Terex Corp (TEX) 2006 Q4 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation earnings conference call for 2006.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. DeFeo, you may begin your conference.

Thank you. Good morning, ladies and gentlemen, and thank you for your interest in Terex Corporation today. A few housekeeping items. The replay will be available shortly after the conclusion of this call and can be accessed until Thursday, February 22 at 5 P.M. eastern time. To access the replay, call 800-642-1687 or, for participants internationally, 706-645-9291. And the conference ID Number is 7947330.

On the call with me this morning is Phil Widman, our Chief Financial Officer and Senior Vice President; Tom Riordan, the Company's President and Chief Operating Officer; as well as our group Presidents, Tim Ford for Aerial Work Platforms; Rick Nichols for Material Processing and Mining; Bob Isaman for Construction; Steve Filipov for the Crane segment. I'm originating this call this morning from our Coventry, United Kingdom factory where the senior leadership team of Terex is conducting a [Kaisan] event on our factory floor. This is part of our ongoing learning and education process, with the senior leadership team getting hands-on operating experience with our lean business process implementation.

So, now let me begin. Terex completed a remarkable 2006 year. By almost any measure, we exceeded our expectations, and the results have positioned Terex for further growth and initiatives in the 2007 year ahead. We will cover the financial results specifically, and this is the obvious part. What isn't so obvious is the continued strengthening of the Corporation's franchise at the customer level, quality of talent and leadership among our team members worldwide, and the ability to produce excellent financial results with a moderate capital base, resulting in returns on investment capital of over 38% in the 2006 year.

Over the past 12 years, when I have had the privilege of responsibility for Terex, I have had one common theme and message, and that is that the best is yet to come. And I could not feel more strongly that this is the case as we sit here today. That's not to say that there won't be downturns or significant issues or surprises. However, over any moderate period of time, the resiliency and ability of the Terex team to improve, even when faced with adversity, has actually been quite remarkable. I expect this to continue and could not be happier with the leadership additions of Tom Riordan, Bob Isaman, and Tim Ford, as well as the tremendous performance by Rick Nichols and Steve Filipov and many others during the 2006 year.

As has been our tradition, Phil Widman will follow me with specific commentary on the financial performance, and then I will come back to discuss each one of our business segments in depth. In our future calls, Tom will take this responsibility, and we will continue to have our operating Presidents available for your questions on future calls.

We are, importantly, providing a strong outlook for 2007 and giving you some perspective for what we think the Company can achieve by 2010. We have established a simple 2010 target, expressed as our "12 by 12 in 10" goal. This means $12 billion of revenue with a 12% operating margin in 2010. The revenue target represents about a 12% compounded annual growth, substantially below the historical growth rate of the Company, but realistic given our current size. We believe our ability to increase our operating margin directly relates to four things. One, supply chain management. Two, productivity through lean initiatives. Three, continued vigilance on pricing practices. And lastly, continued leverage of the existing asset base.

Now, let me turn it over to Phil Widman who will cover the 2006 year and the fourth quarter. Phil.

Thanks, Ron, and good morning.

Before I begin, let me remind you that we will discuss expectations of future events and performance of the Company on today's call. And that such expectations are subject to uncertainties related to macro-economic factors, interest rates, governmental actions, and other factors. A fuller description of the factors that affect future expectations is included in the press release and our other public filings. I encourage you to read them.

We had a strong fourth quarter with continued top line growth, broad-based margin improvement, and cash flow generation. This performance, coupled with our impressive year-to-date results, is reflected in our attainment of a 38.4% return on invested capital for the trailing 12 months compared to 21.5% in the comparable 2005 period. This is driven mainly by improved profitability while maintaining a stable invested capital base.

We reported quarterly net income of $101 million, or $0.97 per share, compared to $35 million, or $0.34 per share, in the fourth quarter of 2005. Fourth quarter 2006 net sales increased 29% to just over $2 billion, compared to approximately $1.6 billion in the comparable 2005 period as we continue to improve manufacturing through-put to meet customer demand. Approximately 3% of the net sales growth is due to foreign exchange and acquisitions.

Gross profit increased to $376 million for the fourth quarter of 2006 from $240 million, with gross margin improving from 15.3% to 18.5%, reflecting improvement across all product segments, due mainly to the impact of both volume leverage and pricing realization over the prior year. SG&A expenses increased to $206 million from $171 million for the fourth quarter 2005. This results in a level of 10.2% of sales, down from the 10.9% in 2005.

Fourth quarter income from operations increased 145% to $169 million from $69 million in the comparable period for 2005. Operating margin increased to 8.3% from 4.4%, representing an incremental operating margin improvement of 22% on the volume change, reflecting the volume and pricing leverage affect mentioned earlier. Order backlog increased to $2,491 billion, a 56% increase over year-ago levels, mainly due to accelerating demand for the Company's crane product range, and is also up $146 million on a sequential basis.

We continued to improve our capital structure, as debt less cash and cash equivalents was reduced by $277 million in the quarter and an impressive $484 million during 2006. Debt less cash and cash equivalents, the total capitalization for 2006 is approximately 5%, significantly down from 33% in 2005. Given the continued strong demand, working capital was basically flat sequentially in the fourth quarter, while we improved as a percentage of working capital to quarterly annualized sales to 17.4%.

During 2006, we generated $406 million of operating cash flow less capital expenditures, $242million of which came in the fourth quarter of the year. The effective tax rate for the fourth quarter is 35.7%, up from 25.8% in 2005, mainly due to the benefit of certain legal entity restructuring activities in Germany in the 2005 period. The effective tax rate for continuing operations was 35.5% for the full year, which is consistent with our expectations. So in concluding, we have delivered another solid financial performance this quarter and continue to focus on improvement opportunities that realize our full potential.

With that, I will turn it back to Ron.

Thanks, Phil. Now I would like to highlight the performance and make some brief observations about each one of our individual reporting segments.

Let me first start with the best area work platform business in the world, and that is the Genie Industries organization. 2006 was a remarkable year for this business. Net revenue was up $2.1 -- was $2.1 billion, up 41% from the prior year. Gross profit was more than 5 points ahead of last year. Operating earnings came in at $373 million, or up 96% from the prior year, and nearly an 18% operating margin for the year. Backlog was sequentially up 6% from the prior quarter, although down modestly at 15% below the year ago position. We believe this continues to represent a very strong backlog, and, as a reminder, our backlog only includes products that we anticipate will be shipped within the coming 12 months. We will continue to -- we continue to feel very positive about this segment of our business.

Our European business in 2006 was up over 75% on booms and scissors, and prospects remains excellent in 2007. While the telehandler business has slowed somewhat in North America, we believe we are continuing to penetrate new accounts and that our share will continue to rise. We are in the process of moving some production to Europe in order to secure additional capacity for certain of our products. Furthermore, Genie is a major contributor and participant in our overall supply chain initiatives across the country. We plan to continue emphasizing Genie's points of differentiation in the marketplace. These are excellent products with tremendous service and customer support. The residual values for our equipment are outstanding. Consequently, the ownership returns from our major customers, we believe, are unmatched by anyone.

The Terex Construction segment had a challenging 2006 year. Significant progress was achieved despite the financial performance, which I will cover in a minute. As a reminder, the products contained within this segment are virtually all U.K. and European production based. Within this segment, we include many midi and large hydraulic excavators as well as wheel loaders, loader backhoes, and material handlers. We also manufacture an articulated and rigid dump truck line. Revenue for this segment was $1.582 billion, or up 6% from the prior year. The gross profit was essentially flat on a margin basis with the prior year, and the operating profit came in at about $16 million, or a 1% margin.

This segment's profitability has suffered for three reasons. First, the currency has been a significant disadvantage in both the pound Sterling as well as Euro-based products that we export to North America. More than 20% of this business comes back through the North -- through to North America, and, historically, some of this business has been transacted in dollars globally. Corporately, we feel most of this currency issue is offset through our Genie operations where we export mostly to Europe from North America.

Secondly, Atlas. The Atlas excavator and crane line had a difficult year in 2006. We obsoleted an old excavator design and introduced a new one. This startup did not go well. We were unable to meet our requirements, leading to significant manufacturing variances and extra overhead being maintained. The good news is that this is mostly behind us. The customer acceptance of the new excavator seems quite positive, and although we have had some supply challenges in the first quarter, we expect a significant improvement in the 2007 year.

We were also hampered by new product introductions in general in this segment. In particular, the articulated truck 40-ton size had a slower ramp-up than we had planned, so we, consequently, missed a number of shipments during the year. Our production rates are significantly better today. The outlook is solid, and we expect improved performance. The bottom line in this business is that we expect solid progress in 2007. We think we can achieve a modest operating profit in the year and continue to build our franchise. We are working on the fundamentals like pulling together distribution in major or core markets, like a new product development process. These will continue to be business investments that we make which we think, over the long-term, will result in success.

We have active projects in China on both the supply chain as well as the manufacturing process of some of the equipment that is contained in this segment. Our exposure on the small end of the product range to housing in North America is fairly limited. We expect fairly solid markets in Europe and Asia for much of the other parts of this product range. The backlog in this segment is reasonable. It's about the same size as it was at the end of the third quarter and about up 37% from where it was a year ago.

Turning to our Crane segment. This segment had an outstanding 2006. Total revenue was $1.74 billion, up 37% from the prior year. Gross profit was up about 3.5 margin points, and the operating profit was $154.5 million, or about 2.6 times last year's level, and the full year margin came in at 8.9%, up 4.2 points from the prior year. The fourth quarter margin was nearly 11%.

The market for cranes worldwide remains outstanding. Our backlog is about sequentially stronger than the third quarter and more than 2.5 times what it was in the year-ago period. Furthermore, we will schedule orders but not place them in our backlog because 2008 pricing is not yet fixed. We have ramped up production in virtually all of our facilities, and we are looking for ways to expand production further. Our Chinese crane, JV, has been a positive contributor, and our experience base is building in this important business as well.

The Terex Materials Processing and Mining segment also had a tremendous year. Revenue was $1.625 billion, or about 20% ahead of the prior year, with an operating profit at $190 million, or an 11.7% margin. Gross profit was up 4 margin points, and operating profit was up 3 points. The performance of the Materials Processing and Mining business was broadly based. And Materials process -- the Materials Processing piece saw revenue at a similar level to the Mining business, both experiencing strong performances.

The margin variation between these two businesses really wasn't that great. Both had excellent performance. Importantly, our customers continue to see positive trends in the marketplace. At the end of the year, our backlog was approximately the same as it was in the third quarter and up about 41% from the prior year. And this, of course, does not include the recently announced $93 million order from Australia. We continue to remain bullish about this segment's potential and performance.

Lastly, Terex's Road Building and Utility business had a solid performance for the year and made better progress, frankly, than we expected. We think the prospects are solid here for continued improvement. Please recall that we sold Tatra and removed its results from this segment and report them as a discontinued operation. In total in 2006, the combined Road Building, Utility, and Other segment revenue was $746 million, up 12% from the prior year. The gross profit margin was 1.6 percentage points above the prior year, and the operating margin -- the operating profit was $25.2 million, or 4.5 times the prior year, with a 3.4% margin.

In general, these businesses are performing better. Within this segment, we did have some losses on our re-rental business as we downsized this fleet. We do not expect significant losses in the going forward 2007 year. This will help our margin. The weakest part of these businesses has historically been the distribution side in the Utility segment. We think these are improving, and we are in the process of consolidating several of the activities between the branches in our Watertown manufacturing facility.

Within Watertown, our Oklahoma City operations have significantly improved, and the other parts of our road building business have had positive profit improvements as well. In particular, our Brazilian operations turned in a very good 2006 year. We expect overall performance from the road building and utility businesses to remain pretty positive. The general backlog is about the same size as it was at the end of the third quarter and up about 30% from the prior year.

Now, let me turn to some overall corporate initiatives and comment on these and then our outlook. We are making meaningful and significant progress on our supply chain initiatives. We continue to forecast over the next several years a 2 to 3 margin point improvement from cost reduction opportunities in this area. We will enjoy a portion of this in 2007, but we will be working hard and probably benefit more in 2008 and beyond as we switch and qualify new suppliers from current and different geographies. We are on track with our One Terex Management System project, and the Terex Financial Services initiatives.

As mentioned in the press release, we expect total revenue for 2007 to be between $8.2 and $8.5 billion, and our 2007 earnings per share to be in the range of $5.00 to $5.40 for the year. Earnings in the first half will be slightly less than the second half, and we expect the first quarter to be about one-third of the first half earnings, including the approximate $10 million charge for the debt retirement.

As mentioned earlier, we are also emphasizing the long-term potential and value we see in our current product ranges. I mentioned earlier our "12 by 12 in 10" program. In simple terms, we expect to achieve $12 billion of revenue and a 12% operating margin in 2010. The emphasis here will be on internal improvements through our Terex business system, supply chain, productivity, pricing, and revenue leverage initiatives.

That's all for my opening comments and my follow-up comments. Now, I would like to turn it over to your questions. Christy, could you open it up for questions?

[OPERATOR INSTRUCTIONS]

Your first question comes from Terry Darling with Goldman Sachs.

Terry?

Yes. Can you hear me okay?

I can.

Okay. Question on the cost that you incurred for the various issues and items for the Construction business and the Materials and Mining business in the fourth quarter. And as we look ahead to 2007, what are you assuming for those two divisions, specifically, in terms of margin performance for the year?

Terry, it won't be our practice to give specific margin guidance by segment. And we haven't done that in awhile. I will tell you that there is significant improvement and -- over year-over-year. But we still expect the margins to be generally low in our construction business and improving in the other business. Phil, do you want to comment further on that?

No, I think that's appropriate, Ron.

Have you not commented in the past in terms of the quarterly results what the impact from some of these special items have been?

Typically, Terry, we have not called out special items that aren't what I would call more operational in nature as opposed to structural in nature, is our practice right now.

And, frankly, we are trying to get away from this special items description and just trying to stick to the basic operating performance of the Company.

Okay. Shift gears and ask you, if I could, about your thoughts updated use of free cash, obviously you announced a buyback recently. But your cash generation and your balance sheet suggest you've got significantly incremental fire power relative to that announcement. And I wondered if you would talk about where you see the acquisition landscape and perhaps as it relates to the stretch goal numbers that you talked about. To what extent are you assuming acquisitions to get to some of those numbers?

Okay, and I will let Phil answer the first part of that question, and I will come back and answer that. I would like to limit everybody to a question and a follow-up so everybody gets a chance to participate, okay?

Will do.

Terry, our first priority on cash flow is, really, to invest in our existing business. You will see that our guidance on capital expenditures is higher than it has been traditionally. Some of that is related to the implementation of our management system but also investments for capacity. We are also looking at our financial services segment. To look at building some on balance sheet capabilities and capacity to take additional orders, let's say, in penetration through our existing equipment. After that, it's really acquisition oriented, and Ron will comment on that. And then I would say priority-wise share buyback would be after that.

Okay. On the acquisition front, these are always incredibly hard to handicap. We have assumed a 12% compounded annual growth to get to the $12 billion. And we know there will be some amount of acquisitions in that assumption. Exactly how much is difficult. Historically, I have tried -- I have tried to guide the Company to about half organic growth and about half acquisitions. Everything really depends upon the value and timing, in large part, on acquisitions. So it's difficult to handicap. But, unlike the prior guidance in year's past where I said all of our growth would come organically, I think we will get a little here from acquisitions.

That's helpful. Thanks, very much.

Okay.

Your next question comes from Jamie Cook with Credit Suisse.

Hello, Jamie.

Hi. Good morning. You know, Ron, my -- just back to the "12 by 12 in 2010", can you just talk a little bit about what you are assuming for the economic environment, just so -- both in the U.S. and overseas?

Sure. We are assuming a fairly stable economic environment. We are certainly not assuming an aggressive recession. It is my expectation that it will get a little bumpy probably in '08 and '09. It will be harder to handicap our Crane business in 2010 because, probably, after several years like three years of growth, the Crane business will slow down. The Area Work Platform business will slow, but I don't see them slowing dramatically.

Frankly, I think our industry is learning how to manage its fleets better and how to manage their inventory and fleet in line with the general demand. And I think that's a positive trend, because you will see less dramatic changes with the visibility of information. And I think that is a positive. So, net-net, I'm assuming a generally positive economic environment, mostly drive by good commodity prices which are going to be driven by a strong India, a strong China, a strong Brazil, a strong Russia, and a strong Eastern Europe. And so, I think the general outlook for infrastructure is tremendous, although it will be a little bumpy.

And then, just my second question on the Area Work Platform business. Your backlog was off, I think you said 15% year-over-year versus your competition, which, I believe, had 8 or 9% backlog growth. So can you just sort of help -- walk me through that? And also, I guess the margins were a little weaker. Are you seeing any deterioration in pricing?

Overall, I think we feel great about our backlog position on the AWP business. I think what you are seeing is virtually just a small amount of our rental companies that last year were trying to get their orders in, and now they are basically placing their orders in a more normalized trend. And I think that's the only thing you see going on here. I am going to ask Tim to comment in this recent experience at the ARA show, which is the principal rental show, just to give you some color and flavor for what was being said down there. Tim.

Yeah, Ron. I think what you've characterized for backlog is pretty much the way I see it as well. One additional point, as we were going into this year, we were still negotiating prices with several of our major customers. We've worked through that. And I think customers were holding back to place their orders until we had those issues revolved.

At last week's ARA, for me, it was my first task through there. We saw tremendous activity. We had a lot of customers approaching us. And though show orders are not are a -- are one blip on the radar screen, we saw significant order growth this year versus where we were last year. Of course, orders were already in last year. So, I feel pretty good about where we are from a backlog standpoint.

And then, just nothing -- on the pricing front, no deterioration there?

No, I don't see deterioration. Although, we are going to be negotiating hard. Maybe we will give a little away. But it won't be anything that I would say dramatically changes our view on margins.

Great. Congratulations.

Thank you, Jamie.

Your next question comes from Robert Wertheimer with Morgan Stanley.

Hi. Good morning, everyone.

Hello, Robert.

So just a quick question on European construction, I guess. It looks like it's very strong. We've seen that elsewhere. And I just wonder if you are able to characterize it, either by end market, by consumer, commercial, residential, or just give some strength -- color on the strength of the rise.

I think we are generally positive about the European construction market. For the first time in some time we are seeing Germany come out of its malaise. And that's, frankly, no surprise given the fact that Germany invested so much in the east in the early '90s. There was so much equipment that went into the east, there was so much rebuilding that took place. And taking a pause in this business for a number of years only made some sense.

I think we are seeing continued strong performance in Spain. Strong performance in France. And, frankly, Italy is maybe a little uncertain, but for the Crane business, it continues to be very good. The U.K. is the one that I'm having a little harder time handicapping. But it's certainly not down much. But -- so, overall, we have a pretty good presence here in Europe. I see 2007 being better than 2006.

Thanks.

Okay.

Your next question comes from Joel Tiss with Lehman Brothers.

Hi, guys. It's Henry [Kern] in for Joel today.

Hello?

Question for you on the swing factors that might take your guidance -- your 2007 up to the high end of the guidance range versus the low end of the guidance range. Are there a couple discreet items that you think could cause that difference?

Yes, good first half. I mean, we want to get that first half behind us. It's always hard to handicap. The selling season in our business really starts in March and goes through September, October. So, we will really have a good sense of how the year is going to be by May, June type timing. And I don't really mean to be smart about it, but that's how -- it's always a little bit hard to handicap. And, frankly, at this time last year, it was hard to handicap also, and the business came in very strong as we went through the year. So, I don't want to get too bullish, but at the same time, I want to give you a sense that we've still got some hard work in front of us.

Okay. And within the crane segment, in particular, could you talk a little bit about the current lead time for cranes and longer term, what the revenue potential for that business could be if we've got several years ahead of us in the cycle?

Okay. I'm going to talk about the revenue potential for the business then turn it over to Steve to comment on some of the lead time issues. I think the revenue potential for this business is still pretty significantly above where we are thinking right now. There is no reason why, over the next several years, this business couldn't grow 50% or more. I think that will require some good things. I think it will require a deeper penetration in Asia. I think it will require us penetrating China, specifically, a little bit more. And I think the Middle East will have to continue to be strong.

I also think there will be big projects that will have to be worked on that the large cranes will be needed for. So, I'm quite bullish about the crane business just in general. But, as I say that, I just want everyone to recognize it is a little bit of a boom or bust business also. We just happen to be in the boom part of it, and no pun intended, right now. So, Steve, why don't you comment specifically on the backlogs that you are seeing today and lead times.

Sure. Yes, Joel, the backlog is, I would say, varied by product line. We do have availability on some of our products. Some of the larger machines tend to be a little bit further out due to long lead time items such as cylinders and steel. So, I would say it's varied by product line. But just to add on to Ron's comments about the business, the energy sector is growing, and if you look at wind, coal and nuclear, there is a lot of development there. So, I think the outlook is quite positive.

Okay. Thanks a lot.

Yes.

Your next question comes from David Raso with Citigroup.

Hi. Good morning.

Hi, David.

Hi. Regarding the '07 outlook, you've never had a first quarter lower than the fourth quarter, except for making that transition from late '00 into early '01, economically. Given we are already halfway through the quarter, why should we be thinking of first quarter as below the fourth quarter.

A simple reason, David. Because the first quarter is always made in March. And as we sit here, we don't know what March is going to be. We think it will be strong. If it's really strong, we will do a little bit better. If it's not really strong, we will do just about the way we expected, and we will end up having a good second quarter. So, it's really difficult for us to handicap the amount of business we will have between March and April, which is kind of a swing month. In particular, a swing month for our Area Work Platform business which has got a lot of product on the water that is headed to Europe to be sold in that beginning of the selling season.

And, obviously, not trying to be cute here to pin you on the guidance for the quarter, but it's mid February, you have a lot of long lead time products, and the first quarter guidance is implying something that rarely ever happens. So, I'm trying to understand, is there something you are aware of to even make that guidance even -- ?

Well, David, we also, as I said, assumed the $10 million charge for the retirement of the $200 million of high yield notes.

No, but even adding back that $0.06, Ron, at base, you're looking at $0.89, is, essentially, the guidance, 48% of the year's earnings in the first half, take a third of it, that's $0.83, and tack on the $0.06, you're up to $0.89. And you just did $0.97. So, I'm just trying to understand the logic behind it, or are we supposed to just accept it and it is what it is and -- ? You would have to know something already to think, given the long lead time, something is going on to even think that you want to be, at least, flat sequentially. And I'm just asking, do you -- are you aware of something, or -- ?

Well, unfortunately, David, it's a whole heck of a lot easier to handicap the business with your computer and a progression than it is when you are trying to ship it out of the door. And at this stage, we think we are going to have a great first quarter. But we have some concerns about the final two weeks of March and what ends up in March and what ends up in April. And we're, generally, just trying to give you our best sense.

The guidance we gave you was not specific on an EPS basis. You translated it to be specific. What we said was a little bit stronger second half than first half and about a third of it in the first quarter of the first half. Which, if you take the higher end -- I mean, you've got to look at, well, what is a little bit stronger first half, that's -- a little bit stronger second half than first half means. I mean, you've made those assumptions. I'm not verifying your $0.89 at all, here. I'm just saying, I'm just repeating what we said in our memo.

I appreciate it. It just seems awfully conservative. Historically, that would be almost unprecedented. So, you are not seeing anything odd in the quarter to make you anxious about a normal pattern?

I'm seeing nothing odd in the quarter, and I think Terex will have a very good 2007. And I'm encouraged by what I see for the first quarter.

Okay. And bigger picture question. Looking at the 12% margin goal, how should I think about that, and not to pin you to exact numbers on each division, but just trying to understand where we go on aerials, for example. Obviously, we're at pretty high levels today. Is that more of a maintained construction? Obviously, the biggest opportunity. But just trying to figure how we get there from here, just given a -- 50% of your earnings, I would argue, are pretty well at the level they are going to be. I don't think that's going to be a 20% margin business on average. So can we better understand how we get to 12% for the Company?

Well, I think I said in my comments that we expected to get there from our Terex Business System, which was lean initiatives, and that's across the Company, not just in any one segment, from the supply chain initiatives of 2 to 3 margin points just by themselves over the next several years, which is across the Company, inclusive of Genie. So, while Genie may slow a little bit and give up some margin from volume, it will probably will get some margin benefit from the supply chain initiatives.

And, lastly, I said from some volume leverage, which, of course, will happen if you grow from $8.2 to $8.5 billion to $12 billion, you will have volume leverage. And if you want to look at it by segment, which I think is the specific question you are asking, obviously, a construction improvement to get to a more normalized 10% operating margin helps a lot. But that's an operating margin improvement, of which some will come from supply chain, but some will also just come from running the business more intelligently and then building the franchise somewhat.

I think we can afford a little margin softness in one part of the business and a margin improvement in another part of the business and still get to the 12% operating margin. So, It's not going to be a straight line. But I think there is enough puts and takes in what we see in front of us to try and come out with that "12 by 12 in 10" objective. It is an objective. It's not guidance. But I want to rally our organization to get there, and I want to illustrate to you what the potential I think we have in the Company is.

No, I appreciate the opportunities in some of the lower margin businesses. I guess one of the concerns I have is we always ran the Company, at least, light on costs when it comes to dealer organizations, engineering, I think, was efficiently used. You didn't throw engineering at the market when the market wasn't willing to pay for it, which was -- I think, always a successful strategy.

But the strategy now we are hearing about, multi-product plants around the globe. Trying to beef up the dealer network. Just trying to understand, if the market doesn't work out economically as we'd like in '08, '09, '10, the ability to throttle back on, what appears to me, maybe, more cost for adding to the system. It might be necessary to build that dealer network out to carry a fuller line. I can appreciate that on the construction division. But I'm just trying to understand the costs that we're layering on, the flexibility and reacting to the market. As, again, as you always said, right, you don't beat Caterpillar by trying to be Caterpillar.

Absolutely.

And I'm just trying to figure out -- we are starting to sound a little bit like Caterpillar, and, especially, the Construction division, and trying to be the low cost provider around the globe. I can appreciate that. But there are a lot of players moving their manufacturing, as well. And there is also a lot of indigenous players in these emerging markets that are going to roll the markets a little bit when it comes to pricing, looking out.

So, I'm just trying to figure out the risk of we're adding to this organization cost-wise while trying to offset it with some of the lean, that if the market doesn't participate for us as we'd like in '08, '09, economically. Are we trying that overhead absorption issue that my other companies face? You've always had one of the leaner organizations. Your SG&A has always been on the low end.

Yes, but my return on investment capital of 38% is clearly a remarkable number. And so, I think to answer your question, I would say this, we are still a young company, maybe first year of high school. We are not trying to be like other companies, Caterpillar, et cetera. We are going to keep lean, which also means lean from an asset base point of view. We are going to operate with an OPM mentality, other people's money, as much as possible. And we are going to implement the lean methodologies which will give us a lot of flexibility.

We are living the lean process. We have the ability to make it part of our culture, whereas some of the other institutions that we compete against have a hard time making that happen. So, I like kind of our strategy, and I like kind of our potential. If the market turns down on us really strong, I'm pretty positive about our ability to adapt. We have certainly been through hell and back. And we are in a situation where we have no debt, virtually. So I kind of like our ability to do what we need to do in all situations.

Okay. I appreciate it. It was a good quarter. Thank you.

Thanks, David.

Your next question comes from Steve Barger with KeyBanc Capital Markets.

Good morning, guys. It's Joe [Box] on for Steve.

Hi, Joe.

Good morning. Can you possibility just talk about some of the current supply constraints in items such as tires and bearings? And if you think, potentially, these could impact your '07 guidance or stretch goals.

I'm going to let Tom Riordan answer that. Tom.

Joe, I think there is some signs, not so much bearings or, especially, materials. Frankly, we're seeing some constraints on weldments, what I would describe as some specialty products that affect different sectors. At the moment, frankly, we are seeing -- the radar visibility within our business sectors continues to increase as it relates to the supply from our vendors. That being said, we're pretty comfortable we're going to get through this without incident. There may be a few bumps in the road. But we were also not seeing significant uptick in cost pressures, which to me indicates, as a question of local supply availability as compared to a global problem here. So, net-net, we're pretty comfortable with where we are at.

Yes, I would say we're scrambling, but we're not being scrambled.

Okay. Fair enough. One last question for you. Can you just talk about the rental market in Europe and, maybe, your expectations for access equipment Cap Ex?

I'm going to turn that over to Tim to give you some commentaries on just, in general. Just give him a flavor, Tim, what you are seeing.

This is my fourth month on the job, so I'm still learning. But the market in Europe appears strong. The Cap Ex for our customer base in Europe continues to be favorable. I have made one swing through with my European counterparts and met a few customers, and they seem to be bullish on the year. And I have every reason to expect that we're going to have good growth in Europe in 2007.

Excellent. Thank you.

All right.

Your next question comes from Charlie Rentschler with Wall Street Access.

Hey, Charlie. How are you?

Good morning, everybody. Ron, a philosophical question. If you get into some choppy waters in the next year or two, do you feel that M&A is -- from your vantage point, becomes easier in tough times, in recession, than in good times in terms of the number of companies, possibly, you can look at and the price?

Yes, I think so, Charlie. There's no doubt in my mind that the best time to buy a business is when the market is down. And it's always challenging to buy a business when the market is strong. We are in an interesting time today, because parts of our industry are turning down, but valuations are still pretty high.

So, I think, when you look through all of that, you have to, basically, look at the opportunity and say, can I add value to this business? Is there synergy, is there strategic combination potential that causes me to believe that over a meaningful future, a cycle or so, that we will be better off with this business than we would be without it? And that's the philosophy you have to take, whether you are at the bottom of the cycle or whether you are at the top of the cycle. And then -- because my job is to add value to the shareholders across a broader time period.

For my follow up, instead of a question, I have a bit of doggerel: 6 and 6 you blitz, figuring in the splits. 12 by 12 and 10 opens gates heaven.

Charlie, you're going to be on my poetic team, here.

I figured you liked that. The emphasis is on "dog" in doggerel.

Okay, Charlie.

Good work.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Robert [Marson] from Defiance Asset Management.

Hi. Congratulations, guys, on a very good fourth quarter and an excellent year, especially with respect to cash generations.

Thank you, Robert.

You really put the numbers up on the board. I guess, the Crane business has a fairly decent backlog these days and a couple more years of growth ahead of it. Would you be willing to opine as to the margin potential in that business over the next two-ish years? One of your competitors is rapidly approaching the low teens. And, in the past, you've said that you have maybe 100 basis points below from structural reasons. Is that a fair margin target?

I don't know whether I would dimensionalize it as 100 margin points below. I don't ever want to have an objective that's below my competitors.

Well, you had a mix issue -- I thought.

Yes, there is, Robert. But over time, that mix issue may also modify as the market is really going to come to our strength. And the market is moving to our strength, which is the big lattice boom cranes that we sell out of Germany. And those will be the cranes that get used on coal projects, on wind projects, on nuclear projects. So, It's hard to opine. I do think our competitor is a great company, and I think they are probably, maybe, a year ahead of us a little bit in some of the things they have done. I don't think -- I think we were closing the gap, though.

So, if they get to mid teens, we're not talking about 100 or 200 basis points of margin improvement, we're talking about considerably more than that.

Well, we're not sure how high "high" is, but it's higher than where we are right now.

Right. And that would probably be the division, excluding the construction business with the most margin opportunity over the next couple of years, and then, maybe, Mining and Materials Handling? Could you comment, though, on how high "high" is there, especially in light of some of your competitors running mid teen margins now and suggesting they are going to go higher?

Yes. Mining business is always a little harder to handicap, because it's got big, big projects. But I'm going to let Rick kind of take a crack at that without getting us in too much trouble.

Okay. We want margins there as good as Genie.

Yes, well, so do I. But I wish for a lot in my life, and I haven't gotten some of those things, either.

Me, too. Me, too.

Well, Robert, you have to look at the Materials Processing and Mining business and split it, as Ron talked about a little bit earlier. Roughly half of the business is coming from the Mining side, which I still do believe there is some runway in what we can do on margin in that business. The Materials Processing side of the Crushing and Screening business, a little tighter business that, maybe, wouldn't see the margin impact that we could probably get out of the Mining side. So, it's split a little bit, so it's kind of muddled as you push the two together. But, there is some run -- .

There is opportunity.

Okay. And in that business, I think at some point in the fall, when you guys were on the road, you were commenting on the order book for significant orders, especially related to coal and iron ore, combined shovel and mining truck orders. Congratulations on that large contract that you just announced recently. Is -- has there been any major announcements from you or your competitors, probably your competitors, since I haven't seen any from you, regarding any major wins for coal orders in Australia or China lately?

Well, I think, not too long back, we -- not too far back, we announced Shenhua, which was a major win for us in China, which was a coal application. So, we are seeing large orders coming from coal, which is a direct result of both GDP and the consumption of power, and iron ore is running strong.

But I think Komatsu won a big order recently.

Absolutely.

And, I also think that we're bidding on a lot of big businesses. Unfortunately, we're not going to win every one. But I think there is enough out there to go around.

Okay, thank you very much. Congratulations on a great year, again.

Thank you, Robert.

Christy, I think that probably does it.

Yes, sir. At this time, there are no further questions. I will turn it over to you for closing remarks.

Alright. I want to thank everybody for their interest. I appreciate your interest. Please follow up with Phil, Tom, or myself. I will be out for the next couple of days or leave a message for me. We appreciate your interest. Thank you very much. Goodbye.

This concludes today's conference call. You may now disconnect.