Terex Corp (TEX) 2006 Q3 法說會逐字稿

Good morning. My name is Christie and I will be your conference operator today. I would like to welcome everyone to the Terex, third quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce today's speaker, Ronald DeFeo, Chairman, CEO of Terex corporation.

Thank you. Good morning, ladies and gentlemen, and thank you for your interest in Terex today. On the call with me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer, Tom Gelston, the Director of Investor Relations and financial planning and analysis, Jon Carter, VP and Controller of the company, and available to answer your questions will be several members of our operating team, including Colin Robertson, Executive VP of Operations, Tim Ford and Bob Wilkerson for our aerial work platform business, Rick Nichols for minings and materials processing, Fergus Bailie for our Terex Construction Product Line, Steve Filipov for Terex Cranes, and Chris Ragot for our roadbuilding and utility businesses. As has been our tradition, I will make some initial overview comments, then Phil will provide you with a specific summary of financial performance and I will return to give some commentary on our individual segment performances. We will then follow it up with your questions. I would like to ask in advance that you limit your questions to one and a follow-up in an effort to get to everyone. A replay, of course, is available shortly after the conclusion of this call, and can be accessed until Thursday, November 2nd, at 5 p.m. eastern time. To access the replay, call 800-642-1687, and for international participants, 706-645-9291 and enter the conference ID number 854-8092.

So let me begin. Overall we had a terrific third quarter. Performance was led by our aerial work platform business, but also we had excellent performances from our Terex Cranes and material processing and mining businesses. Our construction business did lag and our road building and utility business had moderate performance but on expectation. Terex as a company is stronger than every. We are improving in many areas but we have tremendous opportunities still in front of us. The earnings we have been able to achieve reflect the hard work of all the Terex team members and I thank them for a great job. Phil will cover the details but we exceeded our own aggressive expectations in this quarter. And as we look to the future, we expect to have a strong fourth quarter, and I won't give you 2007 guidance yet, but we are very optimistic about our 2007 business at this point in time.

If you will indulge me, I'd like to reflect upon the three-year goal that we established in the beginning of 2004 that's coming to an end this year. As you know, we achieved a greater than $6 billion revenue level in 2005, versus our goal of 6 in '06 and in this year's revenue will be about $7.5 billion. Frankly, a remarkable achievement, given the fact that very little of this revenue has come from any acquisitions. Further more, we are on course to achieve our operating margin target in 2007, of 10%. And we will have achieved the substantial margin improvement this year. And operating margins of over 10% took place in both the second quarter and the third quarter of this year. The resulting earnings per share from these margins and our revenue exceeded even our highest expectations when we set this goal in 2004.

We have benefited from a strong market, a series of successful improvement initiatives around the company, and the support of many of our customers that strongly value the products and services we provide. The Terex franchise, albeit young, is improving, but there's a lot of areas to build, including a better supply chain, better distribution, and additional lean process implementations. We are encouraged by these prospects as we look forward. A number I would particularly like to highlight is our return on invested capital number of over 33% for the 12-month period ending September 30th, 2006. That was a number we could only have dreamed about, even though we did articulate a mid-30s ROIC goal in early 2004. So let me now turn to Phil, who will cover this as well as a number of other financial performance measures, as he reviews the quarter in more depth. I will return in just a couple of minutes to discuss some of our operations. Phil?

Thanks, Ron. And good morning. Before I begin, let me remind you that we will discuss expectations of future events and the performance of the company on today's call. And that such expectations are subject to uncertainties related to macro economic factors, interest rates, governmental actions and other factors. A fuller description of the factors that affect future expectations is included in the press release and our other public filings. I would encourage to you read them. It's important to highlight that our third quarter release provides results and guidance on a U.S. GAAP basis. Non-GAAP terms used in the document are italicized to indicate their inclusion in the glossary of terms at the end of the press release. Including, where appropriate, a financial table showing supporting calculations. Lastly, as we previously reported guidance on a different basis, we have provided information relating to certain large items, included in the periods covered, to aid in your analysis of the company's performance.

We had a solid third quarter, with continued top line growth, broad based margin improvement, cash flow generation and debt reduction. The outcome of this performance, as Ron mentioned, is reflected in our obtainment of 33% return on invested capital for the tailing three months. This level is consistent with our goal to deliver consistent returns expected from diversified investoral companies, as we already exceed those delivered by many of the large machinery businesses. We reported net income of $101 million, or $0.98 per share, compared to $51.9 million or $0.51 per share in the third quarter of 2005. the 2006 figure includes an $0.11 per share impact for the early extinguishment of $200 million of the 10.375% senior subordinated notes, and $0.07 per share impact for the loss on disposition of the Tatra business.

Third quarter 2006 net sales increased 27% to $1.9 billion, compared to $1.5 billion in the comparable 2005 period, as we continue to improve manufacturing thruput to meet the customer demand. Gross profit increased to $367 million for the third quarter of 2006, from $240 million with gross margins improving from 16.1% to 19.3%, reflecting the impact of both volume leverage and pricing realization over the prior year. SG&A expenses increased to $176 million from $137 million for the third quarter of 2005, and this results in a level 9.3% of sales, similar to the 9.2% in 2005. As a reminder, the level of SG&A costs year-to-date has increased over the 2005 period, in large part due to more than $30 million of certain compensation and benefit costs, as well as stock option expenses. As previously disclosed, we would expect more than half of these costs to be unique to 2006.

Third quarter income from operations increased 86% to $191 million from $103 million in the comparable period for 2005. Operating margin increased to 10% from 6.9%, representing an incremental operating margin improvement of approximately 22% on the volume change. This reflects our efforts on pricing as well as volume leverage. Order backlog increased to $2.345 billion, an 88% increase over the year ago levels, and is down $34 million from the second quarter of 2006 due to the sale of the Tatra business and reduction in the aerial work platform segment, based on the timing of the placement of 2007 orders. This was offset by significant increases in the cranes order intake. On a comparable basis in 2005, our backlog had gone down 6% when you exclude Tatra, this year on an apples-to-apples basis, we actually increased by 3%.

We continue to improve our capital structure as gross debt was reduced by $264 million in the quarter, which included the redemption of $200 million of 10.375 senior subnotes during the quarter. Net debt decreased by $207 million to $364 million from the end of 2005, and $400 million over the last 12 months. Net debt to total capitalization for the third quarter is approximately 19%, significantly down from 40% in the third quarter of 2005.

Given the continued strong demand, working capital is basically flat, sequentially in the third quarter, and while we improved to 19.2% of working capital as a percentage of third quarter annualized sales, from last year's level of 2004, we expect continued improvements in our inventory levels as we work through the product start-up issues, and certain supplier constraints. During the fourth quarter, we expect to generate between $150 to $175 million in operating cash flow, less capital expenditures. This is dependent on the impact of continued strong demand, driving the need for working capital. The effective tax rate for the third quarter was 33.5%, down from 37% in 2005 period. This is mainly due to the change in estimate on certain export tax incentives, as well as the mix of income by jurisdiction. We would expect the tax rate for continuing operations to be approximately 36% for the full year. So in concluding, we delivered solid financial performance this quarter, but we continue to focus on achieving our potential. With that, I will turn it back to Ron.

Thank you, Phil. I would now like to discuss some commentary by each one of our segments.

First, the Terex aerial work platform segment. The financial measures for this segment remain outstanding. Revenue in the quarter was up 40% compared with the prior year. Income from operations up 93%. And our backlog was up 82%, compared with a year ago. We continue to have generally strong end markets and the diversification of our business, including a growing international operation is helping to balance this business as we complete this year and plan for a strong 2007.

Our telehandler business had a great year. We do expect this business to slow down a bit from its tremendous growth rate this year, particularly in North America, related to the housing softness. Although, we still expect a very strong 2007.

We have a strong new product pipeline at the AWP segment and an excellent planning process for 2007 is underway now with our customers. We do expect the fourth quarter to be somewhat slower than the second and third quarters, but this is normal, and has been in our planning horizon all along and built into our expectations. This is the fourth year that we have owned the Genie business and while we have added a couple of product lines to this business since purchasing it in late 2002, we are very, very pleased with the revenue, customer satisfaction levels and operating margin performance of the business. This business is growing and has a lot of opportunities still in front of it.

I want to welcome Tim Ford, the newly named President of this business, to the company. You'll be hearing from Tim on our future conference calls. We are excited to have him as part of the team. I want to thank Bob Wilkerson who has built Genie from a start-up company 35 years ago to what it is today. Bob has been the leader of this company for over 30 years and I think there are only a handful of people at our AWP operations that weren't hired under Bob's leadership. Bob will continue to help us throughout 2007 in a number of areas where we can use both his wisdom and his guidance. Bob is a model leader.

Turning to the Terex construction business, the Terex construction business had a generally disappointing quarter. Results were mixed with certain product categories doing well, but this was more than offset by a number of areas where we continue to struggle. Revenue was up by 8%, but the operating margin was only 1.3% or $5 million of income. As I have historically mentioned, this is a year where we have introduced a number of new products and at this point in time, we are still somewhat behind schedule on these product introductions, getting our production rates up to acceptable levels is our near term goal. Supplier constraints, particularly with our Atlas brand combined with some of our own internal production issues have limited the effectiveness of these launches, particularly in the third quarter, which is typically a slow quarter for our European operations anyway, due to vacation periods.

The UK market has also shown some significant weaknesses in a couple of our product categories and we had some bad debt expense and inventory charges associated with our excavator line that were unanticipated. As many of you know, I have historically stated that this business would improve, both in the short term, but also take a little bit longer period of time to realize the results of the activities underway. I feel we are learning what it takes to compete in this segment, despite these short-term setbacks. The new excavator product line we have introduced has gotten excellent customer acceptance, but we are behind schedule. The markets have remained very positive in Europe, which is where we have reasonable market positions and strong backlogs on these new products. We have also introduced aggressive promotion programs in some markets to begin building share. We have made a number of investments in China, which in the short term cost us, but in the longer term will pay dividends. We are lastly continuing to develop a more consolidated distribution strategy which we will report on in more detail in 2007.

And now I would like to turn to Terex Cranes. We had an excellent quarter with revenue up 48% from prior year, 41% excluding the China acquisition, and an operating income about three times last year's level, with a 9.1% operating margin compared with last year's 4.3%. The backlog in this business is, frankly, too high at over $1 billion, which only suggests that we are disappointing some of our customers because we can not get them our products fast enough.

We had a good performance from our operations in China. Sichuan Changjiang Engineering Crane Company and we are excited to be participating in this, the world's largest crane market. The lean initiatives underway in North America and Europe are paying dividends for us. We are continuing to stand behind our products and as mentioned in the press release, our operating results were also negatively impacted by a retrofit program on two models of our all-terrain crane line. We took this charge in the quarter. Our main challenge in this business is to get production rates up, and to continue to put our customers first and get them the products they want as fast as possible.

Let me briefly discuss our materials processing and mining segment. Revenues were up 20% in this segment at $404 million. We had an excellent operating profit. This performance was a 12-point -- a 12% of revenue margin, and the profit level was $48.6 million. This compares with last year's margin of 9.8%. Our performance was fairly well balanced across our primary product lines. Hydraulic excavators manufactured in Dortmund, Germany, mobile crushing and screening product line, and the mining trucks and mining drills. We continue to see strength from this customer base, as the fundamentals of the mining business remain strong and our customers' requirements for future products in '07 and beyond continue to be quite encouraging. We see rising demand for energy and growth in emerging markets as the keys to driving the need for more mining and infrastructure-related products.

Next, the Terex road building and utility products segment had a revenue increase of 16% from the prior year level, and a nice operating improvement; although, off a very small base. The business has shown improvements with the exception of our concrete mixer truck business which we expect will slow down as a direct result of the North American housing-related slowdown. Our road building business had solid trends and we expect this to carry forward and our utility business also has strong trends, and our lower margin distribution business, which is contained within our utility business is being restructured in a number of areas to lower costs and improve the efficiency and customer service for 2007.

Lastly, we have historically reported Tatra in this segment which is now presented as a discontinued operation.

Regarding our outlook. We are past the upper end of previous guidance on EPS. As we essentially beat the street in the quarter, by a margin of about $0.22 per share, excluding the debt retirement and Tatra costs. Given the traditional seasonality of all of our businesses, we have chosen to leave the fourth quarter pretty much alone. Furthermore, since we have moved to try to give GAAP guidance, versus previously we provided guidance on an adjusted basis, we felt it best to let it settle into our estimates, versus trying to perfectly forecast the quarter, which we have historically not done anyway. The primary message here is that the underlying strength of our business is very solid. This will be good for the fourth quarter, and good for 2007 as well. We are entering our final phase of 2007 planning, so it really is too preliminary to provide you with any details. We will do this in February, as we normally do.

Finally, I would like to make a couple of summary comments. Terex is maturing but far from mature. We have wide variances in our businesses. Those businesses that have implemented lean and strong customer-focused initiatives for the longest periods of time have our best margins. Those that are in the early stages of this process have our most challenging margins. As a general rule, we are a company that's strongly aligned with nonresidential construction, and global infrastructure development. A strong majority of our business is outside North America. Our European business ships all over the world to developing markets, Middle East, Asia and Latin America. Our mining business at 21% of our revenue underpins our solid outlook. Our cranes business which has historically been a late cycle business has several years of potential to develop and our operating margins will only get better here. Our aerial work platform business has been a tremendous contributor and we expect another strong North American market in '07, and an even stronger rest of the world business from this segment. And we expect our construction business at 20% of our revenue to improve, but at a moderate rate. Here we will continue to build the fundamentals for long-term success.

The whole company is benefiting from integration initiatives on supply chain, distribution, business systems, human resource planning, and new product development processes. These are all part of the Terex business system that we began in 2005, and, frankly, we started the process in 2004 of changing from an acquisitions holding company to an operating company, and we are still in the early stages of that transition. So while I expect there will be bumps in the road and a few potholes, my outlook remains very strong and quite positive for both the near term and the moderate term on these businesses. We have a good company, trending towards a great company longer term. We have lofty goals and aspirations that for now we'll keep to ourselves but we will work on the foundations that will allow us to determine whether or not these goals and aspirations have the right foundation.

[OPERATOR INSTRUCTIONS] Your first question comes from Phil Gresh with JP Morgan

Good morning, guys.

Good morning.

You probably don't want to talk about '07, but I've got to throw this question out there anyways, because you brought up the margin. When you provided your initial 2006 guidance back in March, the implied operating margin was somewhere between 7.5 and 7.8%, and then your call back then, you mentioned that you think you can get an additional two percentage points in 2007, including the 50 basis points from lower comp expense. So here we are seven months later with year-to-date margins at 9.6% and you have essentially already achieved that. So my question is, do you think you can still get that additional two percentage points next year through cost containment, pricing volume, et cetera, or have you pulled some of that forward already in 2006?

Okay. Good question. The way I would like to answer it is this way, first of all we said as a goal that we thought we would end 2007 with a run rate operating margin of 10%. It was hard for to us handicap how we would transition up to that 10%. I think now the 10% should look achievable. Secondly, we have consistently said that we believe there's at least two to three margin points of improvement from each of one, productivity, and, two, supply chain and just general purchasing and business planning management. We still believe that that is true in both of those areas. That doesn't mean there won't be some headwinds some other areas as we look out. We haven't handicapped that to a particular time period. And if I had the visibility of 2007 at this point in time, I might be better positioned to do that. I don't have that visibility quite yet, because we are just in the final stages of doing our budget planning. I clearly expect to get some of that from each of those two product categories, Phil, in 2007, but at this stage, I can't tell you how much.

Okay. That helps. And then just a quick clarification. Your corporate unallocated expense was down $10 million sequentially in the third quarter. You talked about the reduction of the stock-based compensation for next year. Should we think about this $6 million run rate per quarter as kind of, you know, what we should expect moving forward?

Well, we described the sequential reduction mainly as the long-term incentive plan. Basically we hit the limit and that's the main reason for the reduction in the second to third quarter. And we had some catchup on the equity comp in the second quarter, based on the grants coming out. Again, I'm not going to give specific guidance relative to next year as we are rolling up our budgets, but in terms of the additional costs I mentioned of about $30 million, more than half of that will likely not recur. I won't give you a specific quarterly one yet.

Okay. Thanks. Good quarter.

Thank you.

Your next question comes from David Raso with CitiGroup.

Hi, good morning.

Good morning, David

Not to be too myopic here, but just on the fourth quarter, just so I understand, even if we back out the $0.03 from Tatra, the sequential decline in EPS is about $0.34, using your midpoint. Given the backlog on aerials, as it stands right now, it's hard to get more than maybe a $0.13, $0.15 hit sequentially from aerials. And when you think of the interest expense savings for the third to fourth quarter, it's probably another two or three pennies. I'm trying figure out how we take the extra $0.15, $0.16 hit to get down to the guidance. Assuming cranes and the mining material business, it's not that seasonal, generally speaking it shouldn't be terribly different third to fourth quarter. So the question is, construction and road building, which obviously have been the trouble, are those businesses, despite maybe not a dramatic decline in revenues, sequentially, are those businesses both going back to a loss in the fourth quarter? Unless that happens, it's hard to get the numbers down to $0.79.

They are not going to a loss in the fourth quarter and, you know, I think I tried to articulate, David, that we have really basically left the fourth quarter alone in our view. We provided our guidance and we beat the guidance, but the street was ahead of our guidance, as we looked at, you know, what we said last year. I think you will have to make your own assessment as to whether or not you think we are conservative or -- but we are really focused on what we feel is a strong 2007, and, we don't see -- and I have tried to articulate it by each one of our businesses -- any major changes other than normal, seasonal plans that will take place.

Well, then the issue then on '07, the aerial business, obviously, is a key focus, the domestic cycle is only, you know, so much longer to go looking out to '07, '08, and beyond. The international business, which is now a third of revenue, especially given a little more focus on manufacturing in Europe, obviously, in (Helmach) you are going to take advantage of their facility there and start to make aerials there for the first time early next year. What is the thought and maybe it's a question to Tim or Bob, at end of '07, what should I be thinking of the mix geographically of your aerial business?

Bob, do you want to take a shot at that.

Yes, David, I think I the trend would be 60/40, but the longer-term trend is to push it harder to grow the international business. We see that as a real source of strength in 2007 and 2008, 2009.

Basically going from a third this year and a year later getting it up to 40% non-U.S.?

That's correct.

Okay. Thank you very much.

Yep.

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

Thanks a lot, guys. Great quarter. The crane business, can you quantify the -- the expense of the retrofitting program in light of Manitowoc's quarterly margin of 13% in their crane business. Could you give us an updated longer term target for the operating margin potential of that division, say in '07/08? Thank you very much.

Okay, Robert. I will take a shot at it and see if you might want to follow up on this. We did not quantify the hit attached it. It's a couple of million dollars. It will move the needle a little, but not that much. I think we want to first get well above 10% as an operating margin. We realize Manitowoc is a 13% operating margin and follow that very closely. I think the Manitowoc business is much stronger in the tower crane segment. Their business is three or four times our size there. That's the strongest margin in our crane business overall.

Any opportunity for to you grow that relative to --

Yeah, I was just going to try to mention that. We think that the business that we are growing disproportionately faster than some of our other businesses, we plan to add some manufacturing capacity there. We are adding, actually, manufacturing capacity there and we are not going to stop at a 10% operating margin in our crane business and I think, longer term, we'll get close to where Manitowoc is. On a margin, we are probably 12 to 18 months behind them. Steve, do you want to comment on that?

No, I think the main thing is the mix is a bit different. Our business is not so much focused on tower cranes, as Ron said, where the margins are higher. So we'll continue to build that side of our business, but I think also the benefit that we have going forward is the larger crawler crane business, which seems to be picking up demand, mainly in the emerging markets. So those are higher margin machines. I think moving forward, we'll be increasing our operating profit.

So just to -- to summarize, if and when you are caught up, there's a small structural difference between margins, you should be maybe 100, 200 basis points below where they settle in. So if they were 15, you could be 13, if they were 14, would you be 12, something like that? There's not a structural difference that would require a 300, 400, 500 basis mix differential that would require a 300 or 400 or 500 basis point margin differential target from our point?

That's generally correct.

Okay. All right. Thank you very much. Excellent quarter.

Thank you.

Your next question comes from Joel Tiss with Lehman Brothers.

High, guys. How are you doing?

Good, Joel.

Yeah, can't over emphasize, a really, really great quarter.

Thank you.

I wonder if you could talk a little bit about pricing and cost trends, you know, maybe on more of a medium term basis, just some of the pieces that you are seeing out there.

It's an interesting overall commentary. I'm going to give you just the high level commentary and maybe I will ask Colin Robertson to comment on what he sees as the outlook for our supply chain and costs. We're in a potential inflexion point here, where I think we can continue to get a little bit of pricing, but at the same time, I think we can get more aggressive with our supply base and get substantial cost reductions. The inflexion point comes as a result of just general economic conditions. We got out of phase a couple of years ago as everybody knows. I think we are caught up on pricing. We are going to continue to be able to get a little bit of pricing. Not as much, perhaps, as we once did, but we think we can get a little bit more cost. Colin, do you want to comment on that? [ silence ] Maybe since Colin is in Scotland, maybe I'm -- maybe he got dropped or missed, I'm sorry. I apologize for that.

Okay. Just a follow-up, can you talk a little bit now with your increasing beautiful balance sheet. Can you talk a little bit about dividends and acquisitions?

Increasingly beautiful balance sheet. I'm having a hard time realizing that. [ LAUGHTER ] Joel, if you just pardon me for a second. I -- I think, you know, we are going to look at all three things as we kind of have said, acquisitions, share repurchase, and dividends. We are probably less inclined to the dividends and more inclined to the other areas. Acquisitions at this point in time are difficult. Probably because we are not inclined to pay -- I will never say never, but, you know, the current multiples for things make it hard to generate, you know, 30 plus percent returns on invested capital and if you applied maybe not 30%, our metric has historically been 20%, we will have to find a way to either grow a business we acquire significantly or cost reduce it. So with the amount of opportunity really left still in our business, that remains our number one priority, which could only mean that if, you know, we continue to generate cash, we would have to look for, you know, a way to redeploy that cash.

Thanks. I will let others get in. Thank you.

Your next question comes from Kent Green with Boston American Asset Management.

Hi. How are you protecting yourself against rising cost increases, particularly in some of your heavier equipment using a lot of steel and that thing. And then you might tie that in to your backlog, and whether the backlog is -- reflects a condition where you really don't want to put it in the backlog because of the prices could be higher beyond -- particularly beyond a year, in areas where your backlog is getting pretty extended.

Okay. Thank you, Kent. Overall, I think, we've got more opportunity to lower costs from our supply base than we'll see increases. Taking steel, in particular, as I think everybody on the call probably knows the spot market for steel has actually changed significantly downward. We, as a company, are just completing a pretty comprehensive analysis of our supply base and focusing on fabrications and steel, in particular. We buy approximately as much steel as a small car company, such as a BMW or a Honda, but we buy it from thousands of suppliers. We have yet to truly consolidate our purchasing capability. We are in the early phases of doing that. We have a plan, both in North America, Europe, and in Asia to do that. And I think we have good prospects to get meaningful cost reductions out from all of our supply base focusing on steel fabrications, steel and hydraulics, which are the three largest areas of our spend totaling over $1.5 billion of purchasing. So if we get, you know, anywhere between 5 to 10% cost reduction, it really has a very meaningful impact on our P&L.

The second half of your question talks really about backlog and how we are trying to protect ourselves on the backlog. In fact, some of the reasons why our margins are going up today is because price increases we took as long ago as 12 months ago are now just flowing through, in particular, in product lines like our crane business, are just flowing through, to real pricing actions in our sales. We have substantially greater prices in our backlog and some of our product areas than we have in today's shipments. So we should see those flowing through. That's why I mentioned that we are at a good inflexion point to be able to realize the margin increases in the company.

The other thing, Kent, is our backlog by definition is deliverable within one year. So we don't have orders there that are beyond that time frame.

Thank you.

Your next question comes from Rob McCarthy with Baird.

Morning, guys.

Good morning, Robert.

Ron, do you mean to suggest that you believe that 5 to 10% reductions are -- in that billion and a half is a reasonable target for the next 12 months. For '07 or something like that?

No, not 12 months but over the next couple of years, yes.

The question I wanted to ask was in the construction segment, you had a couple -- you have a couple of issues that, you know, depressed the numbers relative to last quarter. You mentioned inventory charges, Ron, the release says bad debt expense. I assume that's the same thing. Can we put some kind of a bracket around the size of that? Are you willing to talk about how much incrementally your China investment stepped up? What I'm trying to do is get an idea of how much of the $11 million sequential decline in operating income was unusual.

I don't think it was $11, it was more like a $4 million related to those charges, Robert. The inventory and bad debt are about $4 million in total.

Okay. The $11 I was talking about was the decline in operating income for the segment, compared with the second quarter.

Oh, some of that is going to be a seasonal pattern. The second quarter is our larger and also the mix of business in terms of those revenue volumes.

And then last question I wanted to ask was regarding your comments on the mixer business. Can you talk about the interplay between the prebuy that the industry has been seeing on the emissions standards change and your -- your experience that you have been seeing with weakening sales that you attributed to weaker housing market?

Yeah, Chris Ragot you are on the call, do you want to comment on that?

Sure. Robert, in the mixer business, obviously the major influence towards that particular product right now is a downturn in the housing market in North America. As far as the future is concerned, we are taking a very close eye and look at the housing market and interest rates, obviously, could directly affect that. We are making sure that the cost structure for that organization is properly aligned with the realities of the market conditions. So we saw prebuys earlier this year. We continue to see prebuys right now. But we think most of the prebuy spending has gone past us.

Okay. Thank you.

All right.

Your next question comes from Jamie Cook with Credit Suisse.

Hi, good morning.

Good morning, Jamie.

Congratulations on a nice quarter. My question, getting back to -- Joel was asking you about your thoughts on acquisitions and I am going to ask the question slightly differently. You were talking about multiples. I guess I wanted to get your thoughts, Ron, on the Oshkosh acquisition of JLG, what that means. How that changes, if it does at all, the competitive dynamics of the aerial work platform business and whether you think this is an opportunity going forward, just given the integration that they will have to do, et cetera.

Okay, Jamie. First of all, those are two quality companies, Oshkosh is a quality company and done very well, JLG is a quality company and an excellent competitor. So it's a good combination from an industry point of view. We think they will be a quality competitor in our industry. We view the JLG market position as a similar position to ours. And so, we both have good, strong shares within all the major rental companies and good strong positions globally.

Given the fact that Oshkosh is paying somewhere over $3 billion, $3.2 billion, and will have a very significant step up amortization cost as well on an income level of, you know, perhaps, $260 or something like that, they are going to have to be, you know, pretty good at integration and at -- pretty good at getting pricing in the marketplace, which can only be a positive for us, because price discipline is important in our category. With strong buyers, it's important to have strong sellers.

Okay. Great. And then just my follow-up question, as well on the aerial platform side. As I look out to 2007, while your margins in aerial work platforms have been fantastic, the question is, how much more is there to go? And while we have done a good job, I would think from your comments, that we still should be able to get pricing in 2007, you know, I would think that you have opportunities on the cost side, given your supply management initiative. So how do you think about margins and, I guess, how does the growing presence overseas affect the margin mix?

I'll just take a shot and Bob, you might want to follow up on that. But my belief is that we have great margins today. You know, we have to balance a number of things, investments in areas that will allow us to grow the business. I -- I think if I were to handicap this business, I would say, we are going to grow it a little bit, and our margins will remain as around where they are, if not a little bit better. Both of which is almost a Goldilocks scenario. Very -- you know, very positive. Bob, anything you want to add to that?

No, Ron. I think that's well stated and Jamie, we are optimistic, and looking forward to 2007, 2008 being good years.

But is there any difference between the margins in Europe versus the U.S. on the aerial platform, I guess?

Not presently at today's exchange rates.

Okay. Thank you.

Your next question comes from [Alex Langton] with [Engelhoff and Sneider].

I have a question on the aerials also. And I just want to observe that in recent months, there's been a huge decline in a lot of industrial companies, and housing, they have been tagged with the housing label, as if every company that goes down is a housing play, even Caterpillar. So in the Genie business, you were up 40% in the quarter. It does not look like housing had much impact on that. So could you just elaborate on that. How much of the business in aerials is related to housing and then how much of the telehandlers?

Bob, do you want to take that?

Yes, the telehandlers, I will start with that, specifically the smaller models of the telehandler have some housing-related influence and there's also a seasonal pattern to the telehandler business, which we're monitoring, watching now. We have had a great telehandler year, and we're -- we think that next year looks to be a reasonable year. Overall in the aerial segment, housing is a very, very small portion of our business. As Ron said earlier, the focus is on infrastructure build, which is strong on a worldwide basis and commercial construction would be the index that you should really watch for our business. As well as road building with the bridge work that that entails. So residential is very, very small influence on our total overall business.

Yeah, of course. And you have about a 10-week backlog. Is that -- is that normal for this time of year? In this business orders really don't start to come in until December/January, so do you have what you think is a normal backlog or it will go down as lead times go down?

Actually, that's quite a good backlog for this time of year. We had a much more normal seasonal pattern, both on -- on the geographic basis of this being a northern hemisphere business, so the seasonality patterns are stronger and then also the budget periods of our major customers, Alex, that usually they -- they are just going through their budget process now and planning for next year. And also, we -- we are just negotiating prices for next year, and haven't accepted orders from everybody. But this is a good backlog for this time of year.

And what are your lead times? How would you characterize them? And where are they the longest in Genie?

Well, the -- the lead times are probably model specific, but the aerial work platforms are longer than telehandlers and booms are longer than scissor lifts, I guess.

But we have also run Genie in a pretty lean way. If a customer wants a product from us, we find a way to get it to them.

Okay. On another topic, could you elaborate on where the supplier constraints are? Where they are the most severe? And also how much -- can you characterize how much sales and earnings are being lost because of those?

Okay. We -- we can't really handicap sales and earnings lost because of supplier constraints. Most of the supplier constraints that we have are related to some of our new product start-ups, and the construction business. We are -- we have a very strong backlog for our new crawler Atlas excavator and we are behind schedule in the production of that product. We have a new wheel loader that we're introducing in Europe and we are behind schedule on that. And we have a TA40 articulated truck that we are introducing globally and we are just getting caught up with that. We missed a little bit of production in the September ending quarter there.

Most of the supplier-related issues are planning related, planning and communication and coordination related, and so, a lot has to do with both ourselves and our suppliers. I wouldn't necessarily point the blame just at suppliers. Obviously, there's still a bit of a tire shortage in our mining business, Rick. And the mining business is struggling a little bit that way. Our crane business has a shortage of tires, but it really hasn't affected us. I don't think we have missed any shipments that I know of anyway, as a result of that. So, you know, the they impact our business. They are issues, but, you know, it's really nothing that unusual.

Okay. Thank you.

Yeah.

You do have a follow-up question from Robert Marcin with Defiance Asset Management.

Thank you. Could you talk about the activity for the -- the outlook for the mining business over the next year or two? Quoting activity, current state of production backlog, and where the longer term margin potential is in that business? You have already done a great job of boosting the margin up to the 12%, 13% kind of range.

How much revenue could that business do and this is an easy question, in two or three years and what is the margin potential on that business? We all seem to dramatically understate the stunning results out of the Genie division, and I'm just trying to figure out, you know, whether the mining business has that kind of surprise potential over the next two or three years. Thank you.

I will turn that question over to Rick but urge him caution not to overstate, but also we are all pretty optimistic about this business.

Yes, Robert. I think, you know, from a cycle stand point, I think we are very optimistic about a continued mining cycle for really the next two, potentially three years, at least within our visibility. We are doing a lot of good things on product development in the mining business, in fact, next year will be our largest product introduction year in the last five. And I think there's a lot of opportunity for us to continue to grow and expand our -- our market and our market share, especially with our announced Cat alliance for hydraulic excavator business. So I'm very optimistic. We have seen a doubling of growth in the last couple of years. I think there's still a lot of runway for us to continue to grow this business in the next couple of years.

There is a little bit of headwind in the U.S. and the U.S. crushing and screening business, probably related more to housing, but it's a relatively small piece of our total mining and materials processing business.

Somewhere in the 10% range.

All right. Thank you.

Okay?

All right. Great. Okay. Thank you very much.

Your next question comes from Andrew Obin with Merrill Lynch.

Yes. Good afternoon. Good morning. Just a question on a recent trend in your end markets. Have you seen something change in the past month, month and a half? An I also wonder, you have noted in your press release about an aggressive marketing campaign. When did you announce that?

That was related to our construction business, and our construction business in North America, in particular, we started that about six weeks ago on our loader backhoe product line. And it's just in the early stages. It has a theme of -- pardon the pun -- but can you dig it? And it has to do with attractive lease rates, attractive financing, and re-establishing an initiative program on our loader backhoe, which will then move to our mini excavator product line and we will be bringing in a number of key customers from around North America to experience the quality of our products. We are still a relative unknown in these product areas and so, you know, that's met or exceeded our expectations and has been led by Katia Facchetti, our new Chief Marketing Officer with the company. I think we are getting some experience with some different approaches to trying to do business in this area.

Well, I guess what I'm trying to understand, if you are seeing any deceleration of of the growth rate in the past six weeks, if we are seeing inventory build up in the channel, and I am talking more about construction. Because based on what we are hearing from the companies and also companies in the industrial base, it's a very mixed message as to whether or not there's been some material slowing down in the past month, month and a half, and I'm just trying to get your sense.

Okay, Andrew. As a member of the industry, what I will tell you is a lot of the product categories that relate to housing have clearly slowed down. We're not in the Skidsteer loader business but that's having a slow down from everything I read. We are not in some of the smaller trenching and other product areas that are slowing down. We are a little bit in the loader backhoe business. We are a little bit in some of the other compact equipment businesses. Those are going to slow.

Overall, Terex's exposure to that side of the industry is probably 5% to 7%, but there are companies that obviously have a greater exposure to that business in North America, and -- and in that size equipment, and there are companies that historically run their business with captive finance companies that floorplan and use the inventory of distribution as a bit of a shock absorber. We are not in that.

We don't really do a lot of that so I think what you are hearing is generally true, but it's important to separate, you know who is in what area and what kind of products does that company have versus others.

Just a follow-up question, Europe seems to be tracking a bit stronger than we would expect, given the GDP growth there. Do you have a sense of what's going on there?

I don't know. Steve, you are my American-European. Colin, do you guys want to comment on that?

Sure. I think Germany is coming around. It's a bit spotty. The UK is still strong, having visited, we just opened a new office in Madrid, and that business -- you know, that economy is still -- still very strong. It's been that way for the past seven, eight, years. and Italy seems to be up also. So in general, I would say yes, it's up. France is down. You know, I saw some recent articles about consumer spending going down quite a bit in September. So I would say, Germany. The main markets seem to be up, so if that answers your question, Andrew.

I'm just trying to understand why. Is it GDP driven or are we having a replacement cycle? Are we having an upgrade cycle? I guess that's what I'm trying to get to.

Jon, do you want to take a crack at that?

Yes. Now that I live in the US, I wouldn't have the level of visibility in the European markets I normally would have. I would say generally none of the markets are remarkable, either up or down, maybe with the exception of Germany where I certainly see more of a replacement cycle going on, given the fact that from really 2000 to 2005, the average age of the construction fleet, you know, moved up about a year, 15 months. But I would agree with the comments that Steve made.

Andrew, one thing I would say about Germany and I'm sounding old now, so I apologize. I guess it's better to be old than the alternative. Germany went through an explosion at the time the wall came down and a tremendous amount of work and equipment was sold in Germany, in the period of the early '90s. I would imagine that a lot of that equipment has now aged. It's either moved off of the country, out of the country and as we return to some level of growth and the amount of growth is all relative, of course, I think we'll see a pretty solid market there. So a replacement cycle.

Thank you very much. All right.

Your last question is a follow-up question from David Raso with CitiGroup.

One quick question on the tax rate. Phil, can you help us with guidance in the fourth quarter tax rate and how we should be thinking about '07?

Fourth quarter should be about 36%. And full year for 2006, will work out to about 36% as well. We're still evaluating some tax planning strategies relative to next year. Barring anything at this stage, it will still be in that relative range of 36 to 35%. At this stage, I would use 36%.

So that's some of the pennies third to fourth quarter, right?

It is three or four cents, yes.

And the bigger picture question may be for Rick or for Ron. The mining business. The shovels are really driving the profitability right now within the mining piece of that division. The trucks, maybe, you know, lost some momentum two years back when there was thought of maybe selling it, outsourcing the production, bringing it back. With the shovels now increasingly going to Cat dealers who marry their own trucks with your shovel, not your truck, and Caterpillar is out there publicly with an electric drive truck coming, the profitability as it stands today, at least the way I back into it, is pretty darn low on the trucks. What should we be thinking about the opportunity there of getting those margins back up? There definitely appears to be some headwind there. The shovel opportunity for Cat turns out to be great. And I guess the bigger picture, and I don't know if you want to mention this on a conference call, do we need to be making mining trucks?

Well, maybe if I answer the last one first. I think we do need to be in the mining truck business, David. We have actually made really significant progress on the profitability of the mining truck business. You know, we are up almost 4 points, 4.5 points over prior year in the mining truck business and I see a future where that business has the potential to be very, very, similar to the shovel business, with some of the product development activities we are undertaking for -- that will be launched in 2007.

I think the big markets that we see, one our joint venture relationship in China has brought us into a new market that I think is very important. And it will be, in my mind one of the largest mining truck business markets in the long run. We have recently established a very similar relationship with a partner in India for another very large emerging market. I think the truck business is going to be a very good integral part to our business on a go-forward basis, and it's a nice match with the shovel or the drill products that we have in our portfolio.

Yeah, I think one of the things we have learned is that while occasionally a truck/shovel combination takes place and that really happens more in a start-up mine than anything else, these decisions are made independently and they are made on the basis of the performance of the particular product on the particular circumstances of the mine, the grade, the fuel consumption because someone who's buying a factory that's going to run 365 days a year 24 hours a day at plus 90% availability.

We have a quality product that would complete with anybody in this area, and we're just not going to walk away from that and we found a way to get our costs down in the most creative of manners. So we think we can continue to compete in this business and give them hell.

It sounds like -- in my novice opinion is that you are going to have to really make some hay in the emerging markets, the new opportunities where you leverage your north hauler, Inner Mongolia relationship in China, and maybe if you could update us where that big order that you won, when does that start shipping? And also in India, given your whole India relationship from back in the '90s, that big order has got to be up for a renew, I would think soon. So to make your truck future is going to be in China and India, could you help me understand where are we, again, in the China shipment. You saw Kumatsu recently won a big order with China coal. I mean, the opportunities are significant there. Can you help me understand, that whole India deal has got to be pretty close to needing some replacement. We are talking, seven, eight years ago now.

Right. To answer, we'll begin shipping to Shinwa in the fourth quarter of this year for really use around the end of the first quarter of next year by the mine.

And that's where we'll recognize revenue.

And that's when we'll recognize revenue. So it will continue through most of next year. And as I said in India, we are beginning to see -- although the Indian bidding process is complex, as you can probably realize, quite a few of the tenders are out right now and there's a lot more on the horizon to begin that replacement process.

And the size, again of the China shipping next year?

It's -- we have 67 units in total. On the books right now.

Yes, but how much money?

Yes, shipments --

It's north of $150 million.

So that deal alone could add almost 10% growth to the whole division.

Yeah.

Close to it.

Thank you. Yes. [ LAUGHTER ]

Just doing the math. Okay. Thank you.

David, we appreciate it.

Thank you.

Okay. I think that's it. No further questions. Obviously, Phil, myself, Tom and any other members of the management team are available to follow up, and we thank everybody for their interest. With that, I will end the call.

Thank you for participating in today's Terex third quarter, 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]