Terex Corp (TEX) 2006 Q2 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Second Quarter 2006 Earnings Release Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over Ronald DeFeo, Chairman and CEO. Please go ahead sir.

Thank you Amanda 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; Jon Carter, Vice President and Controller. And available to answer your questions will be several members of our operating team including Colin Robertson, Executive Vice President of Operations. Chris Ragot, for our Road Building and Utilities Business; Bob Wilkerson for our Aerial Work Platforms Business; Rick Nichols, from Mining and Materials Processing; and Steve Filipov for our Terex Cranes Operations.

As has been our tradition, I plan to make a few initial overview comments and then Phil will provide you with a summary of some specific financial performance in the quarter and I'll return to discuss our sector performances. We'll then open it up to your questions, I'd like to ask you to limit your questions to one and a follow up in an effort to get everyone to participate. A reply will be available shortly after the conclusion of this call and can be accessed until Thursday, the 3rd of August at 5 pm Eastern time. To access the reply please call 800-642-1687 or for participants internationally area code 706-645-9291 and enter the conference ID number #3296922. So let me begin.

Terex had a terrific second quarter and a terrific first half. Nevertheless, we still believe our company as tremendous improvement opportunities in front of us. It's important for our team members worldwide to take a minute and savor these financial results that are a reflection of their hard work over the past several years. We thank them for their effort. And we thank our customers for their business.

Our earnings in the first half of 2006 were nearly what our total earnings were in the entire year of 2005. And if we reflect over a longer period of time, some of you may recall that we established a goal in early 2004 which when calculated would have resulted in a $7 plus earnings per share performance for 2006. This was classic stretch goal establishment. Not many believed we could achieve it, but we sit here today and our guidance to you adjusted for the stock split gets us to this point or better in 2006. We've accomplished this with a little more growth a little less margin and was virtually no acquisitions, but the net result is a financially stronger company with excellent prospects for the balance of this year and the next several years.

In my time with Terex, our performance has not been stronger. Our balance sheet is strong and vastly improved and even with all these accomplishments the opportunity for further improvements remain compelling. We are at the very early stages of a significant change process that fundamentally will build a better more efficient franchise around a group of products that deliver traffic value to our customers. It is not my purpose today to convince you of this fact, but it is my intend to share some of the activities underway within our organization to improve. But first let's cover the numbers. 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 macroeconomics factors, interest rates, governmental actions and other factors. A fuller description of the factors that effect future expectations are included in this release and our other public filings. I encourage you to read them.

As Ron mentioned we have very strong second quarter with excellent top line growth, through our base margin improvement and cash flow generation, while continuing to position the company for further operational and capital structure improvement. The outcome of this performance in reflected in our attainment of 29% return on invested capital for the trailing 12 months, well on our way to exceeding 30% for the year. This level is consistent with our goal to deliver returns expected from diversified industrial companies as we already exceed those delivered by the large machinery businesses. We reported net income of $119.2 million or $1.16 per share compared to 71.2 million or $0.70 per share in the second quarter of 2005.

The 2006 figure includes a $0.04 per share impact for the early extinguishment of 100 million of our 10 3/8 senior subordinated notes, while the 2005 period included $0.02 per share of special items. As a reminder, per share performance reflects the impact of our recent two for one stock split. The second quarter of 2006 net sales increased 18% to 2.081 billion compared to 1.759 billion in the comparable 2005 period. As we continue to improve manufacturing throughput to meet the increasing global demand from our customers.

Gross profit increased to $407 million for the second quarter of '06 from 282 million, while gross margin improved from 16% to 19.6%, reflecting both volume leverage and pricing realizations over the prior year offset by some material cost increases. SG&A expenses increased to 194 million from 145 million for the second quarter of 2005. This results in a level of 9.3% of sales, an increase from 8.3% in 2005. Of this increase 0.6of the percentage point is due to the increased cost of equity and long-term compensation programs including options expense, the remainder largely driven by investment in international selling efforts to expand their global penetration.

The level of SG&A cost year-to-date has increased over the 2005 period, of which 30 million is due to several compensation related items, the first being increased equity based benefit products of approximately $15 million, resulting from our inability to make certain grants in 2005 due to the the delayed SEC filings. Coupled with the increase in the company's stock price, since we communicated the proposed equity awards for 2005, stock option expense of about $5 million and lastly the final year of the company's long-term incentive plan has resulted in an increase of $10 million for the first six months of 2006 over the 2005 period. As previously disclosed, we would expect more than half of these costs to be unique to 2006.

Second quarter income from operations increased by 55%, to 213 million from 137 million in the comparable period for 2005. Operating margin increased to 10.2% from 7.8%, representing an incremental operating margin improvement of approximately 23% on the volume change, reflecting the volume and pricing leverage effect mentioned earlier.

Order backlog increased to $2.4 billion a 67% increase over year ago levels, and 12% higher than the first quarter with strong growth in international customer order.

Now a f comments on the capital structure. Net debt decreased $40 million to 530 million as of the second quarter from the end of the year 2005. However we generated a very encouraging $204 million decrease over the last 12 months. Net debt to total capitalization for the second quarter is approximately 26%, significantly down from 40% in the second quarter of 2005.

Given the continued strong demand working capital increased in the second quarter, and we ended the quarter with working capital as a percentage of second quarter annualize sales, slightly up from last year 17.5% compared to 17%. We continue to challenge our organization to deliver improvement in inventory levels through leaner manufacturing processes as well as better planning in this period of strong customer demand.

Our full year expectations are to generate $400 million in operating cash flow, less capital expenditures, depending on the impact of the continued strong demand driving the need for increased working capital.

As we have previously indicated, our debt reduction plans included culling the remaining $200 million of [tenants creates] senior sub-notes. These have been, have been culled and will be redeemed in mid August. In July we closed our new larger senior credit facility allowing us to improve our cash management efficiency, assure the flexibility to redeem the 9.25% senior sub notes in early 2007, as well as provide additional operating flexibility to meet the future investment requirements to expand their platform and meet the increasing demand from our customers.

The effective tax rate for the second quarter is 35.3%. This is down from 37.5 in 2005, mainly due to the increased income generated in the US relative to our foreign business. We would expect the tax rate to increase somewhat during the second half of 2006.

So, in concluding, we delivered a strong financial performance this quarter that still have tremendous potential in front of us. With that, I'll turn it back to Ron to discuss some of the initiatives underway to achieve it.

Thanks Phil. And before discussing some segment highlights, I'd like to give you some perspective on some corporate wide initiatives and major activities on the quarter. First we have hired [AT Carnie] to help us in our supply chain activities. This area is being led by Colin Robertson and utilizing his knowledge of our operations coupled with the AT Carney expertise and a team of individuals focus that includes many of our talented professional material managers around the company, we've identified significant savings. We're focusing on three commodity areas to start, steel, steel fabrications, and hydraulics. Our spending in these areas is well over $1.5 billion and it is our belief that we can leverage our size to reduce cost at least 5%.

Secondly, the Terex business system continues to build momentum. We conducted our first team, senior team Kaizen event in May, helping to train and educate our leadership team. Research has shown that any cultural change attempting to implement lean must include the senior leadership team or it is ineffective. We expect to conduct future senior Kaizen events with the team this year.

Terex also participated in the second quarter in two important trade events. We helped lead the initiation of the [ConnExpo Asia] show and participated strongly in a Latin America show called MNT. In Latin America we also had our first ever dealer meeting. We were able to introduce our broad product range to a number of dealers and dealer prospects during the show. Terex is very underdeveloped generally in Latin America. We still have significant overall revenue momentum. As a total company, you heard that our backlog is $2.4 billion, which is up 67% versus last year. And normally we would expect this to come down in the second quarter -- it did not.

Now, I'd like to turn our attention to some of our segments. Let me start with our star performer, the Terex Aerial Work Platform segment. Revenue year over year in the second quarter was up nearly 50%. This is a terrific performance considering that we have grown our production virtually entirely within existing facilities. Our businesses in the first half of this year exceeded $1 billion. To put this in perspective when we acquired the Aerial Work Platform business brand of Genie in 2002, annualized revenue was about $575 million.

We are pleased with the overall performance from this segment, but most notably with some of our progress on the heavy handler product line also. This product line is now a critical part of our future. We believe we have a competitive product and have integrated into our lean production system processes. Looking toward the second half of this year we expect continued strong performance, although handicapping the impact of our customers' consolidation efforts is some what difficult. Nevertheless, our business base has diversified meaningfully, as now about one third of our business is international.

We are seeing strong demand from Asia, Latin America and Australia and we will be increasing our efforts to grow our business in all of these developing markets. During these strong times we've redoubled our efforts around customer service with a number of our major accounts and overall. Furthermore we've increased our efforts on new product development, which we think will benefit us in future years. We are obviously pleased with the 19% operating margin in the quarter, as this is a result of productivity improvements in pricing. The AWP backlog was solid at $544 million, up 25% from year ago.

Turning to the Terex construction group, this group had an improved but challenging quarter. We had revenue of about $430 million which was down 5% compared with the prior year. Our gross margin remained flat vis-à-vis the prior year but operating profit declined about 40%, reflecting difficulties in a couple of our businesses.

First, our German based hydraulic excavator business continues to go through a significant product transition. This business has historically been a wheeled excavator factory and we are in the process of starting up a crawler excavator in this factory also. We expect to make some of our European production there, but also prove out the basic product design for application in other markets around the world over the next few years. This new product introduction is somewhat behind schedule and we are having some difficulty getting components.

We had an improved June and we expect better performance in the second half of this year. We had a solid performance from our mini and middy excavator and wheel loader group in Germany. We used to call this group the Chef group. This group delivered about above year ago performance and most notably came from our European operations and not from exports as the weak dollar has made US profitability challenging. As mentioned in the press release our scrap handler business had some difficulty over the past several quarters. Some of this is a result of increased competition, a slightly slower market and a slow down from the very strong several past years. That's to be expected.

The construction group of Terex has been challenged by myself to pull its product line together under a common distribution network. This is not something we have done historically, but we are beginning to examine the prospects of how to do this and we'll report back to you on our plans as they develop. We think there is an opportunity to build a more common Terex distribution network around the construction products in particular.

We expect the second half to be significantly better than the first half in terms of year-over-year performance. This will reflect the impact of the several new products that are being introduced and gives us confidence that this segment will be additive to our financial performance going forward. The construction backlog was solid at $316 million, up 50% from year ago.

The materials processing and mining business had a very strong quarter. Our business in the materials processing part of this, in particular, experienced meaningful margin and revenue increases. We are managing this business, I think as you know, on a global basis and taking advantage of all the product knowledge and market expertise that comes from doing this. This materials processing business includes our power screen brand, Finley, Simplicity, Cedar Rapids, Pegson, Konica, Jakes, which have all historically had strong crushing or screening product lines that we are now pulling together under a common leadership team and where appropriate sharing some selling and marketing activities. This is a bit of a microcosm of the maturing that is taking place at Terex overall as we look at our markets and our products to identify synergies and pull our leadership team together to capitalize on them.

Our mining business had a terrific quarter also. The opportunities for this segment remain quite good as we look towards strong order backlogs and business opportunities in 2007 and even into 2008. Our Terex O&K mining, hydraulic shovel business continues to be a leader in its field and we are planning on adding significant capacity to this product line in the years that follow. We believe the financial performance of revenue up 13% and operating profit up 37% is respectable, and the $49 million of operating profit or 12% operating margin is quite solid indeed.

This segment's backlog was $376 million up 27% from year ago. Terex Cranes. This segment had a good quarter also revenue was up 31% to $440 million and our operating profit was more than double the year ago level. The operating profit was about $37 million or 8.4%, which is still below our 10% target we're trying to achieve. Of significance is the major improvement we had North American business, which is benefiting from a revamping of our operational approach. We're aggressively implementing lean processes and lean tactics better purchasing and supply chain management across our operations in both Waverly, Iowa and Wilmington, North Carolina. As I mentioned in the press release, the market for cranes is quite strong and there are very large infrastructure projects underway. We're one of the top manufactures of cranes worldwide, our Tower Crane business is growing significantly and we're quite positive about this segment's prospects for the next several years.

Backlog for this segment was $807 million, up 156% compared with year ago reflecting our confidence in the future and frankly some of the challenges of meeting our customers' demands. It's also important to note that in the past quarter Terex acquired a 50% controlling address in Sichuan Changjiang Crane Company in China. The Chinese market is large and this company has a solid position in this market and we expect this to strengthen. The Road building utility and Other segment made some solid progress this past quarter also. Revenues did not improve overall at about a 1.7% increase compared with year ago, but this decline was due to the Tatra revenue a Tatra revenue reduction but offset by double digit growth in both our Road building and utility products. Importantly this segment made meaningful margin progress virtually all parts contributed to the operating profit of $17.6 million or 6.9%, up from 4.1% in 2005.

Backlog was strong at $335 million or up 76%. As mentioned in the press release we have reached agreement to self Tatra to a group of private equity investors who are familiar with the operations and have plans to grow this business. Tatra did have a positive profit contribution to Terex this year-to-date and in this past quarter but it is non-core. More information will be provided when this transaction is completed, which we expect to happen in the third quarter. A few final comments on our outlook. For the full year, we expect earnings per share to be $3.55 to $3.75 per share. But looking past this, I'm looking forward, we expect continued strength in most of our businesses. The area work platform sector we expect to remain strong.

We expect our mining and materials processing business, Road building and utility products to stay strong. Cranes will have accelerated growth as we attempt to meet the demands of a very significant backlog really worldwide, and focused on a lot of non-residential construction. And we expect our construction business to be at minimum steady and we expect frankly, we'll benefit a little bit more from the mix of our construction products, which are more heavily waited to Europe than North America.

But we have to get our margins up in that business. We continue to believe that we can achieve the 10% company wide operating margin target that we set for 2007. I'm not going to provide guidance for 2007, but we plan as you know to pay off the 10 3/8 notes and to cull the 9.25% notes in January. Combined, all these things suggest Terex will continue to strengthen in 2007 and beyond. We have confidence in our future but our share of challenges, we have a number of them to overcome. Terex will continue to strengthen and I thank you for your attention. And now I'd like to take your questions.

Amanda, could you open it up please.

[OPERATOR INSTRUCTIONS] Your first question is from David M. Raso with Citigroup.

Hi, good morning. Your question -- your comment about aerial business staying strong. Can you give us some insight and also the comment about the customer consolidation hard handicap, the order backlog for aerials how for is it extending, the impression I get some of the rental houses are going to the major aerial OEs a little earlier this year to lock in spring deliveries than even the last two years. Can you help us understand the extension of the backlog and kind of elaborate on that customer consolidation comments?

Sure I'll just ask Bob Wilkerson to elaborate on that. Bob?

Hi, David. As you've read the -- there are acquisitions going on, we had Nations rent and Sunbelt -- being acquired by Sunbelt. We've had RSC the division of Atlas Copco that's currently on the market. Obviously, Hertz has a new ownership group this year. So, that's the type of consolidation you're seeing, some of it's going as well as NES being purchased just recently and that closed just last week.

What we're seeing in the market place is people are planning ahead for next season. That's been based on the backlogs they've experienced in previous seasons. As you know most of our customers are on a calendar year fiscal year and we have seen them do planning earlier and are starting to get inquires or requests for deliveries in the first part of next year. Overall our customers are confident and expect 2007 to be an excellent year.

The consolidation that you've seen or the properties that are up for sale. Can you handicap, if you want to go in detail, but the fleets that these customers have, just from prior experience, when we saw some consolidation in the 90s, what is the typical reaction during the merger phase? Is it as you would think people kind of pause a bit, evaluate the fleets -- that's what I was just trying to get a feel for that that spring delivery, we are hearing in a way interestingly more strength in the last two years and a sense of early planning. But at the same time merger activity could cause a bit of a pause to evaluate the fleet. I mean, what did you see back in the, say, 95, 98 period, when you had a lot of rol- up in the industry?.

In that timeframe David, we did see a pause, but the roll -up activity was much more complex, because it included numerable companies that they had to get arms around. The type of merger activity, or type of activity, we're seeing today has not caused a pause with the companies just because it's a one plus one transaction or it's just a private equity from buying a company that they want to keep going forward. So we had seen no slowdown from the activities or actions that have taken place so far.

I think David I'd like to add to that that fundamental demand is still very strong. And we have a lot of growth still taking place, a lot of which is still being driven by non residential construction activity.

My last question on the capacity comment, the O&K shovel -- mining shovel comment, when you spoke of the mining backlog already starting to extend into '08, and you also made a comment about capacity additions, I assume this will be in [Dortman], the capacity additions or would it be new facility? .

Well, clearly we'll expand Dortmen but we we may look to do some things in other places also.

But is it fair to say the backlog comment already starting to extend maybe into '08 is more of a shovel comment than a truck comment? Because your margins I would think are still better in shovels than truck.

No question about it. I would also say that it's less the backlog and more our visibility of what we see as projects underway that we feel very good about our potential to get.

Thank you very much

Okay

Your next question is from Jamie Cook with Credit Suisse.

Hi, good morning

Good morning Jamie

Nice quarter. My first question, Ron, when you look at your guidance for the second half of the year, it looks like you're still going to have pretty good revenue growth but to get to the mid point of your guidance it seems like the implied margins in the second half of the year, should be going again. So outside of -- given some of the improvements you made, outside of seasonality, why should we be seeing margins go down. If anything it seems a bit conservative to me.

Well, I think seasonality is probably the overriding factor and maybe there's a bit of mix in our businesses as you know, our area work platform business typically has a meaningfully slower fourth quarter than it does second and third quarter. So that impacts it.

What about -- can you talk a little bit about how we should look at, I mean the road building actually was much better than our expectations. How should we look at those margins going forward given the strength in those markets?

I think they're, I think we when we take Tatra out we'll see some change but I think you'll find that those margins should be in that range if not better.

Okay. And then last, can you just talk a little bit about -- one of the things that we're hearing is that Europe seems to be recovering -- you mentioned that in your press release. I guess if you could just give a little more data on how things turned in second quarter versus the first quarter and what your expectations are for the rest of the year?

Well I think it is true that Europe is recovering somewhat a robust recovery in Europe is -- would be equivalent to about a mild increase in the United States. So I think we have to temper that comment with a little bit of judgment.

We are seeing several of our construction businesses having good performance in Europe. We definitely see strong aerial work platform performance in Europe. Our mining business is generally not very relevant to Europe our material processing business is, and we're seeing strong performance there. We don't have any road building business to speak off or that's going to be material at all in Europe. And our crane business, while we see strength in Europe, a lot of the pressure we're getting in our European base manufacturing crane operations is for export outside of Europe also. And Steve, do you have any additional comments you'd like to add on that.

I'd just say that on Europe seems to be picking up. Germany crane market is coming back. It's not up to the levels it was at the peak, and UK is still very strong and I think France is stable. But as Ron said, I mean export is really the key and in the Middle East, India and China there is a huge infrastructure projects going on in wind power, nuclear and coal where the demand is very strong for our German manufactured large crawler cranes.

Great, thank you very much.

Your next question is from Charlie Rentschler with Wallstreet Access.

Yes and good morning every body.

Hello Charlie.

Ron I was wondering about the M&A landscape. Do you see it changing at all? Are you seeing more or less opportunities? And in particular, what about China, how much of your M&A activity is being focused on China?

Well, Charlie we have been active in China, we will continue to be active in China. It is a bit of a Rubik's Cube in terms of forecasting what that means and how to predict that. Our general attitude in China has been to identify good long term partners and make investments that are not life threatening, if you understand what I mean --

Yes

-- and get some experience and learn as you go. So we're going to continue that, that makes a lot of sense for us, and generally I think you can expect joint ventures to be the kind of rule of the day, although 100% ownership occasionally is possible.

Outside of China I think the M&A landscape is still interesting but expensive and I think we have continuing discussions -- continuing interests, not discussions in a number of things and we'll remain that way over a period of time. Our commitment is to get a 20% return to our owners as close to the first year of an acquisition as possible.

We don't expect to back off from that, but I also think that the financial markets will want us to deploy our expertise in this area somewhat particularly as we get close to being debt free. But we're not going to go and make an acquisition just to make an acquisition. I think we've learned over a long period of time that it's got to be strategic but it also has to a financially attractive. And we're going to try and keep that discipline.

Well as a related follow up as we get closer to the end of the various upcycles in your different businesses or in fact start to see these things slope downward, is it safe to assume that your M&A activity would start accelerating at that point?

I don't see at the peak anywhere in the next year or two, so I don't want to make prediction on that front. We have been a value based buyer.

Yes.

But we have also said that we have interest in finding better athletes. So if there are businesses that are truly world class and I'd like to say that I think the Genie acquisition was one of them, we would look at that. Genie, we were fortunate to acquire at the bottom and we acquired a world class company at the bottom. I don't know if you could predict that we could do that again. Obviously if that was possible we'd like to do it. But I think generally speaking we're going to look at all the elements that drive acquisitions and try to be fairly balanced.

Thank you.

You're welcome.

Your next question is from Joel Tiss with Lehman Brothers.

Hi guys, how are you doing?

Good Joel.

That's good. Can you talk a little more specifically on the crane business, where the strength is coming from and just just to get an idea what's in the backlog?

Yes Steve why don't you take that question.

Sure, good morning Joel, I think we're seeing North America demand is still strong and we're getting better throughput in our Waverley and Wilmington facilities. So I'd say North America it's more a throughput issue, which we're accomplishing.

And as I said before, I mean, Middle East is very strong I mean Dubai is the largest crane market probably outside of China right now, and there are huge projects going on. India, a lot of infrastructure and China mainly focused on nuclear and coal but we're starting to see some signs of pick up in wind power in North America which would mean larger crawlers. So it's like, I think the biggest demand increase right now is on the larger machines.

Okay. And maybe one for Ron. If Terex is sort of maturing as a company just like just like you've been talking about for a while and you're hitting your sweet spot on the cycle. And so can you talk a little bit about the next leg of the strategy -- what you are thinking about that would be the right things to take the company to the next level for over the next three years or so?

Well, in the near term, Joel, our focus is going to continue to be on integration of this enterprise and ringing out what we believe are still substantial synergies both in the back of the house as well as in the front of the house. And they really are rather substantial. And by doing this we think we will prepare us for any different economic time than we have today. So that's our first area of emphasis. Beyond that, I think we do have a vision of really three things -- one, to be the most profitable company in our industry as measured by our OIC, and you heard Phil talk about our OIC relative to the diversified industrials; secondly to be the most customer responsive company in our industry and we think we've got a lot of work to do on the front of the house to establish our franchise; and lastly to be the best place to work in our industry.

I think our industry is still fairly broad and still quite unconsolidated if you look at our industry. And I think we can establish ourselves as one of the top tier players. And while from a revenue and profit point of view we are, from a customer's point of view we're still not. So, I think there may be an acquisition or two out there that would complement our ability to deliver on those three things, and that's where we're going to focus on both the internal synergies and on an acquisition or two that might allow us to move those three visions forward.

Okay. Can I squeeze in a last one for Phil. Can you talk about why the receivables are up so much in the year-to-date period, up about 40%? Thank you.

Okay, yes Joel. Receivables obviously with the volume increase but also you'll note in our 10-K document and the Qs that pretty much caps are financing the receivables at a fixed dollar amount so there will some growth year-over-year in the receivable value from that. But largely it's due to the timing of our revenue increases.

All right. Thank you.

Your next question is from Gary McManus with J.P. Morgan.

Hi Ron.

Hi Gary.

The AWP margins are incredibly incredible high teens. Is it realistic to assume any further improvement you've -- even assuming moderate growth in the next several years?

Well I let Bob answer that question. I would just caution Bob to say that realism and maybe long-term desire may be too very different things. But Bob --

Obviously Gary we're very pleased with the margins and what I would say is we're going to continue to work on it and do the things that contribute to margins effectively across the organization. So we don't feel this as an endpoint but we have work to do to get above that.

Okay. And there were some questions before on the seasonality and earnings. If I look in the last two years in the fourth quarter you had losses both in construction and Road building, and construction had a -- like a $17 million if I''m right on the fourth quarter last year. Can you talk about those two segments in particular how much seasonality is there, would we expect losses again in '05, I'm sorry in '06?

This is Phil. Let me comment on the construction in the fourth quarter of last year. That included several things that were not, I'll call them, ongoing performance issues and in our minds. We had some inventory shortage issues if you'll recall and I would say not so much related to the volume of business activity as internal issues. So we wouldn't expect that to reoccur in the fourth quarter of this year. On the AWP side again that as Ron mentioned earlier -

It was Roadbuilding utilities -- Roadbuilding utilities. We had some losses - Tatra [inaudible - cross talk]

-- fourth quarter of last year.

We don't expect to have Tatra in the fourth quarter of this year.

So when you talk about this significant improvement in construction in the second half of the year, are you not just doing it because of all this non-recurring stuff that accord in the fourth quarter of '05 you're looking on the half of apples-to-apples basis?

Yes on apples-to-apples basis but we had a very week first quarter as you know in the construction business with a 1% operating margin. We had an improved second quarter but still not what I would characterized as strong. But the second quarter still is a fairly strong quarter in the overall context for the year. I think you'll see us with a back half of the year that will probably be stronger than the first half of the year in absolute dollar operating profit. So if we do that relative to last year's what I'd call less than meaningful contribution, it will make a big difference.

Okay. Last question I have looking I mean I know you don't want to talk on '07 specifically but you're going to benefit from two items I guess is the benefit of calling all this high cost debt and putting lower cost debt. And also the SG&A, I mean Ron, you've highlighted some costs this year that aren't going to repeat next year. Can you give me what the annual numbers are going to be -- or improvements going to be in these two issues in '07 versus '06?

It's Phil. On the comp cost, I think we, in our first quarter release or guidance, we had indicated we have approximately $20 to $25 million that wouldn't repeat year-over-year. I'd say, obviously on the 300 million of 10 3/8, you can do the math, a little more than 30 million on an annual basis but we will called that by mid August of this year, in terms of the improvement potential there. And the January call of 200 million at 9.25 next year that would tend to have full year effect as well.

If you -- and if you pay for that in cash it obviously has a significant benefit. So the cash to bill -- our ability to generate cash at the end of this year is pretty important in retiring that debt. But we also have a very strong revolver and term debt that would allow us to have confidence to call that 9.25% irrespective of our cash generation.

Okay. And the 20 to 25 million SG&A that's what that's a full year number I mean that's not going to repeat in '07 on that's sitting in '06?

That's our current expectation, Gary.

That's not the say that SG&A won't increase in other areas, but as a result of a couple of unique items, that $20 to $25 million will be year-over-year, not recurring.

Okay great. Thank you.

Your next question is from Robert McCarthy with Robert Baird.

Good morning gentleman.

: Good morning Robert.

I have to add my compliments on performance a quarter. It's great to see you guys achieve what you have been striving for so long. I wanted follow up Ron your comment in your prepared remarks you talked about investments to expand the platform in the future. Could we get an update on '06 capital spending plans and then how we should think about capital spending over the next - how you're thinking your requirements might turn out over the next three to five years perhaps as a target in terms of revenue.

: Yes. Phil, why don't you do that..

Robert, as you can see from our cash flow statement we're at about 34 million on CapEx year-to-date. You can also see that net of cash our acquisitions were about 33 million. We did have some investments in affiliates -- these would be some of the minority interests we have or 50-50 relationships that we have. So, 74 million year-to-date. I would say our maintenance CapEx in terms of bricks and mortar and equipment would still be less than 1% of revenue going forward. In terms of the other areas I think it's more opportunistic in the acquisitions front and not specifically in terms of object. But I think 1% or less is a good ballpark --

Of CapEx.

Of CapEx, yes.

Yes, but that's for maintenance. I mean you talked -- already you made mention of adding capacity at O&K I would presume, that with [inaudible - cross talk] extends another two to three years you'd be looking at --

But we're including that, we're including that. Not just -- when we maintenance we mean ability to achieve our goals and objectives.

Very good. And then my follow up relates to the AT Carnie supply chain project, can you talk a little bit, Ron, about timeline here, execution of project, what you're hoping for in terms of how soon you'd start to seeing an impact et cetera.

Colin Robertson will answer that question.

Hi Robert. We're very pleased with the [rate] of progress we're already on this first global operations program that we've undertaken. And as Ron has already said, we are utilizing an expert best practice provider, but we've also mobilized some of the best and brightest talent regionally [inaudible - accent] our performance. Their experienced and our own internal experience with [D-Mac] where we kicked off a local project last August time. We start to see benefits really in the six to nine month period and then accelerating through in two to three years.

We started with steel hydraulics as really raw material. steel fabrications and hydraulics as our three primary commodities. And already, we are starting to see some real opportunities, not just in terms of leverage or bundling or fragmented spend, but we're getting some real visibility and transparency of what we spend and where we spend. And one thing I think that certainly excited me in the last several days, when you consider that Terex as a corporation, has a total steel spend close to some mid size automotive manufacturers, but we don't really view that particular spend strategically, we still tend to do it much more operationally or tactically. That gives you some sense of the opportunities.

So are you seeing benefits that are in the same sort of Ron's 5% order of magnitude at D-Mac?

We would have a high level of confidence in the 5% and that's before we even start looking at some of the complexity or adoption and engineering [lead-type] projects. So, we would have a high level of confidence with that 5% number.

Within, what ,like 24 months kind of timeframe or sooner?

Well clearly you have to look at the whole risk-reward scenario. We're implementing a very robust process. We would typically expect the first two to three points clearly within the 12 to 24-months window, though realization is going to be in the 24 to 36 months. But realistically I think we'll see significant benefits in the first 12 months. That will only accelerate and from there we'll all determine the next steps and potentially, how we look at accelerating the progress in allocating resources.

We don't think 5% should be the overall minimum -- the goal, we think that's kind of the minimum.

Thanks Colin, it's very helpful. Thanks Ron.

Thanks Robert.

Okay

Your next question from Andrew Obin with Merrill Lynch.

Yes hi, hi guys

Hi Andrew

Just a question and I apologize if I've missed it, what was the currency benefit in the quarter on -- or the currency impact on that -- on the bottom line this quarter?

Andrew, was very minimal, that's one of the reasons I didn't talk about it because it offsets -- it helps a little bit in the AWP business and hurt a little bit in the European operations. But it's minimal.

So, what the I am just going through Genie so was there specific impact to Genie was Genie just a impact of the pricing actions we took last year?

There was about a 1 percentage point positive benefit on their margin relative to the favorable volume that they shipped overseas and the weakening dollar.

And Genie was also productivity increase

And another question another -- and this is sort of going to transitioning the company as you have sort of built a portfolio and have de-levered the balance sheet, have you given a consideration to a dividend, and if yes, do you have a time frame for deciding when you would pay one?

Let me answer that question. I think it would only be proper for us to have considered all possibilities -- the uses of cash would be acquisitions, stock repurchase and dividends. And clearly as a executive team and as a Board of Directors, we constantly discuss these topics. We do believe our the highest and best use of our capital is to grow the company. And right this minute we don't expect to have a dividend, we'll continue to consider that, we have the ability to pay the dividend under our new bank facility that gives us a high level of comfort that we can continue a dividend. But, as we look at our future it's our expectation that we want to use our capital and to achieve 30% plus returns on capital. And if we can do that and have confidence on that, it's best to re-deploy our cash.

So, it sounds like the order in which you sort of gave us the use of cash M&A, share buybacks, dividends is the order you're thinking about it?

Yes, but, I would urge you to say that today and, I reserve the ability to change that in the future.

Sure. Thank you very much

Your next question is from Robert Marson with Defiance Asset Management.

Congratulations on a great quarter guys.

Thank you Robert

Since the aerial businesses such a key part of Terex and it's a niche business it's not really given lot of analytical attention, could Bob spend some time may be a minute or so on, where we are in the cycle, what and where the secular growth opportunities are and particularly the international businesses and how the business can grow over the next two to three year since we seem to have satisfied a lot of pent up demand. Thank you.

Okay Bob you want to comment on that.

Yes Robert when the cycle started in September 2003 and the first part of the cycle Robert was a replacement cycle where the large rental companies at the end of consolidation had purged their fleets -- United Rental for example had 26 brands of aerial work platforms, they cut that down to three and were purging their fleets.

So the first cycle that took us really through mostly 2005 was mostly a replenishing of fleets and a replacement cycle. 2006 the primary driver in our market is the commercial construction and we're also helped by the road build, so we have just seen, I think it was May of last year, commercial construction finally started to recover in North America particularly and then the road build -- we're just starting to see road build activities now. In Europe the cycles are a little bit different geographically by country and -- but we are seeing some impact from Eastern Europe to also drive the business and provide a greater growth platform there. But across the world we're seeing major infrastructure work as Steve Filipov mentioned in the crane business and we're seeing a lot of road construction here in North America.

So I think we're -- our customers are optimistic for 2007. Some are talking positively about 2008 just based on the commercial construction activates that they see coming into their various region. But the real planning cycle is a year-over-year cycle where people do their budgeting now and are looking at placing their orders as David Raso said slightly earlier than previous years to get ready for the strong growth of seasonality, but I think this thing has legs. A lot of the Katrina work is still in front of us, a lot of the road build work is still in front of us, and the infrastructure work on commercial construction is still in front of us. And that's really the case across the world.

Well we know that cranes and earth moving equipment have a lot of demand in the brick countries -- the developing Brazil, Russia, India and China story. Do aerials get any kind of exposure there or do they still use scaffolding and older technologies?

Brazil is developing and getting stronger as is all of Latin America. Russia is just an evolving market. It is not a strong market but there is significant investment going into Russia primarily from Scandinavia and Finland and - so those companies are opening branches and locations. So we're seeing the market develop, but certainly it's not a primary driver yet.

But overall the acceptance of that the product worldwide is becoming stronger. We've also added through the Terex relationship some other products that we're taking into the rental channels, so we're very positive. Our customers are doing well, we have people investing in the industry on a prudent basis. And overall the trends in our business are very strong towards acquisition through the rental channel being one of the first ways that people acquire capital equipment that Terex manufactures.

Ronald DeFeoI would also add to that today the large rental companies are much more intelligent about buying fleet than they -- a bunch of independent mom and pop operations might have been at the last cycle. And there is fewer manufacturers and they like the concentration of having two or three manufacturers being their principal fleet because it makes a big difference in their overall maintenance costs.

Okay. And one last question -- I guess this for Rick. Did you quantify how much you want to expand the shovel unit capacity and can you put some color into the projects that you see that give you confidence to expand capacity for a multi-year period?

Okay Robert. If I look at the O&K business specifically, really the areas of demand that we're seeing are coming from the brick countries like you mentioned earlier. And it's also underpinned with us developing a fairly strong [Cap] relationship in markets which we didn't play in previously. From a brick and mortar standpoint I think we'll be very conservative in the German region, we're trying to utilize net -- any of the Genie and the continuous improvement type activities to improve our throughput.

The real challenge is developing a broader supply base because we are very -- we used a variable overhead structure there and the supply base is a key contributor to the capacity that we are trying to develop in O&K. So I think it's not a brick and mortar [inaudible - cross talk], it is developing the supply base and developing the talent and the resources of the business.

Again, I'm not -- I guess it's too early in the morning and I'm not that awake, but could you quantify how many shovels you're producing now and how many hope to produce then three years if all goes as planned?

We're basically at 120 shovel business today. We see opportunities to at least increase it by 50% -- there may be some potential to grow at even further than that in the three-year period.

Thank you very much. Appreciate it. Good luck.

Thank you.

Thanks guys.

At this time, there are no further question do you have any further remarks.

No I don't other than to say thank you, and we did this is in about an hour which is terrific. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.