Terex Corp (TEX) 2007 Q2 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today.

At this time, I would like to welcome everyone to the Terex Corporation second quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn today's call over to Ron DeFeo for opening remarks. Please go ahead, sir.

Thank you, Cynthia. And thank you everyone on the call with us here this morning. We appreciate your interest in Terex today.

With me in Westport is Phil Widman, our Senior Vice President and Chief Financial Officer; Tom Riordan; as well as group Presidents Tim Ford, area work platforms -- he's actually on the call in Redmond -- Bob Isaman for construction, and Steve Filipov for the crane segment.

A replay will be available shortly after the conclusion of the call and can be accessed until Thursday, the 2nd of August at 5:00 p.m. Eastern Daylight Time. To access the replay, please call 800-642-1687 and, for participants internationally, 706-645-9291, and enter the conference ID number 6908356. And, of course, feel free to go to our website and access the information there, as well.

As is our normal practice, I'm going to begin by making some overview comments. We are obviously quite pleased with our second quarter and year-to-date 2007 performance. End-of-quarter net income and earnings per share from continuing operations both were up over 50% compared with the prior year. Our operating margins were in excess of 12% and our incremental operating margin was 24%, with our return on invested capital north of 40%.

These are, frankly, outstanding numbers for Terex, and we're obviously happy, but we also recognize that we are in a changing environment, where business shifts are probably more to our advantage than disadvantage perhaps compared with others.

First of all, we have significant operating initiatives underway to improve our still quite young company. Our supply-chain initiatives are beginning to show some positive signs that Tom will comment on a bit later. The Terex business system, which is fundamentally a continuous improvement and lean process culture change, is taking hold. Not a lot of financial impact at this point in time, but we think process-wise we are improving our company.

We are getting at some of the root-cause issues in our construction group and making good progress. This will take some time, as previously noted, though we have a lot of revenue here that has been underperforming for some time.

Marketing and customer knowledge overall is improving at Terex. So is our information technology capabilities and the Terex Financial Services Group. I am confident we are making progress across all areas as we mature.

What is also clearly different for us, however, is that our business mix is quite balanced. In North America, our revenue was flat in absolute dollars year over year. This is a function of the product lines that we are in and the diversification that we have.

In the second quarter specifically, which is typically our strong quarter and strong for the industry, approximately 40% of our revenue came from North America. Total revenue, as I said, was flat with prior year. Our European business, however, in the second quarter was up 39% and it represented about 39% of our total Company's business, and the rest of the world business for us was up 21% and also represented about 21% of our total business.

This is a meaningfully different mix than the year-ago situation when you look at North America and Europe, because in the second quarter of '06, our North American business represented about 47% of our total and Europe about 33%.

One last point, and I think this is mostly good news. Our backlog is up 59% from last year at $3.8 billion. I say mostly because I know that some of our customers would like to have our products a little earlier.

So before turning it over to Phil, I'd just like to emphasize a couple of things about our future outlook. We continue to be focused on achieving our 12-by-12-in-10 longer-term goal. We think we're moving in the correct direction from both the revenue and the margin perspective.

For anyone new to Terex, we believe we can be a $12 billion revenue company with a 12% operating margin in 2010. In the near term, we're also pleased to be able to take our outlook up to the $5.50 to $5.70 earnings per share range, expressed in the press release, and a revenue range of about $8.8 billion to $9 billion.

So with that, I'd like to turn it over to Phil, who will walk you through the performance more specifically. Then Tom will follow and cover the operating initiatives within our segments, before we take your questions.

Thank you.

Thanks, Ron. And good morning, everyone.

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

We had an excellent quarter, with net sales growth of 16% to more than $2.3 billion, mainly as a result of the continued robust international demand for our products. Foreign exchange contributed 3.7% to the growth over the 2006 period.

Our gross margin improved by 2.3 percentage points to 21.7%, again, largely due to the increased international demand, favorable product mix, prior pricing actions and internal initiatives. SG&A expense increased due to continued investment in improvement initiatives, which Tom Riordan will discuss in more detail, as well as the expansion of our sales activities in international markets to support the growth.

Our operating margin was 12.1% in the second quarter of '07, an improvement of 1.8 percentage points when compared to the prior period. Approximately three-tenths of a percentage point was related to foreign exchange fluctuations. Income from continuing operations in the first quarter of 2007 was $175 million or $1.66 per share, compared to $113 million, or $1.10 per share, in the comparable 2006 period.

Given this performance, we are adjusting our full year guidance to $5.50 to $5.70 per share, including the impact of the early extinguishment of debt which we recognized in the first quarter. Income from operations drove return on invested capital to a level of 41.5%, but we were disappointed with the level of working capital, as it increased to 20.5% from 17.5% of the annualized trailing quarter net sales in the comparable 2006 period.

Working capital increased largely as a result of the higher proportion of international shipments in transit and the impact of supplier constraints on parts availability in meeting our increasing demand. Debt less cash and cash equivalents decreased $31 million in the quarter to $242 million. Cash flow from operations was negatively impacted by the working capital levels. Share repurchases of $19 million were also made in the quarter.

The effective tax rate for continuing operations in the second quarter was 35.6%. The full-year rate is still forecasted at 36%. However, it will be slightly higher than that in the third quarter, given the effect on deferred tax assets of recent tax rate reductions in both Germany and the United Kingdom.

Let's move on to the individual segment performance. First, the aerial-work platform segment continued its strong financial performance in the quarter and our activity continued the trend towards international markets, with year-to-date net sales outside of North America of 41%, an increase of 51% over the 2006 period.

Operating margin improved by four percentage points over the prior year quarter due to the increase in international mix, as well as favorable product mix, currency pricing, as well as internal initiatives. We continue to invest in sales infrastructure in these expanding markets. You will note the backlog levels of $789 million are up 19% from the prior year's second quarter, and sequentially up 17%, again, reflecting the increased international demand.

The Terex construction segment had net sales increase of 17% to $503 million, as demand for compact equipment in Europe and globally for heavy trucks continue to strengthen. Foreign currency accounted for roughly a third of the growth in the period over the prior year.

Overall, gross margin improved by eight-tenths of a percentage point, benefiting mainly from pricing actions and volume growth in the compact equipment businesses and strong improvement to profitability in the excavator business. These more than offset the pressure from currency movement in penetrating U.S. markets.

Operating margin improved modestly to 4.7%, 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 more than doubled from the prior year level 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 continued to demonstrate substantial growth in net sales and profitability, as worldwide demand continues to flourish. Net sales increased by 23%. Excluding the impact of foreign exchange, growth was roughly 19%. Gross margin improved by 3.9 percentage points to 18.9%, 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 10.4%, an improvement of two percentage points, is somewhat less as we invest in sales and administrative infrastructure to address the expanding global business. Backlog, which reached $1,414,000,000, has increased 75% relative to the prior-year period and 10% sequentially. We continue to focus on increasing production levels through supply-chain management, lean principles, and additional resources to accelerate manufacturing throughput in this incredible market.

The Terex materials processing and mining segment reported a net sales increase of 27%, 23% excluding currency, to $516 million. This was due mainly to mining truck and mobile crushing and screening products. The sales of mining products, in particular, continue to be constrained due to supplier parts availability, which is expected to ease somewhat in the second half of the year.

Operating margin was a solid 12.1%. However, similar to last year, as the emphasis to expand the global support infrastructure and the product mix offset improvement initiatives. Order backlog more than doubled from the prior year as we continue to see strong demand for mining products in particular in the Australia-Asian corridor. The overall strength of the global economy and the increasing demand for energy and raw materials continue to support expansion in this segment.

Overall, the road-building utility products, another segment, reported decreased net sales, as well as income from operations, mainly due to the North American residential housing market decline, which impacted our cement mixer business.

You will note the reduction and loss from operations in the corporate eliminations area, as we have allocated an additional $12 million to the business segments over the prior year. We continue to focus on company-wide initiatives in supply management, manufacturing strategy, the enterprise-management system, marketing and the Terex business system.

So in concluding, we had a solid financial performance this quarter and with our focus on improving our manufacturing throughput and supply constraints as we look to the remainder of the year.

With that, I will turn it over to Tom to discuss the operating highlights.

Thanks, Phil. And good morning, everyone. As Ron and Phil both discussed, we had a very good quarter in almost all areas. Overall, order rates were strong. Cost pressures remain moderate. Our supply-chain initiatives are getting traction and improving our cost base.

Component deliveries still remain a slight drag on our performance, but we are very diligently working across all of our businesses. And several areas of the North American market remain soft, while the rest of our markets are generally strong to very strong.

So let's get into some of the details. Starting with the AWP business, overall, our order rates continue to be very strong, with the North American market down slightly and other markets very strong. Our backlog is up an impressive 19% over the last 12 months and total bookings were up a remarkable 46% from last year. As you can tell, margins have improved based on mix of larger boom products, increased sales to our smaller U.S. customers and shipments to Europe, and with some favorability from exchange rates.

Our European sales growth continues to impress us, being up 67% year to date. Working capital as a percent of sales for the sector has begun to drop, and we expect that trend to continue as we ramp up the second European location in Q-4, reducing finished product in transit overseas.

Moving on to the construction sector, we made solid progress in the turnaround in this business with earnings up approximately 50% year to date versus 2006. Although we clearly have much to do, there are clear signs of progress.

Our [ATWS] business has returned to profitability, with a healthy backlog of orders. We began shipping Chinese excavators to North Africa this quarter and our Romanian distributor ordered over 450 units of equipment for next year. Both of these are very clear signs of progress we're making in developing markets.

North America is clearly a soft market for us, which makes the nearly 20% increase in revenue for this business from a year ago a very positive sign in the markets we are serving and the products we offer. Our cranes business continues to see very strong growth and bookings on a global basis, as Phil mentioned. Revenue is up 29% year to date, with earnings more than doubling.

Even at this level of earnings, we believe that during the second half of this year, we will see improved margins in this business. Backlog is a record $1.41 billion, and we are aggressively working on how to solve constraints in our factories globally.

In spite of reaching a new record for shipments from our DMAG facilities, we still have plenty of opportunities for improvement. New products, particularly larger tonnage, continue to be very well received. One interesting indicator is our tower crane business in France will likely double in revenue this year, a strong sign of the strength of the European market.

Our materials processing and mining group continues with this trend of very strong performance, with backlog more than doubled and bookings up nearly 50% from Q-2 last year. With profitability up over 29% from a year ago, we're looking forward to a very strong second-half performance from this group, as well.

As you might expect, with the growth of this group and the cranes business, both have been challenged with supplier constraints ranging from castings to hydraulics, bearings and some other categories. We continue to add Terex resources to alleviate these constraints, and I would expect the supply chain issues to be somewhat better in the second half of this year for both businesses, although unlikely to disappear with the continuing growth of our businesses.

Our materials processing business continues to do a terrific job in launching new products that are very well received by the marketplace. Our road-building utility sector finished a tough first half. These businesses are largely North American-based and revenue was down over $20 million from a year ago, consisting of a large drop in our concrete mixer truck business, partially offset with other product lines, such as asphalt plants, which are up 50% from two years ago, and our Brazilian operations, which have grown revenue over 40% this year.

The profitability drop is basically in line with the reduced margin from the revenue decrease, along with some other non-operating expenses. We expect marginal improvement in the second half from this sector, along with a stable, but still significantly reduced concrete mixer market.

Let me touch on a few of our key operating initiatives. Our Terex business system continues to make very solid progress as we ramp up our learning and execution of lean activities. Year to date, we had 376 Kaizen events globally, involving nearly 3,400 team members, and we continue to accelerate.

In Q-2, we added key resources to our training and development team and non-manufacturing Kaizen events are becoming a way of life. As an example, Phil Widman and an extended team of 90 from our finance team went through a three-day learning and process improvement exercise. This Terex foundational initiative is clearly an everyday occurrence of how we run our business and we continue to learn that we have many significant areas for fundamental process and business improvement.

Approximately a month ago, we announced Tim Fiore joined us as senior VP of supply management. Tim's strong background from UTC and other companies will serve us well as we staff up this important area. As we begin to approach the supply base on a consolidated Terex basis, our cost savings and visibility for delivery performance and working capital changes with strategic vendor partners will significantly improve. Between our Terex business system lean activities and supply management, we remain comfortable these areas will add between two to three points of margin over the next few years.

Lastly, Phil and I are both pleased in how our one Terex management system implementation is going. The three pilot sites are very engaged and although there have been some minor delays, we expect three of our businesses to be up on the new ERP system early next year. This will truly be a huge integrator for our business, allowing us to communicate seamlessly between plants, customers and suppliers once we complete this implementation.

At this point, I'll turn it back to Ron.

Thank you, Tom. Thank you, Phil.

Cynthia, we're ready to open it up for questions. Could you please do that?

Yes, sir.

(OPERATOR INSTRUCTIONS)

Your first question comes from Terry Darling with Goldman Sachs.

Thanks. Good morning, gentlemen.

Good morning, Terry.

I've heard a lot of commentary from various machinery companies about problems in the supply chain, difficulties getting components. It sounds like you are still experiencing those issues, but I guess the commentary, to me, and the outlook seems to suggest they still remain reasonably contained. But could you give us an update there, please?

I certainly can, Terry. Again, I think they are reasonably contained. They continue to be affecting our business on a spot basis. I think there are continuing areas of focus that we have added a number of full-time Terex resources to be engaging with suppliers, including ongoing continuous business to problematic plants that are supplying us, specifically in hydraulics and castings.

Again, I think the situation is stable. I think we're gradually making progress on it. It continues to be a drag on our business. It continues to be a drag on working capital performance. And, again, with the growth of our businesses, I don't expect to get out of these constraints imminently.

But that being said, I do think, back to your earlier point, it's a manageable situation that we're clearly working through.

And you expect working capital to improve in the back half of the year.

Yes, we do.

And I'd also say it's not like we're not really going after it very aggressively, but I think it's something that is part of our maturity, too, to figure out how to manage our supply base. I know the cranes group has actively put over 20 people on the road visiting suppliers and telling them our story, so that we're getting the parts when we need it, and that really helps build the relationships.

Ron, the order intake remains very impressive. I'm wondering if you can update us on sort of your sense of the intensity of demand, particularly in aerials, cranes and construction. Do you see a slowing going on in the back half of the year?

Obviously, the base is getting bigger and the percentages, at some point, inevitably, will moderate. But how would you characterize any change in the intensity of demand second half versus first half?

Obviously, on a percentage basis, I don't expect us to be showing 59% increases in demand quarter over quarter, because I think that would just be too much to ask, although I'm always a bit surprised when I say that because the demand has been quite robust.

I do expect there will be pockets of demand slowdowns, such as the North American aerial work platform business that we have seen a little bit already. But that is really more than offset by the business overseas in aerial work platforms, as well as I look at the other main segments of the company and I think it's fundamentally a long-term infrastructure development that we're supporting.

And while I know that there will be pockets of disruption in the future, in general, I think it's a very robust period we're going to see for the next, I don't know, three, four, five years.

Then, lastly, just a quick item. Foreign currency impact at the operating income line for the quarter, can you give us that number?

I mentioned about three-tenths of a percentage point on margin.

Thanks very much.

And one question, as a follow-up, just as a general rule I'd like to try and stick to. Next question?

Your next question comes from Robert Wertheimer with Morgan Stanley.

Good morning, everyone. I've got questions on the aerial work platforms division, and thanks for some of the detail you've been giving there.

Two questions. One is, are the margins, in fact, just as high overseas or higher than they are in the U.S. and how much of that is currency?

I'll start that and then ask Tim to follow-up on that.

I think margins vary by product type, of course, and it depends on the product type, but since most of our manufacturing is based in Redmond and we're shipping the vast majority of our product overseas and most of our customers in Europe buy in euros or British pounds, you can imagine currency is going to be helpful there.

So, Tim, do you want to be more specific?

Yes. Robert, we have similar margins around the world. There's really not a big discrepancy at the margin level around the world, which is actually quite surprising to me.

In other businesses I've been in, there's more of a discrepancy. This one doesn't seem to have that.

Perfect. And if I can ask the follow-up. I don't know if I backed into these numbers while you were talking or even heard them right, but I think Europe was up very, very strong in AWP and North America may be down 7% or 8%, if I did it right.

Is that correct? You mentioned demand in the U.S. was flat. Was there anything one off that caused you, if I'm right, to be a bit lower than the U.S. and are you seeing any signs that demand is going softer than flat?

Let me answer that question. You're talking specifically about AWP.

Correct.

Our North American business was down only a couple of percentage points, five percentage points at the max, and our European business was up 58%. The rest of the world business was up 23%. So just generally, quite strong.

The telehandler business was the one main drag, I guess I would and Tim probably would support this. If you pull the telehandler business out, which we know the industry is down somewhere around 30% for telehandlers, probably our mainline AWP business is actually up.

That's very helpful. Thanks.

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

Good morning, Ron.

Good morning, Charlie.

I wondered if you could share with us what capital expenditures will be. I don't recall that you mentioned that for the year, but for this year and then maybe looking ahead the next couple of years, especially given the background of, as you call it, shuffling manufacturing.

I know you cited aerial work platforms you're now assembling or building in Europe in a couple of plants and I guess you have plans to move some small excavator production from Germany to China. But can you give more detail on are there some other initiatives beyond these kinds of things and what is the possible impact on CapEx and what will CapEx totally look like, do you think, over the next two or three years?

Charlie, Phil is going to answer that.

Hi, Charlie. Our guidance this year for our CapEx was a total of $120 million, which included two fairly significant amounts in that. One is the manufacturing facility that we're starting, a green field site in India, which, in the plan, was order of magnitude $15 million, and another $15 million or so related to the implementation of our ERP systems.

So in that $120 million, those are the two big items. We've spent $44 million year to date this year. I would expect that we're not quite going to get to the $120 million this year, for a variety of reasons, on some of those projects.

Typically, we're spending about a percent or so of revenue or less in the past. I would expect that we're going to be between a percent and a percent and a quarter of revenue in the future in our CapEx, as you mention, for some of the shuffling around that we would have. But the changes in production footprint that we've implemented this year to move AWPs to Italy, that's insignificant in terms of its overall cost.

And looking at the future changes in our construction group to China, again, not a significant investment at this stage in terms of that CapEx.

Certainly well within the guidelines provided.

Thank you very much.

Your next question comes from Alex Blanton with Ingalls, Snyder.

Good morning.

Good morning, Alex.

Just referring back to something you said about the -- I believe it was the operating expense that you expect the application of lean principles to that to add two to three percentage points to your operating margin.

Did I get that right?

Tom mentioned it, but what he said was we expect two to three margin points to come from our supply chain initiatives and, also, some of our lean initiatives, and that's not a different number than we have provided in the past.

Well, you're already at 12%. So are we saying that you're going to raise your target for operating margin to 14% to 15% or are these improvements you're talking about going to be offset by some negative somewhere?

Well, let's look at this for a second. We're at 12% in the second quarter.

Yes.

Typically, that's our strongest margin quarter of the year. I would say we're not going to change our 12-by-12-in-10 target, which I'd be very happy to have $12 billion of revenue with a 12% operating margin. So you have to balance margin and growth, which I think is what we're trying to do.

And, thirdly, I would be very happy if the mix in geography stayed the same, but we know it won't and we know that some of our businesses may slow down a little bit maybe in two years a little bit differently than others.

So I think, in general, I don't want to change our 12-by-12-in-10 target, but there might be a time when we have an above 12% quarter. I would sure hope that that's the case. And we also are not quite sure what the pricing environment is going to be in the next couple of years.

So overall, Alex, I think a 12% operating margin is healthy. A sustaining 12% operating margin with a $12 billion revenue base would be terrific and, in general, that guidance has been only with a moderate amount of acquisitions that might be possible, not any major ones.

Now, you mentioned pricing, so let me ask. You said that the pricing actions contributed to the earnings and the margins in the quarter. Could you give us some more detail on that? Because there are others in your industry who have talked about pricing power diminishing somewhat recently.

Phil? It's difficult for us to give you. It's really pricing flowing through more backlog, as well, through to revenue in the period in terms of -- as opposed to new order rates.

Probably the best business we have had some pricing leverage in is our crane business, where we have a very large backlog. But when you take a price increase, it may take some time to actually see it show up in your business.

I wouldn't say that the environment is diminished nor would I say that it has changed. I think it's fairly steady state. I'm actually positive about our ability to recover cost increases. But you recover cost increases in two ways -- one, moderate pricing and, two, aggressive cost reduction. That's how do you do it and anybody that tells you that they're not paying attention to both sides isn't running their business. So that's our focus here at Terex.

Let me ask a quick one. You said year to date aerials in Europe were up 67% and then later, for the second quarter, you mentioned they were up 58%. So am I correct then that they were up even stronger than 67% in the first quarter?

I think my comment specifically was they were -- sales growth was up 67% year to date.

Year to date.

In Europe.

In Europe for AWP.

And we're going to have to move to the next questioner, but what you're seeing, Alex, here is that typically the second quarter is the strongest quarter for our North American AWP business. So actually we probably had slightly less growth in Europe in the second quarter.

That's what I'm saying. Thank you.

It's damn good, whatever it is, and Phil can give you that number later, if it's that critical.

Your next question comes from Robert McCarthy, with Robert W. Baird.

Good morning, guys. I wanted to make sure -- well, I guess what I want to do is clarify a couple of things. In, I think, Tom's comments, he said that crane margins improve in the second half. I assume that means as compared with the first half of the year.

That's correct, Robert.

And, Phil, could you give us a little help on what kind of variability to look for in tax rate, third quarter, fourth quarter?

I would expect that the third is going to be a little over 37% and then I gave you the full year at 36%.

Thirty-six, okay. So that helps.

And this corporate expense allocation, the 12 million that you pushed out to the segments.

Yes.

Can you tell us how that breaks down by segment so that we can look at margin comparisons on an apples to apples basis in the individual segments?

In the release, Rob, you'll see we call it out when it was greater than a couple million dollars in each segment. So I'd refer you to the release and we can go through it with Tom after the call.

And then my last question is, you know, with the discussion of supply chain issues, as somebody else pointed out earlier, a common theme across the industry. Do you have any evidence, particularly in the crane business, that these issues might be costing you some business since you are -- what -- maybe a little earlier in developing the same supply chain that -- as you put it, Ron, it's a fairly young company and you guys are in the early stages of leveraging your combined purchasing power.

Steve, do you want to take that?

Sure. Hi, Rob. Obviously, customers want product quicker. We're doing everything we can to get more product out the door and it has had an effect on us.

I think our biggest focus has been on hiring talent in the supply-chain management. That has been our weakness. I think we've done much, much better in that arena. We're on the floor in Waverly. We're conducting Kaizen events and lean improvement events. We're looking at investing in our weld capability to get away from some of those supply constraints. For example, in DMAG, we have in-sourced large weldments from eastern Europe. We've made investments there. We've invested in weld capability in Waverly.

So I would say, yes, it is a constraint. We're trying to get at it and it has cost us some business. It's a bit unfortunate, but we've just to keep at it.

And while you asked the question on cranes, I think we still face supplier issues in our construction business. So, Bob, I think you have some similar things, don't you?

Rob, we're looking at castings, hydraulics, precision metal parts, gearboxes, those things continue to plague us. But we're really spending a lot of time and effort on demand planning, systemic issues, and going back into the supply chain and making sure that the entire supply chain knows what we think the next quarter, the next half-year is going to look like, so they can plan adequately for their production and their expansion.

Bob, is this a problem that is particularly difficult in Europe as the cycle was slower to accelerate there?

I'm not sure if it's just Europe. I think if you look at the supply chain in EMEA, it's there. It's certainly there in the Americas and it's also there in Asia, because it's the usual players that are in charge of most of these more critical components worldwide.

And, I'm sorry, I just have to ask. Did I hear someone say, I think it was Tom, that you guys shipped your first Chinese excavators to a North African customer this quarter?

That's correct, we did.

Congratulations. Thanks.

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

Good morning. I just wanted to circle back on the internal operating margin opportunities, and sorry if I missed this.

Now that you're deeper into the process of vendor and supply chain consolidation, were you conservative or aggressive relative to your internal goals or are you ahead of where you thought you would be at this point?

I think, in general, we're pretty much on track. I think the delay in getting Tim Fiore on board clearly hasn't helped. At the same time, we've had a number of people internally that have been focused throughout the organization.

I mentioned on the last call we have over 100 people collectively working on this. I think Tim's leadership abilities help catalyze key areas of focus, particularly with strategic partners, such as what Steve and Bob just mentioned, both from a delivery standpoint, as well as from a cost standpoint.

It's going to be gaining traction as we go forward here. But, again, I think we're comfortable with where we're at, but it's like a lot of things, the more we get into it, the more opportunities, the more improvements we see that are available to us.

But generally speaking, on track is the right way to think about it versus ahead.

That's correct.

Okay. And my follow-up, on the acquisition landscape. As you look out at your options, is it more that you have a lot of really good options, that you have to choose the best one, or is it sifting through a lot of bad deals to find something that makes sense?

And, globally, has there any been any real change in seller attitude?

I don't think there are significant changes in seller attitudes. The seller attitudes are always the same -- pay me more than you think this business is worth, and it's always a buyer-seller kind of relationship.

My point of view on acquisitions has always been be disciplined, understand what you want to do with the business after you own it, have a game plan attached to what you want to do, if you own it, and have some constraints about what you will pay, evaluate the management, and never fall in love.

What you need to do is just look at the overall plan and that's what we've done for 15 years that I've been with Terex and as long as I plan to stay here, we're going to continue to do that. So I think the landscape for acquisitions always goes up and down.

Okay. Thanks.

Your next question comes from Robert Wertheimer with Morgan Stanley.

Thanks for the follow-up. The question was, just very quickly, on mining. What were the supply constraints in particular that we're using in the second half, if you can answer it?

And, second, I think you mentioned your mining truck business is the slimmest margin line in the mining. Is there any room for pricing there or is it simply sort of production costs versus what your competitors do? Thanks.

Let me answer the second question first. I think mining trucks is clearly the slimmest margins, tough comparisons, obviously working diligently on changing the capability and cost structure of the truck business. But, frankly, that's slow in coming. Obviously, it's a large complicated project whenever you change a mining truck.

That being said, I think the large orders that we have received that we're going to be delivering on the end of the year will clearly be flowing through, which obviously is part of the working capital challenge in that business.

Going back to the first part of the question, frankly, there's a lot of similarities between Steve's business on cranes and Rick Nichols' business on the mining truck side as it relates to large tires, as it relates to castings, as it relates to gearboxes.

In general, those situations are stable. They're still a drag, as I mentioned, in general. And there's been, I think, very good collaboration between Rick's team and Steve's team on tagging up on key vendors on making sure that, in fact, we get fully recognized, as well as more than our fair share of delivery capacity.

Thank you.

Your next question comes from Stephen Volkmann with J.P. Morgan.

Good morning, guys. Just a couple quick follow-ups. Maybe I missed this, but did you talk about the working capital? I think you had said it might get better toward the year end or something.

But can you just give us a sense of the full year kind of use or source?

I'd say, Rob, the way we tend to look at this... Steve. Excuse me.

That's all right. I'll answer to anything.

I'll remember that. It's 20.5% in the second quarter. I think you'll see a couple points improvement in that at the end of the year. Again, it's annualized quarter revenue is how we're measuring that. So we expect some of these supply constraints to alleviate and flush some of the inventory that we have out at the end of the year. I look at this as a big opportunity. We've got $2 billion of inventory on the company's books right now. That inventory is obviously supporting a tremendously strong backlog.

But as we improve our efficiencies, improve the choreography with our suppliers, I've got to imagine there's hundreds of millions of dollars of opportunity here, and we're going to do this. It just may take us a little bit longer.

Great, fair enough. And then, Ron, just, I guess, kind of, I don't know, a big picture question. We talked a little bit about acquisitions here and there, but it just doesn't seem to me, having followed you guys for a while, that this is like your kind of market to make acquisitions in.

I don't have the numbers right in front of me, but I'm guessing you probably, for all the acquisitions you've done, you've paid six times EBITDA or less, and that's just not the kind of market we're in. Can you just comment on that?

Well, I think the most we've ever paid for an acquisition was $300 million and that was Powerstream. But I'd also tell you that I'm pleased that we made all those acquisitions, but I'm also pleased that we're focused on operations and improvement.

Having said all of that, I think Terex is a much more mature company today. I think our ability to drive value as an organization is much better today and I don't think the issue ever is what you pay for an acquisition on a trailing basis. It's what you do with it going forward once you own it and what it means to the overall franchise, what it means to the ability to build out your product lines, what level of talent relative to processes you acquire.

I mean, these are things that we really look at today, whereas in my early days of Terex, really, when you first got to know me, we were a deal shop focused on buying businesses and owning them and we have matured through that.

So I'm not going to give you a grounded number in terms of multiples. Again, it's all about what you do with the business once you own it. I mean, take Genie, for example. Had we not bought Genie, while we paid a great price for it, but had we not bought it and really built down their talent, lean talent, Terex wouldn't be realizing some of the things we're doing today.

So it's what you do with it that really matters.

Okay, great. That's helpful. Thanks.

Your next question comes from Jamie Cook with Credit Suisse.

Good morning. Congratulations.

I guess my first question, when I look at the margins on the aerial work platform side, they were fairly impressive. I'm just trying to figure out how much I guess the slowdown in the telehandler business impacted the margins and how sustainable you think margins are in the 20% range, assuming the U.S. is sort of stable and overseas remains strong.

I think I'll let Tim comment on this, but my attitude on it is you appreciate the 23% number we posted, but you don't plan for that number always. We really want to be balanced here, and I think we're going to have great margins in AWP, but I wouldn't want to say they're going to be sustaining in the north of 20% range.

Tim?

I agree with your comment, Ron. The press release comments about the mixed shift, and that did have a significant positive impact on our business in the second quarter, the telehandler business is soft and the shift from telehandlers to booms in our mix has had a very, very positive impact.

I don't think that this 23% is the kind of number we ought to be targeting as we go forward, but certainly we ought to be looking for the kind of numbers we've been putting up over the last couple of years, in general.

Is it fair to say you would have been more in the high teens or so without the softness in telehandlers?

Yes.

Okay. And then I guess, Ron, my second question, because most of the questions on the quarter have been asked and answered already, when you look at Terex -- a sort of big picture question over the longer term.

I guess the thing that I like about Terex is when you look at your mix of business, U.S. versus overseas, when I think of this cycle, I think most of the spending is going to happen overseas and I think you guys are 60%, 65% of your sales overseas at this point, and I think that's where most of the spending is going to happen. So you're levered toward that market.

As you look at Terex, how do you think about -- do you think this is the optimal mix of sales by geography? How do you think about products, things like that, so we can get a feel for where Terex is going in the longer run?

I think we're sitting here with guidance of $8.8 billion to $9 billion. If I had told you that number three years ago, Jamie, I think you would have probably sent somebody up with a white coat for me.

So I have much greater expectations for Terex over the long term than perhaps we've even said. I think we have the capability to build a great company, but we are still working on our foundations and we're going to keep working on those foundations, but as we work on those foundations, there will become opportunities that get available to us and we will address and go after those opportunities.

So I think Terex is a much bigger company five years from now, seven years from now than it is today, but big isn't as important as being capable and the capability is what we're trying to build in, because then the size that follows will be a profitable, high returning company just like we are today.

Maybe 41.5% return on invested capital is not sustainable, but if I can demonstrate a 20% to 25% sustainable return on capital plans through the cycle, I think it's a company that will be unique in our industry and will, over the long term, have a higher multiple than the average corporation in our industry. That's what I'm trying to build.

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

(OPERATOR INSTRUCTIONS)

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

I just had a couple quick follow-ups. The facility study that you guys are working on, when do you expect -- you talked about it at the analyst meeting. When do you expect to be in a position to share some of your conclusions with us?

We expect to have an internal plan by the end of the year. We're busy in embarking on it kind of as we speak. I think that as it makes sense to share conclusions out of that, we will.

As you can appreciate, I think the discussion on adding facilities in developing regions is a pretty straightforward, exciting area of discussion. I think the discussion around if there's rationalization of plants or facilities elsewhere, that needs to be managed very carefully.

So it'll be an as needed basis, as we can share that information.

Okay. I'll follow that up with you.

And I wonder if -- a lot of discussion about aerial work platform and the different pieces of that business. Tim, are you seeing signs that the North American telehandler market is bottoming out?

My sense is the business is pretty much kind of bouncing along the bottom. I don't know if we're at bottom, but given the results we've had in the last quarter, I'm not sure how much worse it can get.

All right. Thanks a lot.

This is the telehandler business.

That's correct.

Right.

At this time, there are no further questions. I would like to turn the call back to Mr. DeFeo for closing remarks.

Thank you, Cynthia. And thank you, everyone that's still on the call. We appreciate your interest in Terex today. Please follow-up with Tom Gelston, Phil Widman, myself or any other member of management, but please go through Tom.

We want to answer all of your questions and we appreciate your interest. Thank you.

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