Terex Corp (TEX) 2006 Q1 法說會逐字稿

Good morning. My name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS] Now I'd like to turn the conference over to Mr. Ronald DeFeo, Chairman and CEO, Terex Corporation. Thank you. Please go ahead, sir.

Thank you, Angela, and good morning, ladies and gentlemen, and thank you for your interest in Terex Corporation 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 Financial Planning and Analysis; and Jon Carter, who is our Controller; and on the phone also is Colin Robertson, Executive Vice President of Operations; Chris Ragot for Road-Building and Utilities; Bob Wilkerson for Aerial Work Platforms; and Steve Filipov for Terex Cranes; to assist with questions, possibly, later in the call.

As is my custom, I plan to make some overview remarks about the quarter, then Phil will get into the details of the performance with a review of the company overall and by segment and then I'll come back and highlight some operating activities and take your questions. If you would, please limit yourself to one question and a followup so that anyone that has an interest can be accommodated.

A replay of this call will be available shortly after the conclusion of the call and can be accessed until Friday, May 12th, at 5 p.m. Eastern time. To access the replay, call 1-800-642-1687 or for international parties the number is 706-645-9291 and enter the conference ID, which is #8800254. So now let me begin.

Terex completed a very satisfying first quarter. Yes, the overall performance was excellent, but we firmly believe that the opportunities to continue to improve remain very significant. We're pleased with the progress as revenue grew faster than we thought at 21%. Margins were better than planned and 3.4 percentage points above last year on an operating profit basis. And the earnings per share, at $1.57, was positive compared with the $0.59 of a year ago. Good performance.

A couple more engines of performance kicked in with our Crane business making a big move, as well as our Material Processing and Mining business improving significantly and, of course, the performance of the Aerial Work Platform segment was spectacular. Nevertheless, Construction, which is now excluding our crushing and screening businesses, stands out as a problem and the businesses that we have identified as non-core operations within our Roadbuilding and Utilities segment were meaningfully below last year, although the Roadbuilding and Utility business themselves had a nice turnaround and improved performance.

What's more satisfying to me, however, is that we're making progress building the foundation of an operating company out of this historical acquisitions company. The growth we've experienced has been almost all internal and the focus has been on building capability around the Terex Business System implementation. I'm sure this process would be faster if we did not have the positive problems of long backlogs and rapid growth.

On the leadership front, more than 25% of the company's top 400 people are new to Terex in the past 12 months. We are securing leaders that are new to the industry and come with many great experiences. We have assembled a talent pool of lean process expertise that the author of the book, “The Toyota Way,” told me personally is exceeded only at a small handful of companies.

But on a scale of 1 to 10, with 1 being the beginning and 10 being fully implemented, we're about at a 2, in my view. Our leadership-- our entire leadership team will go through a full-week Kaizen event later this month as we get top-level training and we plan another event later this year. This is a serious initiative and not another corporate program and experience has shown that unless the senior team actually does Kaizen events and gets their hands dirty in an operation working to eliminate waste, a lean implementation process either won't work or will not get culturally adapted.

We are also just starting to get serious about an ERP implementation, also just beginning to leverage purchasing and just starting to examine our logistics and material movement processes from a corporate point of view. All in all, a lot more to do.

And on the front end of our business, we're beginning to get real customer data, as well as market share and pricing data and we're beginning to do distribution and channel planning that can help ensure that our franchises continue to build, irrespective of the economic environment.

The market environment currently is robust and we expect it to stay this for a while, however growth rates should moderate. We would expect absolute volume to continue to remain strong in the coming 12 to 18 months on many, if not most, of our products. On other products, we are still early in the cycle.

Overall, the revenue side of Terex has a strong outlook, with a tremendous backlog, up 36% from year ago at $2.1 billion.

Now let me turn it over to Phil for a detailed review and commentary. 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 disclosure of the factors that affect future expectations is included in the press release and our other public filings. I encourage you to read them.

On this call we will be focusing on our first quarter 2006 performance. We will not be updating 2005 figures until completion of our review and audit process, which is in its final stages.

For the first quarter we reported net income of $80.6 million or $1.57 per share compared to net income of $29.9 million or $0.59 per share in the first quarter of 2005. The estimated effective tax rate for the current quarter is 35% compared to an effective rate of 36.7% in the comparable 2005 period.

First quarter 2006 net sales increased 21% to $1.75 billion compared to $1.451 billion in the comparable 2005 period, as we continue to see the favorable impact of recovering markets and our internal efforts to improve manufacturing throughput.

The foreign exchange impact had an approximately 3% negative impact on net sales.

Gross profit increased to $316 million for the first quarter of 2006 from $206 million, with gross margin improving from 14.2% to 18.1%, reflecting the impact of increased volume and pricing actions, dampened somewhat by the impact of material cost increases.

SG&A expenses increased to $171 million from $135 million for the-- from the first quarter of 2005. This results in a level of 9.8% of sales, an increase from 9.3% in 2005. The increased rate is mainly due to equity and long-term compensation programs, including options expense, offset by leverage from the additional volume.

First quarter income from operations increased by 103% to $145.5 million from $71.5 million in the comparable period for 2005. Our operating margin increased 8.3% from 4.9% in 2005 and this represents an incremental operating margin improvement of roughly 25% on the volume change.

A few comments on the individual segment performance. The Construction operating performance was relatively flat with the prior year, with operating margin decreasing to 1% from 2.1% in the prior year period. The scrap handler business performance was the main reason for the decline after being a strong contributor to the results in the prior year. With the introduction of several new products, expansion of opportunities in China, sourcing strategies and improvements in operational efficiencies, we are more optimistic on the performance of the Construction segment during the remainder of 2006.

The Crane segment performance was excellent across all parts of the business, but particularly satisfying was the success at working through some of the production inefficiencies in our North American operations, continued strong demand in the tower crane business and realization of the benefit of pricing and sourcing initiatives in our German operations. Operating margin improved to 7.1% from 1.7% in the prior year. You will recall that we had a strike in our Waverly, Iowa, operation last year, which negatively impacted our performance in that period.

The Aerial Work Platforms segment performance represents the realization of pricing structure actions, volume leverage and broad-based volume increases in non-aerial product lines, in particular the telehandler products, which experienced a year-over-year volume increase in excess of 65%. We also experienced increasing demand from European markets. This performance was partially reduced by component cost pressures that continue to require additional diligence to mitigate their effect on future performance.

The Materials Processing and Mining segment performance, as reconfigured to include all crushing and screening product lines, generated 10.8% operating margin. This represents an incremental margin of 33%. We expect continued strong demand in this segment with commodity prices at the current levels.

The Roadbuilding, Utility and Other segment performance was relatively flat year over year, with operating margin down from 5.2% to 4.5%. However, this was mainly due to the reduced performance of the non-core operations in this segment as their income from operations declined by approximately $4 million over the prior year period, as we were encouraged to see improvement in the Utility as well as the Roadbuilding operations, both in demand and margin improvement driven by pricing and operational initiatives.

You will note in our release that we have indicated the level of corporate unallocated costs and they've increased year over year by approximately $14 million. The main components of this increase include increased equity-based benefit costs of approximately $9 million resulting from our inability to make certain grants in 2005 due to our delayed SEC filings, coupled with the increase in the company's stock price since we communicated the proposed equity grants for 2005, stock option expense of approximately $3 million and the final year of the company's long-term incentive plan, which resulted in an increase of $3 million over the first quarter of 2005. As previously disclosed, we would expect more than half of these costs to be unique to 2006.

Moving on to a few comments on capital structure, our net debt increased in the quarter by $45 million to $615 million from the end of 2005, however decreasing by $257 million in the last 12 months. We made a $16 million acquisition during the first quarter within the Mining segment. And net debt to total capitalization for the first quarter is approximately 33%, down from 44% in the first quarter of 2005.

Given the continued strong demand, working capital has increased on a dollar basis. However, we ended the first quarter with working capital as a percentage of first quarter annualized sales of approximately 19% compared to 21% in the first quarter of 2005. We continue to strive for a level of 15% for this metric by the end of the year, which would provide cash flow in excess of our prior guidance.

As we have previously indicated, our debt reduction plans include calling the 10-3/8% senior sub notes once we have brought our financial statements current and solidified a new revolving credit agreement.

Our operating cash flow projections for the year of in excess of $350 million will continue to be driven by the growth and profitability, as tempered by moderate working capital expansion.

We have continued to use return on invested capital as a key measure-- measure of our overall progress, achieving approximately 24% for the 12 months ended March 31st, 2006, well on our way to achieving our prior guidance for 2006 of 27%.

Our weighted average interest rate on total debt was 8.2% for the first quarter, up from 7.4% for the comparable 2005 period. With that, I'll turn it back to Ron.

Thank you, Phil. I'd like to spend a couple of minutes on the segments, also.

First, Construction -- the new 40-ton articulated trucks have been introduced and the initial production has just started. I think this is a great new product for us, and, as I've stated before, we have an underdeveloped share in the larger size classes and we think that this new product will have-- with meaningful power transmission and braking system improvements, represents a best-in-class improvement for us. Obviously, when you're introducing a new product like this, you're not shipping any of the old model and we're getting ready for the introduction in the second half of the year, although it's in production today.

Furthermore, we are in the startup phases of the new crawler excavator product in Germany, as well as a new wheel loader and we've just introduced a new motor grader to our European line. The Atlas part of our excavator business has been a drag on our earnings performance. It is a factory that historically has had some challenges. It has a cost structure that we feel is a little higher than it should be. We're looking to China to get some sourcing, long term, to get that cost down, but simultaneously introducing a high-- high-quality design crawler excavator will be a critical part of our product future here. For the entire Construction business, that's a-- that's an integral product.

We anticipate a much stronger second quarter and a positive second half in the Construction business. With that being said, this part of our business still does need a lot of work. We have currency and cost issues, as well as distribution weaknesses in various markets.

I think we have a need to make some further product modifications, also, to tailor certain products for certain markets. The scrap handler seemed to pulled back in the first quarter, but recently we've seen an encouraging order pickup on this Fuchs business.

All in all, the Construction business is a big opportunity for us, albeit in the first quarter, obviously, a challenge.

Turning to the Crane business, this business has now turned the corner. The leadership changes initiated in 2005 are resulting in significant process improvements in our North American operations. The team is strong and getting stronger. We have dramatically higher backlogs and production rates are following, but at a level that the supply base can absorb. Step by step we are achieving sustainable change in North America and I'm proud of the progress that this team has had.

In Europe our tower crane business has produced another strong quarter on both revenues and margins and the outlook is very positive. While revenue in our Terex PPM France operation had a slight pullback, operating profits were good, but prospects look good today on revenue for this operation, also.

Terex Demag is really benefiting from big projects in China, the Middle East and Africa. The lattice crane market has been strong and we are now really seeing the benefits of having the Terex Demag franchise be part of the Terex Crane business overall. We expect continued revenue and margin gains in this segment.

The Terex Aerial Work Platform segment has had a spectacular quarter and the near-term prognosis remains equally buoyant. We do not have enough visibility yet to the fourth quarter, which is traditionally a weak quarter as this is a seasonal issue more than anything else, however European demand has noticeably increased in recent days. In 2005 we had an exceptional fourth quarter and it's still too early to know if this will be repeated. A strong fourth quarter probably results in Terex achieving the upper end of our guidance.

This business is hitting on all cylinders and the requirement for product is significant. That is not only aerial work platforms but telehandlers is an important part of this product area today, as well as construction trailers and the light construction products, as well.

We are pleased with the margin of 17.4% but recognize that suppliers are already after us for increases later this year and next year. We have benefited from pricing and-- which we laid on last year and, obviously, volume absorption.

The Materials Processing and Mining segment is showing excellent progress. Revenues were up 21% and the operating margin was nearly 11%. The backlog here did not include the $150 million China order as this was taken in the second quarter and is for delivery in 2007.

The crushing and screening businesses continue to perform well across the board and the Mining business remains exceptionally strong with no near-term end in sight. Commodity prices are high and our product sizes and drills are right in the heart of this opportunity.

Last year the-- lastly, while the Roadbuilding and Utility business looked like it had a down quarter year over year, I'm actually quite positive about what I see with these businesses. The performance challenges took place mostly in the non-core Tatra and ATC operations, as Phil mentioned, whereas the core businesses actually had a nice performance improvement versus last year and the backlogs have come up meaningfully. Progress is promising here.

Now a couple of words about the outlook that Phil has covered somewhat and the capital structure. We're in a good spot, I think, and I am bullish about the company.

We will get our 2005 numbers filed soon and within a reasonably short period of time complete the 10-Q for the first quarter of 2006. This has been an exhausting effort on our financial team, but through the process we've built a better company. The quality of the talent that now calls Terex home is dramatically up from a year ago and there is no comparison with two years ago. This, of course, has to be put in the context of significant revenue increases and the fact that growth does require upgrading. Having said this, we had a lot of expenses in 2006 that Phil has explained, a good portion of which will not be repeated in 2007.

We will take our revenue outlook up from the previous guidance, which was a range of $6.7 billion to $7.1 billion and the range now for 2006 will be $7.2 billion to $7.6 billion or a 12% to 19% increase in overall revenue up from 2005. And, as you know, we've also taken our earnings per share range up to $6.40 to $6.80 or a 60% to 70% increase.

Our margin rates are on the rise, benefiting from our pricing actions and volume. Our return on invested capital is a very respectable number and achieving 27% or greater this year will be a major breakthrough for us.

This kind of performance, as well as the implementation of the Terex Business System, recruitment of additional talent and a significantly strengthened balance sheet, we feel, delivers good value to our owners.

At this point in time, I'm not ready to establish any further longer-term goals. Yet, as I want-- yet, because I want to see the past stretch goals that we established be brought to conclusion. I am generally positive, though, about what the outlook is for the next several years, not really just because of the numbers but because of the capability I see developing in the enterprise. I hope you can see some of that enthusiasm in our team, so I thank you for your interest and now I'd like to open it up to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Charlie Rentschler of Foresight Research.

Yes, good morning, Ron and everybody.

Good morning, Charlie.

Hi, Charlie.

I'm assuming we'll get a balance sheet, a quarter-ending balance sheet, when we get the-- when you release the '05 review and audited numbers. Is that a correct--?

That's correct.

And in the same vein -- I'm trying to make this all my first question -- what is the status of the SEC's investigation at this point?

Well, we continue to cooperate and provide information. This-- we would expect this to be a continuing process.

There's really nothing new to report.

There's nothing new to update other than what we've posted on our website on Q&A.

Okay. And then my followup on the business, Ron, you've got a portfolio of companies here that some are early risers in the cycle, as you say, some are later risers. AWP, though, I guess that's-- that rose early and it's had a spectacular run here, but can you talk a bit more, give us a bit more feeling for where do you think it is in this cycle and where do you think it is with its operating margins? How much more steam is left in this story?

Okay. I'll give you a couple of comments and then ask Bob to follow up more specifically.

It is important to reflect upon history here as we look at our Aerial Work Platform business. In the last peak of the cycle, there were many players that don't exist today and while some have come back marginally, many of our customers still want to buy from a few number of players in order to keep their fleets limited and to be able to service their fleets appropriately.

So the uptick that we're experiencing, I think, is a reflection of both of what happened historically and the fact that our customers are having a good time and they need the equipment and they need to refresh-- refresh their fleets. So I'm pretty positive about the near term outlook, but, as I said, I wanted to temper that a little bit with the fourth quarter reality that is still in front of us.

Bob, you want to comment on it?

Yes, Charlie. I think that the first driver in our business was the replacement cycle. We're now more into-- and that was people updating their fleet starting in September of 2003. What we're now seeing is the drive in commercial construction on a worldwide basis causing more primary demand and we're in what I would call the growth cycle. And our customers are very optimistic for 2006 and 2007.

As Ron did say, there is a little cyclicality in terms of budget processes in the fourth quarter, but people are more and more optimistic every day with what they're seeing in terms of rental rates and in terms of utilization in the marketplace today. So order activity is brisk and optimism is high.

Thank you.

Your next question comes from Joel Pitts of Lehman Brothers.

Hi, guys. This is actually [Henry Kern] in for Joel today.

Hi, Henry.

Hi, Henry.

Can you talk a little bit about what you're doing right now to expand the after-market parts and service part of the business and where we are versus a year ago and what that could do to margins in the longer term?

Okay. Our after-market parts and services business really follows our original equipment business and it always has. It depends upon the product line how large the after-market parts and service is. In our-- for example, we go from one end of the spectrum where in our Mining business our after-market parts and service is probably close to 50% or so of our total revenue and-- versus on our Crane and Aerial Work Platform product lines where that's less than 10%. So we have a broad spectrum of product-- parts and service product support revenue within our portfolio of businesses.

I think what we are looking at with our company is how do we improve our logistics operations and how do we improve our reputation in the marketplace with parts and service? In some of our businesses, we have a very good reputation and in other parts of our businesses it could-- it could be improved.

That's one of the areas that Colin Robertson is starting to address from a logistics and planning point of view and I think you'll hear more about that over time from us.

Okay. I guess my followup question, in Cranes a couple years ago it seemed like the Crane margins would only be able to get to a level under 10% in the near term. Is there anything in the business today that's changed here in your exposure or what you're seeing?

Well, I don't think we ever felt that way. I think we felt that we could get our crane operating margins to the 10% range. I don't think we're at that point quite yet, but I think we can get there.

We did achieve in excess of 10% in the '99-2000 timeframe--

Steve, you want to--

--in that portfolio.

Steve, you want to comment on that?

Sure. I'd say, Henry, there's some upside in the crawler-- large crawler side of the business. I think there's still some opportunity there. Definitely in power cranes. We're working on a plan and I think we'll see improvement there.

And in our North American business there's still some room to pick up. So I think we do have some opportunity.

Okay. Thanks a lot.

All right. Thank you, Henry.

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

Congratulations, guys, on an excellent quarter.

Thank you, Robert.

Thanks, Robert.

Especially the progress towards your 10% operating margin targets. As-- in fact, as we look at each business we see basically most of the businesses either there or making significant progress, except for the Construction Equipment company.

In a year or two, when that division is sort of hitting on more cylinders, anyway, if not all cylinders, let's say with the restructuring of the divisions, what's a good operating longer-term margin target for that business unit?

For the Construction business unit?

Yes.

I think a 10% operating margin is a good long-term target for that business, if not higher, but I think in the near term a 10% margin in a couple years is within our grasp.

Okay. Well, this time next year, if you've made material progress towards that, we're going to have to be raising our longer-term-- longer-term operating margin targets, which would be a good discussion to have in the future, I hope.

Yes. That's really what-- I mean, I said I haven't really set new targets yet because I want to make sure we deliver on what was, at one point in time, very much stretch targets for people.

Exactly. My followup is have we seen the real demand in-- from the business, multiple divisions, from the Gulf reconstruction efforts and the highway bill? Or is that still ahead of us? Has the money been spent or is still in the allocation stage for both of those major projects?

I think it's difficult to say. I would ask Bob Wilkerson and then maybe Chris to comment on this in a second.

My sense, though, Robert, is we are seeing the beginning stages of demand. Much of the equipment from the rental companies servicing that market, that equipment is in play and in use in Louisiana today. And there's orders to replace some of that. So we're seeing some of the effects.

The highway bill, on the other hand, I think a large portion of the benefit of that bill has been offset by the increasing costs attached to building highways. Because raw materials, aggregates, concrete, all those materials have gone up in cost.

But the underlying strength here really comes from the states where states are healthier, their financial positions are stronger and I think there's just such a need to improve the infrastructure that the highway bill itself may not be the answer, but the fundamental requirement to keep our highways and our roads and our people safe is still what's pressing us forward. But, Chris, why don't you comment on that and then maybe, Bob, if you want-- have anything to add?

Yes. Good morning, Robert.

Good morning.

The highway bill-- I just spent some time visiting some contractors, roadbuilding contractors, in the State of Texas and California. In fact, I'm in California right now. It's clear to me after seeing several customers in the marketplace as far as roadbuilding is concerned, they're seeing just the beginning of activities related to reconstruction or the highway bill itself.

So I really do anticipate that 2007 and 2008, that's when we'll be seeing a lot of progress in that area. So at the present time, it's just starting. I don't think it's in full swing yet.

As far as the hurricane areas, clearly what we see in that area is that there's progress being made, but it's very slow. So the pure and heavy reconstruction in that area, I think there's opportunities forward for us in the near future.

Okay, thank you. Bob, Aerials?

Robert, the Gulf-- my opinion on the Gulf is that it's been a cleanup project to date and that reconstruction is just really starting to take hold and that it's going to be a very long-term reconstruction area that we'll-- that'll lead to good demand for products, especially those that are later in the reconstruction cycle, such as aerial work platforms.

Yes. Have you tried to estimate the incremental demand, how many thousands of units that that would require?

Well, it's a little spotty because many of our customers-- one of the reasons you're seeing strong utilization in the rental channel today is a lot of customers have reallocated equipment against their business model to the region. So we can't see it all, but it's significant and it's driving utilization rates across the rental industry. But it's many thousands of incremental units.

Okay, thank you very much, guys. One last point. Could you guys consider splitting the stock and maybe shoot for a three-for-one instead of a two-for-one?

No comment.

All right.

But, obviously, we're-- those questions are on our mind.

Okay. Thanks a lot. Great quarter, guys.

Thank you.

Your next question comes from John McGinty of Credit Suisse.

Good morning. I've got this framed, I hope, so I get my one question and a followup. If we look at the-- one of the things that Phil mentioned was the gross margin was great, but he's-- but there was a concern voiced and it was in the release, too, about steel costs and material cost increases. As we look at the Crane margins at 7.1%, the Aerial Work Platforms at 17%-plus and the Materials Processing and Mining at almost 11%, are those kinds of margins-- if we look over the course of the year, traditionally the margins would be weaker in the first quarter relative to the full year. Are we going to see margin pressure or do you think those margins are either sustainable or increasable, Ron, as you look toward the back of the year in this whole picture?

I think we'll see the margins move around a little bit. I-- I don't think our year handicaps a 17.4% margin for the full year from our Aerial Work Platform business, so-- but I think what we had in the first quarter was the benefit from pricing actions, as well as basically three months of flat-out production. So I think we can keep close to there. It's hard to say at this stage.

On the Material Processing and Mining business, that margin, I think, is sustainable. And on the Crane business that margin is improvable.

And I think the steel cost increases that we tried to highlight in the press release is simply a reality. There's some things that we just don't know yet and material costs will go up. We think we've got pricing now about right for the year, but we also recognize that the strengths that we're seeing our suppliers are seeing and they're going to want to get price increases.

So I think it's important to moderate expectations a bit because we are going to have cost increases.

But-- just-- were you saying that your price increases were right, I mean, assuming that there's further steel price increases? In other words, have you kind of built that in intuitively with the price increases or do you go back if there are more?

No, I think we've built-- we've built in the fact that we expect some increases. Now we could be positively surprised and there could be less cost increases. There will be an inflection point where the leverage of our company will overtake the marketplace general drive to get cost increases, which is some of the things that Mr. Robertson is working on, because I think we still have yet to benefit from the full power of our purchasing leverage in certain areas, one of which is steel, for example.

Right. And the followup is simply, if you do this and you generate the $350 million in cash, which moves you to virtually a net debt free position or close to it and certainly next year, how long can you keep the move going toward becoming an operating company without making an acquisition? Do you start to buy back stock? I mean, where do you balance, yes, I want to be an operating company, with the fact that your cash balances -- I can't believe I'm asking you this -- but your cash balances are getting to be too high?

Yes. Well, I want to be an operating company that does acquisitions--

Okay.

--not an acquisition company that becomes-- that is a holding company. Okay? And first an operating company. That's not to say that-- we'll never be done on operational improvements. Continuous improvement will be part of our mentality, but we can do acquisitions in the future and I would hope that we-- we can add to our portfolio, complement our portfolio and branch out into some new areas.

Are you actively looking?

John, you know me, I probably never stopped looking, but our first focus has been to try and get some operational improvements done and with prices the way they are in our industry, it's hard to be an aggressive buyer. So we've focused some of our attention in places like China where we did this truck crane acquisition and places where we think we can get reasonable value at this point in time. I think we want to be value conscious.

Great. Thank you very much.

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

Good morning, gentlemen.

Good morning, Robert.

Ron, or maybe this is a better question for Bob, can you talk about where you are on capacity in the telehandler business? I mean, are you looking at needing to add capacity this year or can you meet current market demand without doing so?

Bob, why don't you answer that?

Okay, we-- we're looking at global capacity. We presently have three plants based on the new assignment from Terex. We have plant in Italy, we have a plant in Upper Michigan and we are now producing telehandlers here in Redmond. So, no, I think our capacity is-- we've obviously had a very, very fast growth here, 65% quarter-over-quarter. It won't grow at that level, but we have more capacity. We have a little bit further to run and we're looking at ways to increase it.

And then as a-- as a followup, I'm wondering, Ron, could you talk a little more in depth about the Construction segment as currently configured and with operations right around break-even? You've identified Fuchs as facing tough comparisons compared with prior year, but I'm not-- maybe I'm should, I'm not inferring from that that it's losing money. I assume that the businesses that are below break-even would be the Atlas and the Compact Equipment businesses, but can you help us a little bit with where the variability of performance is across that segment now as it's currently configured?

A little bit, Robert. You're right. Fuchs is not losing money but the year-over-year comparison was pretty significantly down.

Our biggest-- our most challenging operation is the Atlas Group. The Atlas Group is losing money and-- and they are in the process of upgrading and introducing several new products.

I also would say we've had some disappointing performance from some of our distribution organizations, which in the first quarter in some markets the quarter does tend to be a little bit low year over year and the second quarter selling season we would expect to show some significant improvements.

I am pretty positive about our mini and midi excavator business, not in North America, but in our European operations. They had a pretty-- pretty good quarter and we also made some investments in China which were negative to our overall performance from a cost point of view and will likely be negative for a little while as we add some infrastructure and start up a couple of small factories in the Chinese market.

And profitability in the UK-based operations, the Arctic business and Compact?

The Arctic business is pretty-- had a pretty good start to the year, despite the fact that we introduced a brand new model, at least compared with the prior year, but is nowhere near realizing, I think, its potential.

And the Compact business in Europe did pretty well, meaning the loader/backhoe business, but in North America lost money. So-- and that has to do with our transfer and our-- we have extra cost in the assembly process that we're going to need to pay attention to. We are spending too much money getting that product ready for market and those are opportunities for us right this minute.

Atlas, for example, I think is about 20% to 25% of our total Construction business these days, just to give you a sense.

Okay. And it would be fair to say that none of the businesses, as you've discussed them, are really anywhere close to the 10% level at this point?

I think our mini and midi excavators in Europe are.

Ah, okay.

Okay?

That's very helpful, Ron. Thanks.

Yes.

Your next question is from Gary McManus of JP Morgan.

Good morning, Ron.

Hi, Gary.

To get back to pricing raw material costs for a second, to what extent did pricing exceed -- I assume it did -- raw material cost increases in the first quarter and what are you assuming for the rest of the year? Does pricing just cover raw material cost increases, still ahead of it or behind? Just give me a sense on that.

Gary, I think we believe that in the first quarter we had a 2% to 3% realization in excess of cost increases and we would expect that level to continue.

So you expect pricing to continue to exceed raw material costs, even though there's some language and comment about increases in steel costs and so forth? You still think pricing is going to exceed raw material cost increases?

Again, as we've priced already -- and Ron mentioned earlier, trying to anticipate what's there -- we believe that that's the kind of range and gap that we would have, but we have to continue to watch it.

Yes. And also, Gary, some of our businesses really won't show the pricing benefit until May or June because we had such large backlogs that when we took up prices that we hadn't gotten through the backlog yet. So what will happen in the future is that while costs go up, our pricing-- the implementation of price increases from last fall will now begin to flow through.

Right. And when you talk about cost increases, you're assuming-- giving relief to your suppliers, as well, component suppliers, as well? It's not just strictly raw materials like steel, it's component cost increases, as well. Is that right?

That's right.

Okay. I wanted to make sure of that. Second question is, can you just talk a little bit more about the-- the two non-core operations in the Roadbuilding area, Tatra and ATC. What were the revenues? You said there was a $4 million drop in profits. Are they still profitable? Just give me-- kind of ballpark how important is that to that segment?

The Tatra business was still profitable, pretty much met its goal but was down vis-a-vis the prior year. And I don't want to comment too much about these, because, as I said, they're non-core and we think they're good businesses, particularly the Tatra business, it's just not a core business for us now.

The ATC business really was a failed joint venture, okay? So that just cost us money. It was a negative in the quarter, probably in the-- close to a $0.5 million, somewhere in that range.

So there's really two different issues there. One is the ATC bad JV basically going away. The Tatra business really is non-core. What we do with it will really depend upon some strategic decisions we want to make.

Okay. All right. Thanks.

Your next question is from Martin Sankey of Neuberger Berman.

Okay. Hi.

Hi, Martin.

Okay. I have a couple of high-class questions. I guess, first, while your language was kind of-- has been kind of guarded on the call regarding your 10%-- a 10% operating profit margin target, if one reads the press release you seem to be far more definitive about it than ever that you will do it in 2007 as opposed to-- as opposed to aspire to. Would that be a correct impression?

Martin, you know me. I probably don't parse my words quite as good as you guys do, but I have stated for many years now that I think I could end 2006 with a 10% operating rate going into 2007 and that's my expectation, to deliver a 10% operating margin. I don't think many people have really believed me, but I've continued to believe. So whether it's “aspire” or “will,” I wish I could will it, but I can't. I'm just going to have to work hard at it.

Okay, but I do get the feeling you feel a lot more confident about achieving it than you have in the past.

No, Martin, that's not true. My confidence never-- level has never wavered. People's assessment of our ability to do it, I think, has and I've always come back to the business mix that we had, feeling that with that mix we didn't need to have every one of our businesses hitting on all cylinders to achieve it, but the mix would allow it.

The thing that has complicated my thinking here has been the significant growth that has taken place. It has not been a straight line. So how do you achieve that margin target when you have significant growth, which brings with it both pricing and cost? Hard to predict how you'll do on both fronts.

Okay. Thank you. My second question is, for some time now you have been accruing taxes at the rate of 35%. I recognize that over the last year or two your corporate accounting and financial staff have had significant issues to work through, but once-- we're sort of at the end of that path and you have significantly better information now then you've probably had at any time. Is there some hope that you guys can start working on the tax rate a little bit to structurally bring it down?

Yes, Martin, I think we have worked quite a bit over the last two years on the tax rate and you've seen the benefit, although masked by some of the valuation allowance impact in the U.S. of the continued profitability allowing us to release valuation allowances, in particular, on some of our European operations, affecting the rate positively.

We've been able to do structuring actions, as well, in terms of our legal entity organizations to take advantage of combinations that also freed that up, so although it may not be totally visible, we continue to work on opportunities to improve the rate. I think, given the significant consumption of our net operating losses in the U.S. from the last couple of years of profitability in 2006, as I mentioned in our guidance, we're getting to be more of a cash tax payer. We look at opportunities globally, as well, to simplify our structure, in particular, as we expand in China as to situations that we would--

So we do have a lot of things underway, Martin. I'm not going to comment on the impact of all those at this stage, but it continues to be a focus.

Great. Does that mean at some point we might start seeing a reduction in the-- in the tax rate for financial reporting purposes?

Well, at this stage I would say for 2006 I would stick with the 35% level. As to discrete items related to valuation allowances, we've made most of those adjustments. There are a few opportunities, potentially, there, but I would continue with that for this year and we'll look at guidance for the future as we get closer to 2007.

Okay. Thank you.

Your next question is from [Edward Winpenny] of Merrill Lynch.

Good morning.

Good morning.

Actually, my name is Ted and I'm not an analyst so I can't ask a difficult question, but I did want you to know that I congratulate you on your performance and from a personal point of view, I want to thank you as a stockholder.

The question I have deals with one of your competitors, whose name I won't mention, who has their name on their equipment all over, which gives them a lot of public exposure and I wondered-- as I go around, I don't see much in terms of Terex and I know that you have a lot of other underlying names, but I wondered if, at any point, had you considered improving your public exposure by putting your name and logo on your equipment?

Great, Ted, thank you. And thank you for your comment. We have made a decision that we're going to focus on three brands, long term, and those three brands -- one would be Genie, which is the Aerial Work Platform product line and telehandler and some related products that really have a great reputation just in general, but also with a very strong position in the rental-oriented channel; Powerscreen, which as a product line has a unique distribution structure under the Powerscreen name and a very, very good mobile crushing and screening franchise; and then, of course, Terex as the main product that we-- name and brand that we want to grow over a period of time.

We probably have somewhere close to 50 different brand names in our product portfolio and around the Terex product we have virtually every one of those other products now are named Terex Demag, Terex Advance, Terex-- Terex Cedar Rapids, et cetera. So I think those brands are in the transition phase and I think over a period of time what that will do is it will begin to increase awareness at the user level as to just what Terex is all about.

Now simultaneously, at all of our trade shows we have a common painting system, a common decaling system and a common logoing plan to begin pulling all those pieces together. This is a journey, Ted, and it's going to take us time. I think a lot of the big buyers still don't know Terex and still view us as a company of only trucks and I think we've got a lot of work to do.

So we believe-- and we've hired-- we've recently hired a new Chief Marketing Officer to also help us work on that. So you're on a good topic. It's really what will help us become a stronger franchise and really earn the place of the number three player in the industry, whereas today from a customer's perspective we're not number three.

Okay?

[OPERATOR INSTRUCTIONS] Your next question comes from John McGinty of Credit Suisse.

Hi. Just one followup on Gary's question and I understand you don't want to talk about Tatra, and that's fine, but on the other hand, how can we really understand whether or not there was improvement? I mean, if we look at the Roadbuilding and Utility, their sales went up a little bit and their margins went down. Now there's a $4 million swing in there, but could you just give us some idea of the sales and the operating profit, either what Roadbuilding and Utility did together or what we should take out? Because it does not look like there was much improvement in there and it's masking what has long been a troubled spot with the Roadbuilding in there. And you're saying it gets better and I'm not disputing, I'm just saying we can't see it this way.

Okay. Phil?

It's about 1.5 points on the operating margin drag.

This year.

On a year-over-year comparison.

Okay, all right. Okay, so we can work into the sales, giving the operating profit swing.

Yes.

Okay. Now here's a little math question for you, Ron. Our sales-- previous guidance was-- sales was $6.1 to $7.1, which is $6.9 on the midpoint and the new guidance, if I got this down right, is $7.2 to $7.6 billion?

Yes.

Okay. So that's $7.4 on the midpoint. That's $0.5 billion increase from where you were before. As Phil pointed out, you're at a 25% incremental margin on what you did in the first quarter. If you sustain the 25% incremental margin on the higher half billion, that works out to $1.50 a share. The guidance from when you first gave it, was a midpoint of $6 to a midpoint of $6.60, so are you assuming lower incremental margins or are you just being conservative in the earnings forecast?

I'm saying God bless you, John. That is wonderful. I don't-- I'm not going to comment any more.

Thank you.

All right.

There are no further questions at this time. Mr. DeFeo, do you have any closing remarks?

No, just thank you to everybody for their interest in the company and please call any one of us for followup.

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