across the range of our customer types. We're going to rebalance our pricing there, so I think that will result in a more equitable pricing strategy across the range of customers we have, as well as incremental margin to the company.

Although we want to recognize that we still have very large customers that look at our product and have good choices to make buying decisions from other people. So it's a balance and when you're making a decent margin, as we are in the AWP business, we have to be conscious of that fact.

Are any of your -- are any of those other people kind of holding pricing down?

I'd say that -- I really can't comment on that, Steve. I think it's not 100% clear. In the AWP business, everybody's pricing because it's a complicated product line and you have a consolidated customer base. So pricing is more than just the list price. It's discounts that take place locally, it is a range of things, it's the ability to take back used equipment and refurbish it. As you know, JLG has a very large refurbishing program where they take back equipment and that can mask pricing to an extent. So it is -- it's not a straightforward proposition but I think everybody's desire is to get pricing up.

Okay. Thank you.

Your next question comes from the line of David Raso with Citigroup.

Hi, good morning. I'll apologize in advance; I've got a few questions here. First, on the lending group waiver that you got a couple of weeks ago, was the lending group at the time aware of the situation with the previous DFO (ph) resigning? The resignation date appears in the filing last night as August 31st.

I think we discussed that. I can't remember with everyone. I think we've discussed it with the agent, though.

You believe they were aware of it when they gave the waiver?

I'm just trying to think of the timing. Yes, I believe so.

Also, regarding the third quarter restated with a valuation allowance adjusted. The longer term goals of getting the margins up, it appears when you restate the segment, the biggest increases were in area work platforms and also on cranes and a little less so on the roadbuilding. Can you -- I'm not sure if it was -- in the fourth quarter settled, but the base that we're coming off of, I believe that the goals you gave when you first gave the $6 billion revenue goal and so forth, you gave the segment a target, the margin improvement. Can you elaborate a little bit on how the valuation allowance adjustments and the adjustments in general are changing kind of the base that we're thinking about those businesses, having to go from point X to point Y?

And again, you use the word valuation allowance, David, that's really a tax related term that we're talking about. But there's no real change in our thinking in terms of what we have. If you're thinking of the cost variance issue from third quarter '04, that would not change our long-term expectations on the margins.

Yes, that's a quarter-to-quarter issue, isn't it?

Yes.

Well, I'm just trying to think is it -- I mean does it continue or is it a one-time adjustment? For example, the aerial division went from -- I used to think a year ago third quarter was 10.7 and I was just given a 12.5 margin.

Right. Because it's--

That's a pretty big change.

It rolls through the inventory turns is basically what we have.

So essentially did I - not saying for a whole year --

No, no.

-- the margin's 150, 200 basis points on a comparable basis.

No, they even out, David.

Okay.

They even out. I mean the fundamentals over a 12 month period of time even out.

Okay. Also, the issue of filing, I assume the voluntary meeting with the SEC a month or two ago was to kind of get the full blessing and knowing when you file that you pretty much have a clearance from the SEC. Given the issue of having to file the 10-K, at least for one of the last three years, by the end of March to avoid any de-listing, what's the timing we should be thinking about on you being willing to go ahead and file with as much comfort on the numbers as you can and then let the SEC evaluate it as need be?

It's a balancing act where you've got to get something filed by March, I suspect, to avoid a de-listing, with or without full blessing, I guess you were speaking a month ago. Can you take us through that thought process by management? When do we just go ahead and give it a shot and file the statement?

David, let's make sure you're clear. The financial statements are management's statements. It's not something that you necessarily get a blessing for from the SEC. But we will go through our process. When management's comfortable with what we have, we will file our statements.

But can you balance that with, and please correct me if I'm wrong, the March 31st --?

Well, we intend to meet with the New York Exchange later this -- in the month of November basically, towards the end of the period to discuss, update them on our progress. That's not necessarily mandatory, as I understand the issue. It's evaluated in terms of circumstances and we'll keep them up to speed like we have our other constituents on our process.

Okay, that's helpful. And regarding the cash flow, the third quarter cash flow, I understand the working capital issues, but obviously the debt I would have figured there'd be a reduction in the third quarter where you went up 30 million. But you did speak to the fourth quarter expecting to see the cash benefit. Can you update us on your thoughts for full year cash flow and also your net debt percentages just on a cap target for year end?

Well, the cash flow from operations that I indicated in my talk was 200 to 250 for the full year would be the expectation, which is a little bit down from what we had previously said due to the working capital movement. That would -- should result in a couple of hundred million reduction in net debt from where we are at the end of the third quarter.

So, a couple of hundred million sequentially and essentially from like 765 looking end of year--

That's what --

I --

-- yes.

Okay. And one last kind of small issue, but you mentioned the crawler excavator. Obviously, a huge global category for construction equipment, not a market that you've fully participated much in before. Is this, and correct me if I'm wrong, are these Atlas components being built in the Chinese, the inner-Mongolia JV and shipping back to Europe? I'm just trying to feel the competitive cost advantage versus we're sourcing from Daewoo, now Daewoo has new ownership. I mean how big a push is this - and I'll ask this to Ron -- because obviously it's a huge category opportunity if you're really looking to go into this market or is this more just trying to offer it to your dealers?

Well, let me comment, then Colin maybe chime in here. First of all, we have been in Atlas in the crawler excavator business. But we judged that excavator to be too costly and too old-fashioned, more or less, so we put a team to work on updating the product. I think we've got a very good new product so far that we've developed. It is our expectation that a number of those components could come out of our Atlas JV in China, thus lowering the cost and allowing us to sell competitively in Germany and with a competitive product at a competitive cost.

Longer term, it's not clear yet how this would impact our supply agreement with Duson (ph). We just signed that supply agreement up for another couple of years. We think that's a supply agreement which is getting us some participation in the Terex brand in the U.S. excavator market. But we will -- we will take a look at our overall U.S. distribution strategy over the next year or so and figure out just how important the excavator product will be to our overall distribution strategy. So I think I'm answering your question somewhat indirectly, David. Colin, you want to add anything to that or am I pretty much on the mark?

You're right on the mark, Ron. The product that's manufactured in China is effectively, if you like, the legacy design that Atlas built basically in Germany until the end of 2003. The new product is literally a brand new from the ground up product. It does share some of the new '05 series components from a commonality standpoint, which were launched at Boma (ph) last year. It's been thoroughly designed and evaluated in the marketplace.

We've taken a lot of time to make sure we get this product right for all of the reasons that you say, David, as a massive product category that we have to be in and we have to have a product that clearly, as a minimum, meets -- we believe will exceed many of our customers' expectations. It's critical for us from a distribution standpoint because even in Germany, which represents roughly 45 to 50% of our Atlas field excavator sales. Many of our current distributors carry a competitive crawler line and have been literally crying out for a competitive Atlas product, which we believe in performance and in cost we have got there.

I guess to kind of summarize then, before you bought Atlas a few years ago you really didn't participate much at all. With the Atlas deal, we're still largely wheeled excavators more of a European product.

Yes.

This is the first time -- it looks like you're not yet ready to fully commit. We're going full at this category, but especially coming out of China, it sounds like it's the first time we have a real -- I mean firstly from Daewoo was offering the product. If you're actually going to make it out of China with a cost advantage, all of a sudden you have a chance to actually maybe become a real player in this market. At this stage, I shouldn't yet extrapolate your comments to be you're going at it full force, you're still evaluating it.

(inaudible - cross talk) sorry Ron.

I think, Colin, I would say generally that's right, David, but our focus is not the Americas market first. Our focus is the European market.

Okay, that's helpful. Okay. Thank you very much.

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

I just had a very quick follow-up. You're obviously throwing a lot of resources at trying to clear the accounting issues on a timely basis. We've been treating these as non-recurring expenses. Should we look for the rate to accelerate here near the end of the process from the, I think it was $800,000 in the third quarter?

Yes, there'll be some increases, Rob, as we go through the fourth quarter.

Order of magnitude? Under a couple million?

Again, 2 to 3 million potentially.

Okay, terrific. Thank you.

Your next question is a follow-up question from the line of John McGinty with CSFB.

Yes, I'll ask the question, Ron, if you can just cut it off and say that you're done whenever you want. But the question I have is on the crane business. Could you come back and talk a little bit about where the profitability -- I mean the overall profitability is pretty bad at cranes at 4%, but is the U.S. profitability substantially below what we see in Europe? And since you've been trying to increase Waverly now for at least two quarters, what's going wrong there?

Well, the profitability issue -- a large portion of the profitability issue in cranes is in Waverly, Iowa. It's a negative. I won't give you the size of the negative, but it's a negative. And what's going wrong there is a combination of things that will get turned around. One, a lack of availability of very hard steel, which has gone and in large part continues to go to the U.S. military. So the ability to ramp up production to meet demand is not just a Terex problem, it's an industry related problem.

Secondly, we had a supply base on the Waverly product range that basically went out of business in the last three sessions. So we've been scrambling to redirect our whole supply. We're taking a number of the components from the Waverly operation that we got 70, 80% cost increases and we are sourcing them from our Acuna facility, which is led by our mining team, as an internal source for some of those fabrications. That takes time to start up, that takes time to get up and ramp up, but I think good progress is being made.

And lastly, we got a new team in place there that just started within the past couple of months and we've brought in a number of purchasing and operational people and we have dramatically lowered the age level of the employees in Waverly because we've added 40 or 50 new employees. I think the average age has dropped from 57 years to 45 years of age in the plant. So the facility is going through a bit of a transformation. So, I'm confident we'll get that operation turned around. And turning that operation around has a meaningful impact on the overall crane market.

Would -- ?

Now, there are operations margin -- there are operating margin improvement opportunities also in Demag and in a couple of other places. So it's not just Waverly, but that's a big piece of it.

You were 4.3 in the quarter. Would it be as high as 6, 6.5 if Waverly were at breakeven?

I'd like not to comment on that since my competition is also -- listens to these calls.

Thanks.

Your final question comes from the line of Greg Hyde with Wachovia Securities.

Yes, thanks. Just one follow-up question. With respect to the SEC inquiry, are you all in sort of frequent dialog with them or did you all have a meeting and then look, here's a punch list of things which you all, meaning the company, are going to go and explore and pursue and come to some resolution on, which is to a large degree laid out in the Q&A section, or is it a frequent dialog or, could you just provide some color in that regard?

Greg, we're continuing to have discussions as we go along. So we continue the flow of information and such and events driven. We try to keep the communications going continually.

And I think the real thing for us is these are our financial statements and we want to go back and look at all of the elements and make sure that in the full -- with full sunshine, that everything that was done historically, I think this is our challenge, was done the right way. And I have full confidence that Phil and the team will make that happen and has my full endorsement to do it.

Okay, thanks.

Okay, operator, I think we've gone a little bit longer than an hour. So, I appreciate everybody's interest in Terex today and we look forward to answering any additional questions through Phil, myself or Tom Gelston. Thank you very much for your interest.

This concludes today's Terex Corporation Third Quarter Earnings Release Conference Call. You may now disconnect.