Terex Corp (TEX) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Terex Corporation first quarter 2007 earnings release conference call. (OPERATOR INSTRUCTIONS) Thank you. Mr. DeFeo, you may begin your conference.

Thank you, and thank you everyone for your interest in Terex Corporation today. On the call with me this morning is Phil Widman, our Senior Vice President and CFO; Tom Riordan is with me here, the Company's President and Chief Operating Officer; as well as our Group President's, Tim Ford; Bob Isaman; and Steve Filipov. A replay will be available shortly after the conclusion of this call and can be accessed until Thursday, May 3, at 5:00 p.m. Eastern daylight time. To access the replay please call 800-642-1687, and for international participants call 706-645-9291, and the conference ID is number sign 5491002. We're holding this call this morning from the Bauma Show in Munich, Germany. This is the world's largest construction related show. It happens every three years, and the industry is booming and people are buying. I know I've seen several of the analysts on the call over the past couple of days and I'm pleased to be able to report our first quarter earnings to you today, which I think are outstanding. Phil is in Westport, Connecticut, and we're here in Germany.

The earnings progress we're making at Terex as well as the general franchise development at our company reflects a number of years of hard work. We're pleased with the progress. Financially we're happy with the first quarter EPS of $1.09 per share, including the $12.5 million charge for the $200 million note redemption that took place in January. This represents about a 45% increase compared with last year on a net income from continuing operations business. Phil will obviously cover the specifics of the financial performance and Tom will follow with a detailed conversation about our operations and some of the initiatives underway.

While we are delighted with the financial performance and the near-term outlook for our business we realize we have much yet to do with this company. Several years ago we set out on a journey to transition Terex to become a superb operating company. We're still in the early days of this journey, but I think there are clear signs that progress is being made. Our operating margins are now clearly in the 10% range, increasing our confidence in our longer term goal of 12 by 12 in 10. That is specifically to be $12 billion of revenue with a 12% operating margin in 2010. We realize that to achieve this goal we need to grow our business in Asia and in the rest of the world at a much faster than we have planned for our Americas and European businesses. As we look outwardly, we expect to grow our Americas business about 6% per year, our European business about 8%, and the rest of the world at about 28% through to 2010. This results in about a 12% compounded annual growth which we feel is achievable. This 12% growth is obviously slower than the nearly 19% rate we achieved in the first quarter, recognizing that some of the first quarter growth was from currency.

Crucial for our long-term performance is the development of our management talent. As you know, Tom Riordan joined the Company as President and COO in January of this year, and two other members of our management team, the leader of our aerial work platform business and construction business are leaders that are new to the Company and I couldn't be more delighted with this team of individual. These new additions to our team, coupled with the leadership that's already in place I feel is one of the strongest teams I've ever seen in the construction equipment industry. I think our leadership is passionate about the business, willing to take thoughtful risks and not confined to conventional tactics. Continuing to deepen and build our management ranks will be the most fundamental requirement to achieve our long-term goals.

Terex will continue to examine acquisitions. However, we remain reluctant to pay extremely high multiples for businesses despite the rather fluid capital markets. We're willing to pay a full price for a quality asset but our historical tendencies have been more toward finding product lines that can be added to our mix and having that business being built as a compliment to our existing businesses. I don't want to nor can I handicap at this point in time what and when we might make an acquisition although we continue to look at a number of opportunities as they become available.

I'm looking forward to seeing many of you at our May 24, investor day at the Greenwich, Connecticut Hyatt. This will be a day when you'll get a chance to meet the broader Terex leadership team and have a chance to discuss our business performance in more depth. What you'll find is a company that's growing, that's improving itself, but that has a lot to do. We're working on cost improvement, technology, new product development, distribution, and all the fundamentals of a business. As I've said before we are still a very young company, and as such I expect to be successful, but also make a few mistakes. So with that, I'll turn it over to Phil who will cover the quarter in some depth, and then Tom will cover the operating initiatives and progress underway. Thank you, and I look forward to take your questions when Tom is finished. 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. Ron, you're still on. A further 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 an excellent first quarter with net sales growth of 19% to more than $2 billion, mainly as a result of improving international demand for cranes, construction, and aerial work platform products. Foreign exchange contributed 4.7%, and an acquisition contributed 1.7% to the growth over the 2006 period. Our gross margin improved by 2.3 percentage points to 20.5%. Largely due to the flow-through of prior pricing actions, international demand in our crane segment, and parts volume in the materials processing, and mining group. This results in an incremental growth margin of 33%. The increase in SG&A expense is due to continued investments in improvement initiatives which Tom Riordan will discuss in more detail. As well as the expansion of our sales activities in international markets partially offset -- at least partially offset the gross margin improvement when looking at operation margin.

Our operating margin was 10% in the first quarter of 2007, an improvement of 1.6 percentage points when compared to the prior period. Approximately 0.3 of a percent of which was related to foreign exchange fluctuation. Income from continuing operations in the first quarter 2007 was $114 million, or $1.09 per share compared to $77 million or $0.75 per share in the comparable 2006 period. As noted in our release we had a charge of $0.08 per share in the current quarter as a result of the early extinguishment of $200 million of the 9.25% senior subordinated notes. Given this performance, balance with some market uncertainties, we would expect our full year guidance to be at the high end of our previously indicated range of $5 to $5.40 per share, including the impact of the early extinguishment of debt.

Although favorable income from operations drove return on invested capital to the level of 39.7%, we were disappointed with the level of working capital as it increased to 22% of annualized trailing net sales. Working capital increased largely as a result of investments in anticipation of the seasonally strong second quarter. A higher proportion of international shipments in transit to customers, and the impact of supplier constraints in certain production locations. This was a key improvement opportunity for us as we focused on supply-chain management, demand planning, and our execution of lean principles. Order backlog increased to $3.4 billion, a 56% increase over the prior year, and a 25% increase sequentially as global demand continues to accelerate. Recall that order backlog is defined as orders that are deliverable within the next 12 months.

With regard to capital structure, we completed the pay-down of the $200 million of 9.25% senior subordinated notes. The total debt however decreased by $85 million during the first quarter, as the need to fund operating activities, largely working capital, partially offset the note paydown. The effective tax rate for continuing operations in the first quarter was 37.5%. As discrete items, largely related to the early extinguishment of debt, and the repayment of an inter-company loan, increased the rate somewhat from our expectation. However, the full year effective tax rate for continuing operations is still forecasted to be 36%.

Let's move on to the individual segment performance. Firstly, the aerial work platform segment demonstrated continued strong financial performance in the quarter as more of our activity here continues to shift to international markets, particularly Western Europe. International net sales rose to 43% of this segment's volume from 33% in the prior year's quarter. Overall net sales volume increased to 19% to $548 million. We improved gross margin by 1.2 percentage points as the favorable product mix and growth in international markets, coupled with the effect of prior pricing action, more than offset cost pressures.

Our continued investment in sales infrastructure in expanding markets provided some offset when looking at overall operating margin, which improved to 18.1% from 17.4% in the prior year's quarter. You will note that backlog levels of $676 million are down from the prior year first quarter as the pattern of U.S. market orders has leveled out through the year. Given that supply has come more into balance with demand. International order growth has largely offset this pattern, however, and overall backlog has increased sequentially by 3%. To meet the growing international demand and to improve working capital efficiency, which suffers from the increased transit times to our customer base, we launched production of an aerial work platform product in one of our European facilities this month.

Next, the construction segment had a net sales increase of 22% to $408 million, as demand for the compact equipment in Europe and globally for heavy trucks strengthened. Foreign currency accounted for roughly a third of the growth in the period over the prior year. Overall gross margin improved 1 percentage point, benefiting mainly from pricing actions and volume growth in the compact equipment businesses, more than offsetting some of the pressure, the currency movement and penetrating U.S. markets.

Operating margin improved modestly to 1.5% as we continue to focus on execution of our plans to pull together distribution in core markets, improve manufacturing, product introduction and global supply management processes, while capitalizing on the growing opportunities in key home markets. Backlog levels in the segment increased over 85% sequentially to $599 million, due to increasing demand for hydraulic excavators, compact equipment, and heavy trucks, as well as certain supplier constraints limiting production output, particularly in material handlers and hydraulic excavators. The Terex crane segment continues to demonstrate substantial growth in net sales and profitability as worldwide demand continues to flourish. Net sales increased by 36% to $501 million. Excluding the impact of foreign exchange and the acquisition of a controlling 50% ownership interest in a Chinese manufacture, growth was roughly 22%.

Gross margin improved by 4.9 percentage points to 19.9%, as the effect of prior pricing actions flowing through the backlog, coupled with a higher mix of crawler cranes more than offset cost pressures. The operating margin of 10.6%, an improvement of 3.5 percentage points, is somewhat less as we invest in sales and administrative infrastructure to address the expanding global business. Backlog, which reached $1.286 billion has more than doubled relative to the prior year period. And increased 14% over the year end 2006 levels. We continue to focus on increasing production levels through supply chain management, lean principles, and additional critical resources to accelerate the delivery of our order backlog in this incredibly strong market.

The Terex materials processing and mining segment reported a relative modest net sales increase of 4%, to $395 million. Net sales of mining products decreased over the prior year period mainly due to the timing of deliveries hampered by supplier constraints, while material processing volume continues to expand as demand for the mobile product lines, in particular in emerging economies, picked up the pace. Gross margin improved by 2.8 percentage points to 22.8%, mainly due to the improving mix of parts volume versus new equipment in the period. Operating margin improved by 0.9 of a percentage point to 11.7% as support infrastructure is are built to address the anticipated net sales volume as evidenced by the backlog growth.

Order backlog more than doubled from the prior year as we booked a large order for Fortescue Metals Group Limited in Australia of $93 million this quarter, as well as experiencing strong growth in most product lines. The overall strength of the global economy and the increasing demand for energy and raw materials bode well for continued expansion in this segment. Overall the road building you utility products and other segment reported flat net sales with improvement in the utility products business and most of the road building product lines offset by the impact of the slowdown in U.S. residential housing which has continued to negatively impact our concrete mixing truck product line. The current year results also include losses of $3.5 million related to two areas. The wind down of our re-rental fleet business and certain charges related to a distribution joint venture which we consolidate in the segment.

You will note a reduction in loss from operations in the corporate and eliminations area as we have allocated an additional $12 million to the business segments over the prior year. We continue to focus on companywide initiatives and supply management, manufacturing strategy, the enterprise management system, marketing, and the Terex business system. So in concluding, we are pleased with our financial performance this quarter and continue to focus on operational improvement initiatives which Tom will discuss in more detail. We need to do this in order to fulfill our full potential. With that, let me turn it over to Tom.

Thanks, Phil, and good morning, everyone. In general, we had a very good quarter of order and sales performance in most of our businesses, while being challenged in many areas from supply chain issues with deliveries of key components and planning and ramp-up issues based on higher demand. Cost pressures from our supply base remain moderate. Starting off with our aerial work platform business, order rates in the U.S. are up low single digits. Order rates in Europe and Asia are up high double digits.

Our large boom business, over 60 feet, continues to be very strong around the globe. Tim Ford and his team have continued to diversify our customer base successfully. With the success of revenue growth outside of the U.S. one of our challenges is working capital growth with U.S. focus manufacturing base. As we ramp up assembly in Europe Italy has started assembly in a second location and is expected to be running in Q4 and continue to explore opportunities in Asia Pacific working capital needs will moderate over time. We're moving one of our key operating leaders into the role of the aerial work platform managing director for Europe which will accelerate the progress.

Our construction group is seeing strong continued demand from Europe, Middle East and Africa with the U.S. light construction market continuing to be soft and with negative impact from exchange rates for this group. Bob Isaman has made very good progress on identifying key talent with new and additional leaders being added in key slots for focusing the group on customer and cost opportunities. Progress in China has not been as fast as we'd like. We've been adding resources and skills to accelerate the results in this region.

The Cranes group add terrific quarter. We're seeing strong demand in in order rates in all regions particularly with high tonnage product. Steve Filipov's organization is continuing to ramp up capacity with good success in solving our welding capacity issues mentioned on our last quarter's call and are working through some supply chain issues with supplier capacity and planning for this strong growth. Order backlog is at record levels and shows little to no signs of abating. A strong new product pipeline is also helping to continue this growth.

Next, our materials processing and mining group had a solid quarter. Strong materials processing order rates and sales continue with robust new product pipeline. This has been somewhat offset by a slower quarter for mining revenue but with strong future orders as evidenced by the backlog increase. A key part of the challenge in the first quarter was supplier deliveries which Rick Nichols' group is aggressively addressing. Based on a strong order book for second half of '07 and good fundamentals in this market we are cautiously optimistic that our revenue growth will rebound in the near future. Working capital is also a concern in this group with work on lean process improvements for sales and production planning continuing.

Our segment of road building, utilities, and other operations had mixed results. Strong road building order rates has been offset by weakness in the concrete mixer market as a result of U.S. residential houser market. The utilities business continues a strong improvement in U.S. order rates and is starting to develop sales outside the U.S. As Phil mentioned, there were some one-time nonoperating issues affecting the results of this reporting segment.

Moving on to our key initiatives, being the best place to work in our industry is one element of our vision statement and we have recently completed our second global survey of all team members with an 83% response rate. We're very encouraged by the progress we've made in most areas and virtually every business has made progress since the last survey in late 2005. Our team is very focused on our safety improvement annual goal of reducing loss time accidents by 25% and we're working diligently to implement a variety of other actions that make Terex such an exciting place to work. Our one Terex initiative for installing upgraded ERP systems throughout our business continues to make very solid progress with a total of three pilot plates in the U.S., U.K., and Germany fully engaged with Phil's IT team and all the resources. With a streamline approach to having a common view of customer and business processes this will be a huge boost to our insight on data and intelligence in running our business. This is clearly a long-term significant transformation of our business over the next four to five years and is being very enthusiastically viewed by our team members and leaders throughout the Company.

TBS, the Terex business system is continuing to mature throughout our organization with significant learning and Kaizen events occurring globally. We were the focal point of our recent annual leadership conference where we spent most of three days engaged on learning and sharing best practices. As a quick example, we have 66 Kaizen events or Terex improvement events in Q1 in the materials processing and mining group alone virtually one every business day. We clearly have much to learn and the organization understands we've got significant opportunities to continue to improve our business for the benefits of our customers, team members, and stakeholders.

Sourcing and supply chain. We hope to announce shortly a new Vice President of Sourcing to Terex which is a clear sign of all Terex businesses beginning to work together to leverage our supply chain spend. We've made good progress with regional business teams on steel, fabrications, and hydraulics. One key result is significant savings over the next few years in these commodities with a variety of additional opportunities and other cost reductions and working capital. We're just beginning to appreciate the huge opportunity we have on collaborating on engineering improvements for component rationalization and for developing strategic supplier relationships.

Improving our face to the customer is a key priority as we work through the many challenges of satisfying and expanding list of sophisticated global customers. As you can appreciate we have a wide variety of legacy processes to enhance from aftermarket parts logistics, fill rates, warranty policies, upgrading our service engineering support and other aspects of making it easier for our customers to do business with us. We're benchmarking and modeling what they've supervised, world-class service for the entire buying experience and working very hard behind the scenes to do just that. Our strategic accounts group is gaining traction to work across all Terex businesses on a seamless basis for the benefit of our larger customers. We have a lot to do and significant change does not come easily. The end result will be very worthwhile, however.

Overall I'm very pleased with the tremendous amount of work and enthusiasm from our team members to improve our infrastructure while most of our businesses are producing at record levels. It is through this kind of commitment and results that will enable us to continue our journey in making Terex a world-class operating company. At this point I will turn it back to Ron.

Thank you, Tom. Why don't we open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Terry Darling with Goldman Sachs.

Good morning, good afternoon.

Good afternoon and good morning.

Good morning.

Ron, wondering if you could calibrate us a little bit on the guidance relative to the -- the discussion on the fourth quarter call. You talked about the first half of the year being roughly half of your earnings and the first quarter being roughly a third. I think you beat that number sort of adjusting for the debt extinguishment piece by about 20% but the full year guidance if you go from midpoint, 520, up to the high end of the range, 540, suggests either you've got more conservative or there's been a degradation in your outlook on some parts of your business. Wonder if you could reconcile that for us.

Okay, Terry. I don't think I've gotten more conservative, nor has there been a degradation in my outlook. Simply stated, we are a business that has a strong backlog with some supplier issues trying to fill that backlog. We believe the second quarter will be a strong quarter but it's a difficult for us to handicap exactly how this year will play out from a calendarization point of view. We still think the second half will be pretty strong. Maybe we're doing a little bit better in the first part very this year than we anticipated. Clearly from the first quarter we did fine. But, I'm just -- I guess taking the position that we'll be in the higher end of the overall range, and as we complete the second quarter we'll take another look at the guidance and be in a much better position to assess the total year. But we're looking at earnings of up 50% year-over-year, and I think that's pretty good performance, and I know the annual look of our earnings is up somewhere between 29 to 39%, somewhere in that range.

So can we do 50% earnings year-over-year? I'm not ready to call it it that. Will we try? Yes. Do we have the backlog to do it? Yes. Do our suppliers have the ability to ship us? I don't know. That's kind of the wrap up of the situation.

Okay, so if we talk about the risks in the second half of the year beyond the supplier issue that you mentioned, if you could step us through how you're feeling about the U.S. aerial business and some of the potential consolidation going on there and any other sort of key issues that remain, balls in the air that keep you from pushing the guidance further at this point, wanting to wait until the end of the second quarter.

Okay, Terry. And just in general, from a discussion point of view for everybody on the call, one question, and a follow-up, is really what we'd like to do, so I'll turn that question over to Tim Ford who is here.

Terry, we look at the U.S. aerial market. We had customers that were taking a look-see attitude tin first quarter as we turned the corner from the first quarter into the second quarter we've seen customers that are beginning to open up the order books. As he we sit here at the end of the first quarter, beginning of the second quarter, we feel pretty good about where our aerial business should be in the U.S. The order rate probably won't be where it's been over the last two or three years. It's more seasonal but we feel pretty good about what the business looks like through the second quarter and into the second half.

Thanks very much.

Your next question comes from Alex Blanton of Ingalls & Snyder.

On that aerial business slide, the percentages, you gave 43 and 33 which resulted in a 56% increase in international and 2% in the rest in the first quarter. Does that sound about right?

A 56% increase in international business year-over-year?

In aerials. Yes. You said international was 43% of the total.

Yes.

So I just applied that percentage, and 33% for last year.

That's about right.

Is the number you gave.

That's about right. Okay.

Okay. The international include Canada?

I don't believe so.

Okay. So the rest is North America.

I don't mean to make a political statement here, international obviously is Canada, but I don't think that's in your numbers the way they--.

We actually rack it up North America, Europe, Asia Pacific, and Latin America.

Fine. I just wanted to check those numbers with you. Now, why is Europe so strong in aerial work platforms at this time? They do run behind the U.S. in terms of applications and usage or have. Is it catch-up there, or is it an economic factor? Exactly what? What's your analysis?

The European business has been gaining strength over the last two quarters. We've seen the business take off -- I don't know that I have enough personal experience to give you a color analysis. I've heard a lot of theories on why that is. What you just stated is one of them. We're seeing customer strength across the market, big customers, small customers, Western Europe, and even into the Middle East.

I'll pick up on that, Alex. I will tell you, I've lived in Europe, I was in the construction business in Europe 20 years ago. Europe has been in the doldrums for a long time. Germany, in particular, has been in the doldrums. Germany was in the doldrums in the equipment business because in the '90s an incredible amount of money was spent in reunification. Once that money was spent a lot of the equipment sat underutilized. We've been through that period now and Germany is the engine of Europe in the construction equipment field, and Germany is moving again, okay, and that's had an overall impact throughout the continent. Spain has continued to be fairly solid, Italy is solid, but when Germany starts moving, lots of good things happen, and there's a lot of big projects at work, and it works on aerial work platforms, the same can be said on construction, on the construction product line, clearly the same is true in the Crane business, and that's good for Terex because we have a lot of our business in Germany and a lot of our business in Europe.

Will you have people on May 24, at the meeting from the AWP division that we can talk to about this, get some details?

Sure.

That would be very interesting, because there were some -- even some legislative and governmental restrictions on the use of aerial work platforms at one time, in terms of the height they could go and so on, and I wanted to find out the extent to which changes in that, changes in that kind of environment might have--?

Why don't we take that off-line, if you will, too. We could do that for you, Alex. All right?

Fine. One more thing. I wanted a clarification. You said compact construction equipment in Europe was strong, and you also mentioned material handlers. Are you talking about telehandlers, I thought they were in the aerial work platform division, or is that something else?

No. We're talking about material handlers, our Fuchs product line as well as our Atlas material handler product line. We handle scrap, we handle logging, metal scrap, both of those products are in our construction segment.

Okay. And what is in the compact segment?

Compact is compact equipment. Loader/backhoes, mini excavators, midi excavators, et cetera.

So that is strong in Europe even though it is weak in the U.S.?

Yes, these are two very different continents.

Your next question comes from David Raso with Citigroup.

I have a question on first the supplier issue. Can you help flesh out a little bit where the issues are in particular if you can help maybe highlight some of the components and how quickly you feel they can be resolved in a way to the point about you feel like your mining shipments might obviously kick in at some point over the next couple of quarters and get that revenue growth going again. Cab you flesh that out a bit?

Yes. We'll talk on a broad basis, David. I think in general that the precision parts are tending to be under capacity constraints at some key vendors, specifically hydraulic controls, specifically some precision castings, forgings. Occasionally we're getting backed up on some other minor parts, but as it relates to precision machining, forging, casting, hydraulic componentry, and on top of that, particularly for the mining industry, there also has been, and there's frankly, a continuing challenge on tire availability that the whole industry is fighting through that has been there. That really hasn't changed. It's not getting any better or getting worse. That being said we do see early signs of starting to be able to get ahead on most of the rest of the capacity constraints.

Okay. On the cash flow, in the press release, it kind of read like it played out as you thought. I've got to believe it was a little bit weaker though, net-net, than you were hoping, at a minimum. Is there any update on the full-year cash flow and how does the cash flow start to the year being a bit weak have any implications on your willingness when it comes to size of acquisition or so forth?

Well, let me start, and then, Phil, I'll turn it back to you. Weakness can also be straint. I mean, we were disappointed a little bit in the fact that we used more working capital than we thought, but a substantial amount of working capital change took place as a result of currency, and Phil might comment on that. But beyond that, we do have more inventory than we'd like, and I think it the's partially a reflection, as we said, of some of the supplier shortages. But it's always reflection of the very strong backlog that we now have. So if we can clear that backlog, obviously there's upside in our revenue. So we -- to a certain extent, you can read that as both a weakness, or an opportunity. I'm thinking about it as an opportunity, and I'm still pretty positive about the overall cash flow we expect to generate in 2007.. Phil, you want to follow-up on that?

Let me mention a couple of additional things. David, year-over-year the first quarter cash flow was also impacted by the payout of our long-term incentive program in the first quarter, as well as some other incentive programs, which is in the neighborhood a total of maybe $50 million. Prior year I think went out in the April/May time frame. We also have some cash taxes that we're paying now. You don't see it in the -- you see it in the operating side, but given we've consumed our net operating losses in the U.S., that number will start to grow over the year. But I think the disappointment, as we've discussed, is really working capital related. Our inventory turns year-over-year almost decreased by about a full turn in the first quarter. Really, in anticipation of this dramatic backlog increase that we have. So I would expect that we're going to get, by the end of the year, back to inventory levels that are what we've been experiencing, such that 22% trailing of our annualized revenue should be more in the higher teens or mid to high teens area, which is more traditional. So I think we're still optimistic for the full year.

I'm just trying to square up if you still have the confidence in getting the working capital down, you're inherently saying we can get the revenue, but obviously the revenue guidance doesn't necessarily reflect the cash flow optimism.

The question is can we get the parts, and if we get the parts, we'll get the revenue. If I had a crystal ball, I could have that better answered. But at this stage, we're planning to do the best job we can to convert as many of those orders into revenue when the customers want them. Trust me, our customers want our equipment now. They don't want it later. So it's incumbent upon us to try and make that happen, and we don't make all of our parts, as you know. So I think we're going to do fine, but I'd like to get through the second quarter.

That's why I asked the first question, the supplier issue. You're starting to see some breakthrough, thus willing to stick with the cash flow guidance essentially.

Again, David, let me jump in just for a second. We haven't declared victory on this issue at all, frankly based on, as you know, it takes one key component to significantly curtail manufacturing, and put kind of an air bubble in the system, so to speak. I don't, clearly, want to place all the blame on our supply base here either, because frankly we've got an ownership piece on the planning side and our ability to forecast, and, frankly, with the strong rates we've got that tends to be very difficult to do with the explosive growth in some of our product lines. So we've got a situation, I think we've got the best people in the Company working on it, very focused on it, we've got specific teams deployed in each of our businesses, focused just on this issue, and I believe, again, there's early signs of getting better, but, at this point, per Ron's comment, I'm not willing to declare victory and that capacity constraints are going to come off.

I have a couple of real quickies, I apologize. But just real quick on the individual segments. For the mining materials, the SG&A was up a lot. It could either be, like you thought you were going to ship, you had the SG&A, the revenue didn't show up, so your SG&A percentage was up. Or it seems like supporting the CAT dealer network on the shovels has proven to be maybe a little more expensive than we thought a year or two ago. How much is it a number that's elevated because of the CAT dealer network situation or is it simply a function -- if you had shipped the way you would have thought this wouldn't be a question?

I'll answer the CAT dealer thing and then I'll turn it over to Phil. The CAT dealer is not costing us more money, so that's not the cause of the SG&A going up. And Phil will tell you what the SG&A increases were. I don't think it's also a result of thinking we were going to ship more and having the expenses there. There's several things at work. I'm not particularly worried about it. It is concerning, though, some of the SG&A increases, but I think these are good investments in our business. Phil.

As mentioned in the release, we did have roughly 3 million increase in management charge from corporate year-over-year, and I'd say the support infrastructure I'm talking about is really management support focusing on aftermarket, new equipment, and between materials processing and mining building up some capability that hadn't been there before. And we do have a few million dollars of translation impact in this business as well. Nothing beyond what I would expect.

Okay.

Real quick on Cranes, the margins were particularly strong when you pull out the extra corporate that's layered on top of that margin.

Right.

The pricing, how far are you willing to price out your cranes right now? I don't mean to ask a competitive question here, but if you can give us a rough idea, how far are you willing to price out right now on the cranes?

Okay, and this is your last question, David, because I've got to go to somebody else.

David, I'd just say that we're trying to get the most we can by market. We're working on a pricing strategy to get the best value for our products, and we'll do the best that we can do, and I would just say that.

We're in a competitive world where pricing is a big issue, and we want to take care of our customers, but we want to make a good return. Okay?

Your next question comes from Joel Tiss with Lehman Brothers.

I wonder, maybe it would clarify some if you could give us a sense of the percentage increase in the backlog from new orders versus stuff that's already in the system that's kind of stacking up a little bit?

Our revenue was up about 19% year-over-year. I think virtually all of the increase in the backlog is from new orders.

I think the ones that are beyond 12 months, Joel, is that what you're getting at?

Our backlog doesn't include things that are past 12 months.

Yes, I'm just trying to see how much of the backlog increase was from, I guess you don't put things back in the backlog if you expected to ship it it in the quarter.

It stays there. If you didn't recognize the revenue, it it stays in backlog.

Okay. Can you talk a little bit about share repurchase plan versus share creep in 2007, and also, Ron, you mentioned acquisitions. Can you just give us some sense of areas where you're interested and things that you think make a lot of sense? Thank you.

Sure. You want to do this, Phil?

I think on the -- I'll talk about share repurchase. I think we've announced the plan of $200 million. You will note in our cash flow statement we repurchased about $5.5 million roughly in the first quarter. I'm not going to get specific in terms of our plans by period or the specific share count. Again, our plan was to go out to mid-2008 time frame for that $200 million, and we'll continue to pursue that.

Are we going to see share creep during the year, or you're trying to keep it even, or just the philosophy there?

I don't think we're trying to offset share creep or not offset share creep. That's not the purpose of our share repurchase program. I think the purpose of our share repurchase program is pretty straightforward, and that is we think we should be buying our shares in if we see opportunities for them, and think our stock is fairly valued and feel that's a use of cash that we can execute, obviously there are a couple of other uses of cash that we plan to execute as best we can also.

Then on acquisitions quick, and then I'm gone. Thank you.

Acquisitions are impossible to handicap. We continue to look at a variety of things, domestic, international, big, small. I mean, we're trying to cover -- we're trying to cover them all. So I -- but I'm not going to handicap it because over a period of time we want to deliver a 20% return on capital at a minimum, as we have said historically, and we want to continue to be disciplined.

All right, thank you.

Your next question comes from Jamie Cook with Credit Suisse.

Good morning. Congratulations.

Thank you, Jamie.

Ron, my first question, just if you look at your SG&A for the first quarter, I think we're up 27% or so, and your sales are up 18%. So SG&A is up much higher. If you could sort of flush out how we should be thinking about that going forward.

Okay. Want me to cover that, Ron?

Why don't you, Phil.

I think, Jamie, the S&A that I would look at here is, we're focusing on several initiatives that Tom mentioned which are kind of -- we expect significant payback on those. Supply management, some of the manufacturing issues, and TBS. Those are the key areas of spend. And what you'll see in the increase year-over-year besides that is the selling effort. Pretty dramatic increases on cranes, construction, NAWP, largely to get after the international side. FX was about 8 million of the overall change there. Then the acquisition in the Chinese manufacturer was about 3 million in terms of the year-over-year increase. I think the level of dollars will not tend to change so much, so you'll see that percentage, the revenue relationship be more in the less than 10% range is what I would expect going forward, than what you've seen in the first quarter.

Okay. Then my second question on the road building and utility side, even if you add back the 3.5 million, that you talked about, your margins were still sort of down year-over-year, disappointing when you look at some of the things you've done on the other segments. So if you could just sort of flesh that out and how -- the type of improvement we should see going forward.

In general, Jamie, I would say the real challenges at the moment is our concrete mixer business. It's under significant order pressure, and, frankly, we're taking, I believe, prudent and reasonable cost reduction efforts in that business in particular. The rest of the road building business, per se, is going reasonably well. The backlog is up over 30% from a year ago. We think the fundamental product line is pretty solid. The utilities business, frankly is doing well but it has been traditionally kind of a margin challenged business as it relates to pass-through margins defined as trucks in many cases that our customers bay and that we -- or we sell to them at low margins and then install equipment on the truck itself for the utility boom business. So net-net, the real soft spot we've got is the mixer business, as I mentioned, and the other two key pieces of business are doing pretty well.

Okay, great, thanks. I'll get back in queue.

Your next question comes from Joe Bach with KeyBanc Capital Markets.

My first question relates to the gross margin expansion. What do you think is a good run rate for gross margin expansion going forward?

Are you talking about incremental gross margin?

Just general gross margin. I think you've got, what, 230 basis points in the quarter?

Right.

Do you think that the 200 basis points plus going forward is maybe a decent barometer in 2007?

I think it it's going to depend, obviously, on the flow through from our backlog and mix. The Cranes group, probably the largest one that had the pricing in the backlog that's flowing through.

Joe, I'll answer that a little bit more directly, recognizing that I think this is -- we're still a little bit of a work in progress to balance out all the elements of our business as our company kind of evolves. I think a 20 to 22% range is probably not unreasonable. We're working on supply chain initiatives. Those supply chain initiatives will have a direct impact on our gross margin also as well as our ability to hold and retain pricing, as well as the various -- the various geographies where we do business. The mix, whether it's the mix or mix by product line.

So we have historically, as a company, had anywhere between a 16 to 18% gross margin because we have historically been more of an assembler, but we've been working hard to get that gross margin up into the 20s, and I'm proud that we're getting there. And that will show as we can get it in the 20 to 22% range, and possibly north of that, that our pricing is sticking, that our ability to generate supply chain or strategic sourcing initiatives are working, and that we're able to sell a mix of product that's a bit richer and as business slows down somewhat, where we've got a strong parts business that will actually help our business as the parts carry a higher gross margin. So I hope that answers your question. I don't know if I would be able to tell you what to put in a specific model, but I think it's the right kind of rang to look at.

That's good color. Thanks. My final question is just in relation to raw material prices. Can you just tell us what you're expecting for the remainder of the year and maybe out into '08 as well?

We have been -- I don't want to say quiet, but a lot of cases the supply base comes in typically fourth quarter looking for price increases, sometimes Q1, and candidly, the results of early stage supply initiatives is working with a variety of different suppliers particularly in three commodities I mentioned I think is paying some dividends from the standpoint of people recognizing what the Terex name represents in terms of size and scope of the Company as compared to buying from 50 different plants which is in many cases what they've been doing. We've been doing a reasonable job but again, very early stages of putting our sourcing organization together. I think the more we coach, counsel, and kind of provide a catalyst for our broader purchasing organization, my expectation continues to be we will see, as I said earlier, moderate price pressures, and unless there's something fairly unusual coming on, I don't know that there's anything that's going to change that one way or the other. I think there's going to continue to be need, or desire, I should say, for supply base at all levels to be continuing to offset inflation, and that's just an ongoing everyday battle we're going to be resisting.

Fair enough. Thanks, guys.

Okay.

Your next question comes from [Charles Ober] with T. Rowe Price.

I had a quick question on a specific market for you. I'm wondering what your approach and strategy is in terms of large trucks for the Tar Sands projects. There's potentially a huge market for them, and I was wondering what your progress is to date?

Okay. That's a good thing for us to comment on at this stage. I want to be careful that I don't overpromise here, because we have no experience that would suggest we can be successful in the Tar Sands on trucks. Our current mining truck design, mining truck design has a suspension system which essentially makes it too shallow to really perform effectively in the muck of the Tar Sands.

We're introducing a brand-new product though later this year. It's being designed in a way at the ultra truck size that will be able to, I think, perform effectively in the Tar Sands. It probably will go into some prototype testing later this year, so we're trying to address that product need. We think our competition does a pretty good job up in that region, and although we have a presence up there through our Terex mining hydraulic shovel business and the amount of trucks they're going to need is pretty substantial, and we don't want to give away that market. So we think we're going to have a product that can compete, but we don't have one at this very moment. Thank you very much.

At this time there are no further questions. Mr. DeFeo, are there any closing remarks?

Just like to thank everybody's interest in our company, and please follow up with Tom in Westport, Tom Gelston in Westport, or Phil, and I'd be happy to take your questions, but I'm a little bit far away, and Tom will relate anything we need to follow-up with back to you. So thanks again, and speak to you soon.

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