Terex Corp (TEX) 2007 Q3 法說會逐字稿

Good morning. My name is Vanda and I will be your conference operator today. At this time I would like to welcome everyone to the Terex third quarter 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. DeFeo, you may begin your conference.

Thank you Vanda. And good morning to everyone on our call today. Thank you for your interest. With me this morning is Phil Widman, Senior Vice President and Chief Financial Officer, Tom Riordan, the Company's President and COO, as well as several of our group Presidents, Tim Ford for Aerial Work Platforms is on the line from Redmond, Washington, Bob Isaman for Construction, Rick Nichols, Materials Processing & Mining and Steve Filipov are all with me here in the room this morning. I have a couple of opening remarks, as is typical, then I'll pass it on to Phil and Tom who will cover some of the specifics. I would encourage you to look at the replay information to follow up the details of which will be on our website. The access replay number is 1-800-642-1687. Okay let me get started.

We're actually quite pleased with our third quarter performance. Business conditions are generally strong, in particular where we have solid market positions. As we look at our Aerial Work Platform business, that business is up overall, although the North American AWP business has declined mostly due to the telehandler product softness, which is quite housing-related. The Crane and Materials Processing & Mining businesses continue on strong upward trends. Our Aerial Work Platform business internationally looks to remain strong with excellent margins and the construction business is right on track with the improvements activities we have planned. The Roadbuilding, Utility and Other segment had a tough quarter and Phil will cover some of the added expenses we incurred in this segment during the quarter.

Most importantly we feel we're remaining on track with the initiatives that are underway in the Company. Although it wasn't very long ago folks questioned our ability to deliver a 10% operating margin in 2007, we feel we're ahead of this goal, actually, with a 10.8% operating profit in the quarter and an 11% operating profit year-to-date. Furthermore, to achieve our 12 by 12 and 10 goal, we need to average about 12% compounded annually on the revenue line. We are obviously ahead of this with the nine month period at 16.6% growth rate. The supply chain initiatives are going well, our team is stronger today, frankly, than it's ever been, and the expansion plans for various initiatives, whether they be in China, India and other developing markets continues to progress. Nothing ever happens in a straight line and Terex is certainly no different.

Our corporation remains an exciting place to work. We're looking to the future with real earnest. As I've told many of you, we're a freshman in high school with a advanced degree aspiration. This means that the hard work we have done over the past five years to build an operating Company is well underway. We have the foundation of a strong operating enterprise with the Terex business system we've been working quite diligently on and the deepening of the Management team. We have not made a significant acquisition over the past four to five years and now we feel that as market opportunities do develop, which we think they will, we're well positioned to apply our better operating capabilities across a range of value-building businesses.

As previously stated, we want to achieve a minimum of 20% to 25% return on invested capital across the cycle and we believe we can significantly out earn our cost of capital. Though we're quite pleased with the 41% plus ROIC that we delivered in this past 12 month period, we think in general overall, the levels of returns on capital we can deliver through the cycle will be in the 20% to 25% range. We believe that as we have exceeded historically our growth expectations and as I look forward past the 2010 period, we're really going to try and pull the Company back to our 20% compounded annual growth rate, which we feel is within reach, about half of which will come from organic growth and the balance from acquisitions. However, as you know, this never happens evenly. So we're working to make sure we're well positioned to grow shareholder value through the period.

The use of our cash and debt balances in the future will be targeted first against higher return potential M&A and also to fund the different internal expansion activities that we have underway, CapEx, as well as some new facilities where we feel the appropriate returns can be achieved. To sum it up in a sentence, the sky is not the limit for Terex, but we feel the best is certainly still yet to come as we build on the years of experience and talent that's now housed within the Company. Now I'd like to turn it over to Phil.

Thanks, Ron, and good morning, everyone. Before I begin, let me remind you that we will discuss expectations and future events and performance of the Company on today's call, and that such expectations are subject to uncertainties related to macro economic factors, interest rates, governmental actions and other factors. A fuller description of these factors that effect future expectations is included in the press release and our other public filings. I encourage you to read them. We've continued to realize strong net sales growth of 15% to $2.2 billion, mainly as a result of international demand for our products. Foreign exchange movements contributed approximately 4% to the growth over the 2006 period. Gross margin improved by 1.8 percentage points to 21.1%, largely due to the increased international demand, favorable product mix, and pricing actions, partially offset by investment in internal initiatives. Net sales growth has been reduced due to the continuation of certain supplier and capacity constraints, which has contributed to the record level of backlog. Approximately 10% of our backlog is past our originally expected ship dates.

SG&A expense increased due to the expansion of our sales activities in international markets, continued investment and broad-based initiatives, foreign currency movement and certain bad debt charges. Operating margin was 10.8% in the third quarter of 2007, an improvement of 8/10 of a percentage point when compared to prior period, approximately 3/10 of a percentage point of which was related to foreign currency movements. The effective tax rate for continuing operations in the third quarter was 34.1%, which included discreet items for the impact of changes in U.K. and German statutory rates of $3 million, as well as benefits from certain tax planning initiatives. The full year rate is anticipated to be slightly less than 36%. Income from continuing operations in the third quarter of 2007 was $151.5 million or $1.45 per share compared to $105.6 million or $1.02 per share in the comparable 2006 period. The 2006 period included a charge of approximately $0.11 per share due to the earlier extinguishment of debt.

Given our performance this quarter, we are maintaining our full year earnings guidance of $5.50 to $5.70 per share, which includes the impact of the early extinguishment of debt made in the first quarter of this year. Income from operations continues to be the main driver of return on invested capital, which reached 41.9% for the trailing 12 month period. We were disappointed with the level of working capital, as it increased to 23.2% from 19.2% of annualized trailing quarter net sales in the comparable 2006 period. Working capital increased largely due to the increased level of international shipments in transit, certain customer delays in mining products and the impact of supplier constraints on parts availability in meeting our increasing demand. We anticipate being close to 20% for annualized trailing quarter net sales as we end 2007.

Debt less cash and cash equivalents decreased $9 million in the quarter to $189 million, representing 7.7% of total capitalization, which is down from 18.6% in the prior year's quarter. Cash flow from operations of $55 million was mainly generated from income, partially offset by the growth in working capital. We spent $30 million on CapEx in the quarter and share repurchases totaled approximately $50 million.

Let's move on to the individual segment performance. First, the Aerial Work Platforms segment had an excellent quarter, as our activity continued to trend towards international markets, with international net sales representing 46% of the total. Operating margin improved by 1.5 percentage points over the prior year quarter due to favorable product mix and currency, offset partially by investment in internal initiatives, particularly expanding our international sales infrastructure. With regard to backlog levels in the third quarter of 2006 for this segment, we identified an error in our press release. It should be $517 million in the third quarter of 2006, as was indicated in our historical release earlier this year instead of $396 million. The current period of $650 million results in an increase of 26% from the prior year third quarter and is down 18% from the second quarter of 2007, reflecting the increased international demand and the normal North American seasonal order pattern.

The Terex Construction segment had a net sales increase of 17% to $452 million, as demand for compact equipment and construction-class excavators in Europe continued to strengthen. Foreign currency movement accounted for roughly 1/3 of the growth in the period over the prior year. Operating margin improved to 3.1% as we continue to focus on execution of our plans to pull together distribution in core markets and global supply chain processes while capitalizing on the growing opportunities in key home markets. Backlog levels more than doubled from the prior year to $732 million due to increasing demand for hydraulic excavators, compact equipment, and heavy trucks, as well as certain supplier constraints limiting production output, particularly in the hydraulic excavators.

The Terex Crane segment realized substantial growth in net sales and profitability as global demand remains robust. Net sales increased by 23%, excluding the impact of foreign currency movement, growth was 16%. Gross margin improved by 4.2 percentage points to 21%, mainly due to the affect of prior pricing actions flowing through the backlog, coupled with a higher mix of crawler and rough terrain cranes. The operating margin of 12% an improvement of 1.9 percentage points is somewhat less as we invest in sales and administrative infrastructure to address the global expansion. Backlog, which reach $1.742 billion has increased 71% relative to the prior year period and 23% sequentially. One of our main areas of focus in this segment is capacity expansion through process improvement and investment in additional manufacturing resources.

The Terex Materials Processing & Mining segment reported a net sales increase of 31%, 25% excluding foreign currency movement to reach $528 million, due mainly to mining truck and mobile crushing and screening products. Net sales of mining products in particular continue to be constrained due to supplier parts availability. Operating margin of 11.3% was down somewhat from last year, due to a higher proportion of net sales being generated from the lower margin mining trucks, as well as continued investment in S&A infrastructure to address the growth. Order backlog more than doubled from the prior year as we continue to see strong demand for mining products in particular. The increase in demand for energy and raw materials continue to support expansion in this segment.

Overall, the Roadbuilding, Utility Products and Other segment reported decreased net sales and income from operations, mainly due to the North American residential housing market decline, impacting our cement mixer business. We incurred a charge of $4 million related to a customer in the Terex assets services group, our rerental business, which we continue to wind down.

You'll note an increase in the loss from operations in Corporate and eliminations of approximately $4 million as we continue to focus on Company wide initiatives in supply management, manufacturing strategy, the enterprise management system, marketing and the Terex business system. We also took a charge of $2 million related to the completion of the Company' relocation to a new headquarters location. In the third quarter we have allocated an additional $12 million to the business segments over the prior year. Overall, we had a solid quarter and we continue to focus on improving our internal capabilities to address our profitable growth objectives. With that I'll turn it over to Tom to discuss operational highlights.

Thanks, Phil, and good morning, everyone. I'll cover the current views of our end markets, discuss how each of our businesses are performing and then get into some of our key operating initiatives. The end markets for Terex are generally quite strong as global infrastructure drives the basic demand for our products. However, there are clear differences between various geographies. We remain reasonably well positioned for the current environment. The Aerial Work Platform market has softened in North American and overall we are seeing what we would characterize as a more traditional seasonal pattern. Major rental companies are buying less and are busy planning for 2008, with smaller regional rental companies being much more active. The international business remains quite buoyant. These are general trends we expect to continue into 2008.

Globally, the construction equipment market for traditional products is quite varied. North America is down mid-teen percentages, as best we can tell, Europe remains very strong with Eastern European countries accelerating, and the Middle East and Asia are also quite strong. The end markets driving Material Processing & Mining products also remain globally strong and still quite positive in the U.S. These markets are nonresidential infrastructure and commodity-based mining categories. U.S. coal is a temporary concern, but we have little exposure there. Cranes is all about the large infrastructure projects under development around the world and is likely to remain this way for some time. Yes, the North American housing market is having a modest negative impact on the small end of our range, but overall the applications which cranes are most desired and profitable are very strong. Lastly, most of the U.S. Roadbuilding industry is generally flat to down and the Utility Products categories we see are flat, but with encouraging signs.

Let's discuss what this means for Terex. Overall, our Aerial Work Platforms business performed very well in the quarter. The North American Aerial Work Platforms business decreased by mid-teen percentage points in Q3, reflecting substantially similar demands for booms and scissors compared with prior year and a much more significant deterioration of telehandlers. Europe continues to be very buoyant and most of our Asia/Pacific business continues to be very strong as well. Latin America is up significantly from a year ago. Overall, our international business grew well over 40%, which is in line with how we expected the quarter to develop. The year has pretty much developed as we thought it would.

Going into Q4, we expect the North American market to be approximately flat with last year, with other key markets continuing to be strong to very strong. Backlogs are up substantially from a year ago and are in line with our expectations. The Construction segment continues to make solid progress. While our U.S. business is softened substantially, it represents approximately 15% of this segment's net sales. We are generally in line with the market, although in several products we're making small share gains. The currency, obviously, has negatively affected our competitiveness with our primarily European-based plants and these issues are clearly being factored into our longer term manufacturing plans.

However the strength of our European, African and Middle Eastern businesses more than offset any weakness in the U.S. For example, our European business is up low-to-mid double-digits in most product categories. Our backlog has more than doubled from a year ago and our profit margin is strengthening. To Q4 we'd also expect these trends to continue. I'm pleased to announce that we have our first mini-excavators coming of our start-up plant in Shenhua, China and we're beginning to market these German-designed products via of lean production build facility located in China. Many components are still western or Japanese so costs are not yet optimized, but we plan to keep working on this extremely important initiative.

Terex Cranes continues its strong growth. With the exception of some weakness in North America where small truck cranes and boom trucks, all regions demonstrated a very robust demand, particularly in the Middle East. Backlog is at record levels, up an additional $380 million in Q3 alone and we are very aggressively working to build capacity in our plants. We expect these trends to continue at least through next year.

Our Materials Processing & Mining also continues to be very strong, with bookings up 20% from last year and backlogs up over 100%. Our margins are somewhat lower than the last year due to engineering, other operating expenses and some product mix changes. However, profitability was still up over 22% from last year. With the continued growth in this segment, we are aggressively working on capacity bottlenecks. Construction will begin early next year on a new plant in China, with production starting by year end 2008. This will be the first plant of three built as part of a manufacturing campus for Terex.

Our Roadbuilding, Utility segment despite aggressive cost reductions continues to struggle. Sales are down mid-teens percentage, mostly due to our concrete mixer business. We're seeing some improvements in order rates, particularly in our Utility business. For Q4, we're expecting marginal improvements in profitability and Phil's already discussed the nonoperating items in this segment.

Moving on to our key initiatives, we now have placed the core team of supply management group. I'm very pleased with the caliber of talent we have with the blend on internal and external people. This team is focused on cost reduction from leveraging our global spend, as well as bringing additional focus and visibility to supplier capacity and delivery challenges. We continue to be challenged moderately with supply capacities and deliveries. Substantial effort has gone into reviewing and improving our materials planning and forecasting methods, and despite the high level of inventory, we're seeing improvements in many areas. We're also in the process of starting up sourcing teams in India and China to support our cost objectives. I would expect these teams to be up and running early next year. In general, material pricing has been very moderate and we expect that will continue into next year.

We have recently staffed a new position, Vice President of Technology, for Terex. Jacob Thomas comes to us from Navistar where he was responsible for their big bore engine business. With a very strong background in engineering, he will be instrumental as we begin to rationalize our drive train and major component systems, the upcoming Tier 4 engine requirements and drive best practices across the Company on advanced technology and intellectual properties. He's off to a great start. The Terex Management system continues on track and on budget for implementation of our new ERP system at three pilot sites early next year. This capability, once implemented at all locations, will be a huge enabler to communicate seamlessly between customers, plants and suppliers and we feel this will also help us improve operational efficiency.

Lastly, our Terex business systems continues to become a way of life. Through September, we've had 553 (inaudible) events with nearly 5,000 participants. This is a very broad-based improvement process through all of our businesses, focused on solving real life problems of capacity, cost, quality and generally reducing waste in our offices and in our plants. At this point I'll turn it back to Ron.

Thank you, Tom and Phil. Just let me reemphasize what's stated in our press release, that our near term outlook remains consistent with where it has been historically, which is the $5.50 to $5.70 per share for the full year. We will not provide guidance at this point in time for 2008 as we are entering our budget period and we'll be reviewing our outlook, but we remain quite optimistic about the Company's opportunities to progress through the time period. So let me now open it up to your questions. Thank you.

(OPERATOR INSTRUCTIONS) You're first question comes from the line of Alex Blanton with Ingalls & Snyder.

Good morning.

Good morning, Alex.

On the Aerial Work Platform, just a clarification. You said in the press release that that was up 46% -- I'm sorry, the international part of that was up 46, and then in the opening remarks, you said international was 46% of the total. Is that just a coincidence or is there an error somewhere there?

The 46% is 46% of the revenue and it's approximately the same number.

It's up 46% also, okay?

Yes.

Just wanted to clarify that. Now in the AWP part of their business in North America, you said it was roughly similar to last year. Is that mean flat or is that down single-digits or exactly could you clarify that part?

What we stated, Alex, was pretty -- what we stated was that the scissors and booms were roughly flat with the prior year period with most of the revenue reduction which we characterized as in the mid-teens for the segment driven by substantial telehandler sales declines. I said their clearly tied to the residential market.

Okay. So it's mid-teens for the North American part in total? Okay.

Correct.

Now, there's a shift going on towards booms. I was in your plants out in Redmond in August and there was a lot of activity in booms and some of the telehandler business had been shut down and the booms had been replaced it. So what are the -- what is the situation in the large booms right now? Is demand holding up in total?

Tim, could you comment on that, focusing on the global demand for our boom business?

Sure. Alex, the-- what you saw when you were here is exactly what we're experiencing around the world. We have over the last year seen a shift in demand -- not a shift in demand, but an acceleration in demand of our boom business. And in the boom business, we've seen the bigger booms with more demand, growing demand over all of them. So those that are 80 foot and above. And that's been pretty consistent around the world through the year.

Okay. And that's responsible for -- mainly for the remarkable -- I mean, 96% incremental profit margin for the segment, right?

Well, Alex, we have a very highly profitable business here in our Aerial Work Platforms business, as been historically and we expect that continue. We do and have benefited from the fact, frankly, that we are largely Redmond-based from our production point of view, so we've also benefited from a currency help as the business -- most of our businesses overseas gets sold in local currency. That's been a strong contributor to the Aerial Work Platform businesses. We have very efficient manufacturing operations. The one negative about our manufacturing operations is it ends up carrying a pretty high level of inventory due to the transit time required to move product from Redmond to Europe and other parts of the world.

Thank you.

Next question. And that was perfect, Alex. We would like to limit it to a question and a follow-up.

Your next question comes from the line of Terry Darling with Goldman Sachs.

Thanks, good morning.

Good morning, Terry.

Yes Ron, I'm wondering if you can take us through sort of what the key unknowns are in your mind that drives the 4Q results towards the high end of the guided range or the low end, because obviously that's a very wide range.

It is a wide range, as is obvious. We've felt it appropriate to keep the range consistent. As you know, we've never really been that focused on quarterly guidance. And so as you get toward the end of the year, quarterly guidance becomes more critical and it's obviously a subtraction game from what we did so far versus with a we're going to do. We've got some very positive things happening in our Mining business, in particular. We are delivering on a number of orders.

We have some very positive things from our Crane business. We have one crane that is $20 million in size - in Euros, 20 million in Euros, sorry, thank you. It's the CC8800, if I get the model correct. We've been building this crane for nine months, I think, and it will be delivered in the third -- in the fourth quarter, rather. And so getting these delivered, getting these done, getting the lumpiness recognized in our business is what's driving that range in the fourth quarter. If everything works right, we'll be, as far as I can see it, in the upper end -- well, we're not going to stop ourselves. We're going to do the best we can, let's put it that way?

Okay, that's helpful. And then I wonder if you could talk about the SG&A number, up to 10.5% of sales. Obviously you've got a lot of things your doing to try to build for the future and that's understandable, but I wonder if you could talk about your tolerance for SG&A as a percent of sales continuing in that 10.5% range, which is well above where you have been sort of over the longer term in the past? Whether we're seeing a sort of a sustainable structural shift up in that number, or whether you're going to ratchet that back down?

I'm going to let Phil cover the specifics of it, but I'd like to make kind of a highlight remark. If we were in a race, you eventually-- you potentially got to go and get a pit stop every once in a while and get your tank refueled and get yourself ready for the next part of the race. And we're rebuilding some of the capabilities, we're in the pit stop growth as to our SG&A and we expect it to be a key part of our fuel going forward. That means some investment. And if you're looking at a company that's grown 28% compounded annually for 12 or so years, 16%, 17% this year with constraints due to production capabilities, we've got to fix some of those things and that means a little bit higher SG&A in a number of areas.

And in addition to that, as an $8.5 billion, $9 billion or so Company, we've got some Corporate things that we have to do. We've got a major initiative on diversity and inclusion in the Company, because that's not just the right thing to do, but long term, we have to reflect our customer base globally. And that means a broader and different type of leadership team. And so and that just kind of echoes its way through the organization. So we'll probably be in the 10% range, but Phil, why don't you cover a couple of the specifics?

Sure. Terry, just a couple items that affect this quarter. FX is about $7 million of the change and we had bad debt up about $5 million quarter-over-quarter. I mentioned the $4 million in rerental. The other things that are really driving year-over-year change, the biggest one would be related to our implementation of the ERP system. This year we're developing a system that will be used for the global Company. So we're capitalizing about half of the cost related to that. But year-over-year, that's a reasonably sizable increase in expense. Order of magnitude, about $10 million. And obviously with the growth internationally, sales development and engineering development to handle the sheer volume we've had in many of our businesses are the main other areas of investment that we've had.

And I think the comment -- add to Ron's comment over the longer term, I would say the IT investment over the next few years as we implement the ERP system will cause somewhat of a blip in our S&A rate, but we would expect that to deliver efficiencies as well over the longer term to more than offset that. And they may appear in other areas like operating margin as well as in S&A and inventory. But I would expect that might be one that shows up a little more as we go into the development and implementation phase.

When we're finished, we might actually be a senior in high school.

Okay. Thanks.

Your next question comes from the line of David Raso with Citigroup.

Hi. Thank you. Thank you for the clarification, the correction actually, on the press release on the Aerial backlog from a year ago. It changes my thoughts a little bit about how I read it. Can I get a little bit of a read from -- you must have had some conversation so far with the domestic major rental houses. It looks like now that your-- with the correction, your international backlog doubled roughly year-over-year from my estimates, but then it shows that the domestic is down a lot obviously because you're excluding any backlog from the major rental houses.

Basically.

What has been the early read, and I understand from ownership changes to a lot of issues to not as willing to sit down yet and give a number, but what does it look like from the major rental houses as of now for '08, at least the early read?

Sure. Let me pass that over to Tim.

David, we've been engaged in some conversations, as you might expect, with the major rental houses and I would say as we sit here today looking ahead, what we're hearing and seeing is that 2008, when they start looking at their CapEx, feels substantially the same as it does -- as it did in 2007. We're a long way from having agreements with any of these guys. And so I'd be -- it'd be premature for me to make a comment on that. But I think we feel, that as we sit here today, 2008 from a CapEx expenditure standpoint, from our customer's feels substantially the same as where we are today, in North America.

And Tim with getting a little more nonmajor rental house, more mom and pop, when it comes to the mix next year, again a somewhat secular shift to the bigger booms above 60 feet, and I have to believe you get a little better margin selling to the independent mom and pop than the rental houses, how are you thinking about your profit profiles in booms next year, or I should say Aerial broadly scissors and booms next year domestically versus this year?

We had a focus this year on going after some of the mid-sized players and I think we're going to continue that in 2008. The big seven, if that's the way we want to group them, command a substantial portion of the Aerial market in North America as you know, but there is a lot of other business out there with a lot of other good-sized regional players and while the -- you could look at the math and say the cost to serve some of the smaller people is a little higher, your point on the pricing and the margins is right on.

Okay. And last quick one, on the 10% comment of the backlog that you would have expected to ship already that has not, if you just give a pretty reasonable incremental margin on that, it's $0.50 of earnings and floating that you would have thought you would have shipped by now. Any way to handicap in your mind from suppliers are telling you, your own capacity additions on when do we play catch-up, or is it simply just we kind of lost $0.50, it's pushed out, and it's still just an open-ended question of when we play catch-up to add to say '08 earnings?

Well David, we're certainly focused on it. We don't plan to lose any $0.01 of that $0.50. And some of it is not in our control because a few of the mining companies are building out their infrastructure. They've got railroads to complete and their estimates to hold some of the inventory, but we don't plan to lose $0.01 of that $0.50 and we're very well focused on our suppliers to try and help us out. I could not calendarize that for you. I mean that would be a degree of precision that we don't have, so to suggest that we have it would be wrong.

I appreciate it. Thank you.

Your next question comes from the line of Henry Kirn with CS.

Thanks. Good morning, guys.

Good morning, Henry.

When you look at your M&A and internal expansion opportunities inside Terex right now, how do you view share repurchases going forward?

I think we repurchased 50 million -- I mean, $50 million of shares in the third quarter, $74 million or $75 million year-to-date. We had previously announced the $200 million share repurchase program. We plan to continue that. Obviously, if a share price weakens, we'll be active. We think that the opportunities for share repurchase need to be weighed against the M&A activities, as you mentioned. We view it as one of the levers we have to pull to deliver better returns on capital and for our shareholders, but frankly with the changes in the credit markets, we believe that there will be some M&A opportunities that we can go after and we're virtually unlevered here at less than one time debt to EBITDA, and a little bit of leverage could help deliver better returns to investors. So we're not unwilling to lever up a little bit in order to make some good M&A decisions, and if the M&A decisions aren't there, then we'll use the cash and not sit on it.

Okay. And I guess for my follow-up, with the rerental business, how long does it take before that business is wound down and could we see anymore charges there before it is wound down?

We're down to less than about $10 million in assets to liquidate and we've got programs to get rid of that, basically, by the end of the year or into the first quarter. We do have some customer issues that we are litigating, but again they're not material in terms of the potential impact that would be there.

Great. Thanks a lot, guys.

Your next question comes from Joel Tiss with Lehman Brothers.

Good morning, how's it going?

Good, Joel. How you doing?

Good, wonderful. I wonder if you could talk a little bit about the outlook for the Crane business. I understand the end markets are very strong, but your 16% revenue increase is probably well below your potential. So can you just talk about your debottlenecking and so we can get a frame maybe for what to look for coming out of Terex in 2008?

Let me turn it over to Steve, who I think has a number of year-to-date revenue of what 23%?

Yes, 23%.

So maybe the 16 was a European vacation.

Yes. Europe is obviously-- has an affect on us in the third quarter with facilities in Germany and Italy and France, so I'd say that's a little bit the difference that you see in Q1 and Q2. The things that we're doing internally, as Ron commented, I mean we're focused as much as anyone on throughput. There's several things that we're doing. The first one is our ramp up, second shift in Waverly is ongoing and that's going to deliver 20% to 30% production improvements into I'd say the latter part of the Q4 and into Q1. We've invested in plasma welders in Waverly and in Germany, which is also going to improve output into 2008. We have a new boring mill going into Germany into-- in Q4, which is going to help us into 2008 also.

And one of the good news -- I'd say another good news is we found additional capacity in Europe through one of our suppliers for welding components, so that's going to also help us get through some of the bottlenecks. The last piece, I'd say, more importantly is during the quarter we held three open houses, one in Waverly, one in Italy, one in Germany and probably had over 2000 customers come through our facilities and really show them firsthand what we're doing to improve on our throughput and to show them that we're dedicated and we're trying our best to improve. And the last piece of it is our supply chain, which is, as I said several times, we have task force out there with our suppliers, trying to help them improve also internally, which is going to have a payback for us. So I think the outlook is good. We're doing a lot of things to try and improve.

Okay. And since I have like 10 more questions, I'll just trying to glue two together here. Maybe Ron, can you talk sort of philosophically about acquisitions? Again, it seems like maybe the road paving business could use some help or something? But also, you probably know a lot more other areas where there's opportunity. And then can you talk philosophically about the capacity additions in terms of costs, like on a longer term basis? Is there flexibility there and all that? Thank you.

Okay, okay, Joel. Thank you. Acquisitions is something we have continued to work on. We have an active team that really canvases the globe for businesses that are related strongly either for geographic expansion or product expansion. And so we work both ends of the spectrum. We spent a lot of time and have spent a lot to learn the Asian opportunities. So our team has spent time in China. But there are also opportunities now that are presenting themselves, I think, both in Europe and in North America.

When an asset was available to be sold or potentially available to be sold, very often the first route for those assets was to look towards private equity as a high-class solution to sell that asset. Well, that's just not there. It was the same level of intensity that it once was. So now the opportunity for strategic acquirers, of which I would characterize we are one, I think is improving, which gives us really a chance to talk to potential companies about how one plus one can equal three or could equal four. I don't frankly expect to find another Aerial Work Platform or Genie business with the same situation that we could pay what we paid and get the kinds of returns, but I sure think there is the opportunity to get 20% return on our money, which we have more than done over the years and I think that's there for us.

Some acquisitions we might make would seem to be expensive on one hand, but it's what you do with the business on the other hand. And Terex is in a place really where we think we can grow businesses that are aligned with where we are. So that's the philosophical commentary on acquisitions. I don't have anything in my pocket I'm going to pull out and announce tomorrow, but we do continue to look at things that we feel will be nice additions to our Company.

Relative to internal investments, we talked a little bit about them, but let me reemphasize. Tom mentioned building an Aerial Work Platform factory in China and a campus of several factories in China for components, for manufacturing capacity that we need and for participation in China. We have a plan and we have land in India that the first investment for our India expansion will be the crushing and screening business, which is frankly at capacity. It's a highly-profitable business, it's been a very successful business for us, but we're just hitting the top of our ability to have the right throughput. But we expect to have several different manufacturing opportunities added to the India campus that's underway.

Steve mentioned a different way for investment, and that is plant production changes, such as plasma welder, boring machines and things like that. Now as Terex matures, we can look across our enterprise and a fellow like Jacob Thomas who comes to us from Navistar will be helping us as well as the team members and leaders that have crossed incentives to work together, because frankly the kinds of components we're short in cranes are almost the same kind of components that mining is short of. So maybe we can collaborate a little bit and figure out how to build more commonality into our components. And those are all future opportunities for Terex. And a little bit of investment goes a long way in terms of payback. The only thing I would encourage our owners to recognize is that these are not, spend $1 today, see the $1.10 or $1.20 or $1.30 tomorrow. It's more like spend $1 today and see $1.50 or $1.60 next year and the year after. And that's the kind of things that we think are crucial to take Terex from where we are to the next place.

So you add acquisitions, which we think are more than appropriate, with internal investment, either in capacity, in new factories in new markets, or in capacity in new component changes and it makes for a much better long term enterprise. And that's building Terex to a stronger Company. All right, Joel?

Yes. Thank you.

Thank you. Your next question comes from the line of Robert Wertheimer of Morgan Stanley.

Hi. Good morning, everyone.

Hello Robert.

Could you help me understand the, I guess the seasonality of the AWP business? What I'm curious about is sales up around $25 million, $26 million year-over-year, down around $70 million sequentially and your backlog is up, maybe a little bit less than I initially thought, but still up. So is there a production constraint in 3Q or shipping constraint in 3Q?

Tim, why don't you handle the just in general seasonality comment and then make a comment relative to 3 -- third quarter?

Okay. One of the things that's happened in this business over the past three or four years is there has been no seasonality, largely due to the extraordinary global demand. And I think what we're seeing now is a more traditional construction cycle of seasonality, is what we're experiencing. So as we went into the first half of this year, we were still living off some of the -- living off some of the strength of the prior couple of years, frankly, and I think where we are today, is we've seen the North American business enter more into a typical business cycle or seasonality. I think what we feel is that we'll see a little bit softer sales in fourth quarter relative to others and pick up mid-first quarter and carry through second and third.

Tim, relative to other fourth quarters over the past couple of years, not necessarily relative to other competitors.

That's correct. Yes, yes. Thanks for the clarification. As far as the third quarter was concerned, we really-- we don't have a constraint on product. What we've seen is we've seen strength in orders from our European and Middle Eastern customers and that's really driven some of our backlog growth. We do have a cycle in Europe where the business is strong. Latin America has continued to be very strong and Asia/Pacific has been pretty strong. So the orders we're seeing in the order pattern we're seeing in Europe, frankly, reflects a similar pattern to what we've seen in North America over the last couple of years.

And Robert, one of the things I'd like to emphasize, too, is that we're really going to treat Europe as a whole market, where we have historically not really treated it as a whole market. And that means that over time, we're going to work on improving our logistics. One of the investments Tim has made is that he has put a new leadership team in place to oversee our European operations, which is going to get at some of the excess working capital that takes place when we ship from Redmond, that then goes to the U.K. for predelivery that then goes on to the continent, which just adds to our inefficiencies and lead times relative to satisfying customer demand. So the short term investments of putting more feet on the street and putting more people in terms of leadership positions are going to make it much better for us to service Africa, the Middle East and Europe.

Thanks, Ron. You may have just answered my follow-up, but even though the margin performance in that division was very good, you had, I guess 46% of the business with a significant currency swing. And so the margin wasn't quite as good as I might have guessed. And so my question was, did you give any price back as you saw the currency benefit or was it more just investing in the SG&A?

I think it's investing in the SG&A.

All right, I'll leave it at that. Thank you.

Okay Robert, thanks.

Thank you. Your next question comes from the line of Robert McCarthy with Robert W. Baird.

Good morning guys.

Hi, Robert. Sorry to beat a dead horse, but I want to ask Tim if he'd clarify what he just said. I think I heard that your expectations for the AWP segment in the fourth quarter would be somewhere below the 5% growth we saw in the current quarter and flat. Is-- did I understand that correctly? I don't think Tim provided a specific comment like that.

But I heard softer but not down?

No, he said more of a traditional-- more traditional seasonality in the North American business, but that is offset by a very strong European business. The size of the strength we have yet to characterize, although I'm pretty optimistic we're going to see pretty darn good performance of AWP in the fourth quarter.

And just to clarify what Tom said in his comments is how we're seeing the market, we see North American being substantially flat in the fourth quarter to where it was a year ago.

Okay, all right. Thanks. That's very helpful. And also helping us understand the dynamics within that business, can you give us an idea how much of the North American business is not scissors and booms, in other words, telehandler?

How much of the nonNorth American businesses?

Of the North American.

Yes, how much of North American AWP is telehandlers?

Yes, we could give you that. This year -- Well, it's the -- Booms and scissors account for approximately 70% to 75% of the--

New equipment sales.

Of the new equipment sales.

Okay, thank you. That's helpful. My other question relates to Crane segment, Steve. You had a fairly sharp increase in crane order rates for the entire segment in the quarter over what we've seen in recent quarters and I wonder if you could speak to -- it seems to me that, well, maybe the business is just getting fundamentally stronger on the demand side, but you also had some events during the quarter which-- at which I would expect might have triggered some incremental order activity. I also have this idea that in effect you've been restraining order activity really in the first half of the year in part because of the work that was being done at Waverly. So could you talk about the strength in the bookings in the quarter in terms of fundamentals, the events, and to the-- any extent to which you'd been kind of pushing orders off temporarily until you were convinced you'd have the ability to deliver?

Right, okay, Robert. I saw there's a few factors, the first one obviously being the three open houses that we held during the quarter which generated a substantial amount of additional orders, as customers came through the facilities and saw the improvements that we were doing, I think that's the first issue.

And increased their confidence as well as to our ability to deliver.

Deliver.

Yes.

The other piece of it is obviously the longer lead time machines are getting more visibility, so customers are ordering machines ahead of time. The other piece of it is is we released 2008 pricing in Waverly in August, so there was also a jump where customers were holding back until we released our '08 pricing, which has been done. So there's a few issues that happened during the quarter, I think that jumped the number and then business is just, I think you know, worldwide growing infrastructure and energies is kind of driving everything. So I'd say it's kind of --

So to summarize, demand is great, but be careful about extrapolating off of order activity in the quarter because it did get a little bit of special help in the quarter.

We've always said, backlog is a perspective number that taken as a discreet item and extrapolated off of is a mistake. It gives you perspective about a business, but it doesn't answer all questions.

Okay. Thank you very much.

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

Yes. A lot's been made about say, U.S. activities versus international. Excluding AWP, what percentage of all of these other divisions would be say, domestic or international? And is it significant-- or are the products positioned so that you have one that may be gaining market share from other people?

Okay, Kent, thank you. If you seclude our Aerial Work Platform business from our-- from the balance of our enterprise, probably more than 80% of our total revenue comes from outside of North America. And so -- and AWP is the prime driver, historically, of our North American business. That's a good news/bad news situation. It's good news because today the global environment for infrastructure-related products, which is what we do, big equipment mostly in a lot of places around the world is strong. The bad news, of course, is that the North American market is one of the biggest markets for construction equipment globally, although it's declining in its percentages because of the strength in Asia. Our business in Asia is mixed. We get mixed reviews, ourselves, from our ability to grow our business in Asia. We've been active, we're making progress and that's the -- we've made some comments about either factories or activities that we have put into the Asian markets to grow.

Our European business is quite strong and our franchises are quite strong. And I think we're gaining some market share in hydraulic excavators in our European theater. I think we're gaining some market share in our articulated trucks, in places around the globe. I think we're gaining some market share in our Aerial Work Platform business outside of North America, which is still is a big piece. And I think clearly our Crane business is one of the dominant players outside of North America, particularly in the large lattice boom type crane products that we have real product differentiation in. The Demag products are highly engineered, highly designed, and wonderful for some of the more sophisticated applications that we get asked for. Our Demag business in Asia is at a high level, but it is fairly flat because of some of the Chinese players are actually strengthening their ability to develop product and source the Chinese market. Which is one of the reasons why we have a good 50/50 JV, our Shishwan Crane business in China. So that's helping us.

And lastly, I would be remiss if I didn't mention our Materials Processing business and our Mining business, globally. That's where the lion's share of those businesses go. Particularly, the mining side of the business, that's where the front end of the commodity activity takes place. And while the North American coal business is slow, the balance of the types of commodities that we make products for, iron ore, copper, zinc, gold, those remain pretty positive for us. So I hope I answered your question, Ken.

Thank you. Just a quick follow up on your long term growth goals of 20% with half organic and half acquisitions. I find it curious that with your positioning here and your history, which isn't that long as a major Company, that the secular growth rate forecast by whoever's forecasting it on First Call is only 8.5% with most machinery companies are somewhere in the 15% to 20% level because of the global movement into commodities and et cetera and building infrastructure, et cetera, et cetera. How do you account for this apparently very, very low outlook or level of confidence by whoever's making these forecasts?

Well, we seem to have done okay over the years relative to others' forecast, but I would account for it this way. That at one machinery company is not the same as another machinery company. So you get into the agricultural uptick, which for John Deere, for an ag Co., and for a C&H are the much greater portions of their business. And the year-over-year forecast for agricultural equipment globally, are generally a lot stronger than for the year-over-year forecast for North American, in particular driven construction equipment. So sometimes we at Terex have gotten painted with the same brush as everyone else, but if you look back, we have been using different brushes for many years. And those different brushes have been what's benefited -- I'm sorry? I'm sorry?

I'm sorry. That's all I had.

Thank you.

Your next question comes from the line of Chris Lippincott with Standard & Poor's Equity.

Good morning, everyone.

Hello, Chris.

Just wondering if you might be able to quantify, perhaps on the fourth quarter, what the impact of the capacity constraints were and if we started to see that going into the fourth quarter?

I don't think we can quantify it. I think what we said is our backlog is about 10% -- 10% past due and so if you've got a $4 billion backlog, you've got a 10% past due, it's in that range of that and when I was asked earlier to try and calendarize when we could accelerate that backlog, I said I really can't do that. So we're working hard to try and get the products out the door, but we are also supplier dependent. So I can't answer that question, precisely.

Okay. But is there any way we can think about how your efforts to work with the suppliers might be hitting the operating line, be it SG&A or otherwise?

Well do you want to answer that, Tom?

I can. Obviously, a lot of our businesses have been very focused on local expediting. Steve mentioned he's got several task forces working with key suppliers, Rick does as well, Bob Isaman does as well. In general I would say the planning process efforts we have put into our businesses in terms of doing a better job of future forecasting or starting to pay some dividends in terms of better visibility for our supply base in fairness to them, because our business has been growing so aggressively, and in general most of our suppliers are starting to step up. We're seeing a lessening of what I would describe as surprise delivery problems. That being said, obviously as our mix shift continues in terms of less home market product and more international market, as an example, the AWP platform more and more going internationally, the construction equipment less in the U.S., more in Europe and Middle East, those changes also drive some changes with the supply base because not all equipment is exactly alike. Obviously there's mix changes based on local homologation standards.

So in general I would describe it as the noise is coming down, I would agree with Phil and Ron's characterization of about 10% is past due. A small piece of that is frankly some customers pushing out deliveries, mostly driven around problems they've got. Mining is a prime example, where in Australia they've got some infrastructure problems and in China as well, with accepting our product as quick as we like, it will happen, but it's pushing back a little bit. So I don't -- in my mind, there's nothing that I'm fundamentally concerned about. I continue to see improvement and I think that probably the best indicator of that will be the relative levels of inventory that I would expect in Q4 will be going down.

Okay. Thanks.

Thank you.

Your next question comes from the line of [Robert Marson] with [Defiant Asset Management.]

Thank you very much. Could you comment on the Crane business execution and the mining equipment business execution relative to your peers? It appears to me that's sort of where the most leverage is for 2008 in both revenue growth and margin expansion relative to the peer groups? Thank you very much.

Okay, Robert. Thank you. I think internally we have believed we've been a little bit behind some of our crane competitors, the better crane competitors. So they jumped on some of the opportunities a little bit faster than we did, but I think we're going to overtake that in 2008. We're pretty positive about that. We believe we've made the right long term changes to address it and get back into the beating rather than just following kind of category. I do think we have less in cranes, less of a tower crane business than some of our other players, which will make the margin mix slightly less than them. But I think we have a greater and better big crane business than some of our players, which will be offsetting that somewhat. So I'm pretty excited about that.

In the mining area, I think we have seen some of our competitors or-- maybe not even competitors, I wouldn't characterize them that way, other players in the mining business miss some expectations and I think we've got some real good plans to try and generate some positive performance relative to that, but Rick is here, I'll just ask him to comment on that.

Well I think so far, Robert, we have pretty much moved with the market. I think from a share standpoint, we're staying fairly close to shares that we've had traditionally, but I think we're making some real end roads into some new regions or new areas of the world that in my mind have some real potential for 2008 and beyond.

All right. Thank you. And one follow up. The Aerial Platform business has sort of been a big surprise to everybody in the last two, three years, for probably even yourselves. Is there any way to try to gauge the international business opportunity? It's up to, as you say, pushing almost half of the business. Could it be there in two, three years? Could it be bigger as the products basically gets introduced for the first time in much of China, perhaps Russia, Middle East, South America, et cetera? Thank you.

Well one of-- Robert, one of the first assignments I told Tim -- maybe not assignments, priorities I established for Tim when he joined our team was we had-- we've got to get this Company global, okay? We just absolutely have to get an attitude that we are not Redmond centric, but we are rather market centric. And we're going to go to where the people are. We're going to go where the people need to go and work at height, and we're going to figure out how to satisfy the demands of people that need to work at height in all markets as economies develop. We have as a Company been fairly rental company focused, which is the channel of distribution. That channel of distribution tends to be very well developed in North America and developing in Europe and in the Middle East and in some places.

I would like to see us both follow the channel as well as develop the channel or the alternative channel through products that meet local market needs. I don't think you're going to see dramatic changes tomorrow, but I think over the next five years, you're going to find that this is a category which has significant growth potential, because it puts people at heights safely and gives them an opportunity to do work that is more efficient than the alternative of in some cases just plain bamboo scaffolding.

All right. Thank you.

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

Good morning.

Good morning, Steve.

You talked around this issue a lot and I know you're really focused on working through supply constraints, but you're also trying to consolidate your vendor base. Can you talk about the willingness of the supply base right now to invest in capacity to support you across your important segments given where we are in the cycle?

In general they have been willing to. I think in many cases, they have been somewhat due to our visibility as well as the industries, they have been kind of caught flat footed relative to the amount of growth they've seen in the last several years and you can point to the bearing industry, some of the hydraulic key suppliers that are frankly very busy investing in new capacity, in new plants, but frankly have not been able to keep up somewhat due to start-up issues, somewhat due to any one of a number of issues frankly and somewhat due to our own planning issues. So we don't see that being a problem. What we do see going forward, however, is a with our new Supply Management team, is a much more focused approach on rationalizing the key global suppliers we want to work with and taking a look at a much more detailed partnership approach, may or may not include equity in some things, but frankly more focused on dedicated capacity to working with expert partners such that as time goes forward, we don't get caught in this kind of situation again.

Right, okay. That makes sense. For my follow up, if 40% of your mining sales came from parts and services, I guess I would have expected better margin pull through. Can you talk about the margins relative to OEM and aftermarket in mining?

Well, I think from a mining perspective in the third quarter, we had actually very strong parts business in the quarter, but that was offset as Phil commented on trucks and we had a very large truck sales in the quarter which is at a lower margin than our shovel business would typically be.

It's a mix issue, Steve.

Okay, I understand. All right. Thank you.

You do have a follow up question from Alex Blanton with Ingalls & Snyder.

Thank you. I just wanted to clarify the-- and going back to AWPs for a second, can you tell us what the international sales in total were up for the quarter? You said Europe was up 46%, but what about the total international?

We think we said that above 40% is what we said.

Okay. That was above 40 --

For AWP, you're referring to?

Yes, for AWP.

Well, I really was talking about the whole segment.

Oh you mean the international business for AWP (inaudible)-- so the nonNorth American business.

46% of the mix.

Yes, was 46% of the mix.

Yes, for Genie.

And how much was that up, was his question?

Yes.

It's plus 40%.

About the same amount.

About 40%, okay, thank you. And on the statement that rental fleets were buying less at the moment, large rental fleets, the top seven, is that true for-- if you strip out telehandlers, would that still be true?

Are we talking for Genie or are we talking for the market?

Well we're talking about Genie, really.

Oh, well, what we said was that our Genie, booms and scissor business was essentially flat with year ago. And that most of the reduction came from the telehandler.

Right, but I'm referring to the statement that the large fleets were buying less and the smaller rental fleets were more active. Now in regard to the large rental fleets buying less, are we talking-- are we including telehandlers in that statement or not? Are they buying less AWPs?

You're asking us a question of the large rental companies as defined by the top seven?

Yes.

I don't think, Alex, we want to get into describing what our specific business is with the top seven. We do think our competition listens to this call.

Yes. Okay, so you're basically talking the industry when you said that and not necessarily Genie?

We talk the industry in general and then we talk Genie in particular and let me repeat.

Yes.

Genie's Aerial Work Platforms business is categorized into several products, booms and scissors were essentially flat--

Oh I know that.

Last year.

I was only interested in what the large rental fleets are doing?

Yes well, we're not going to disclose what our seven large rental fleet purchases are. Now if that becomes a common practice of the other guy in the Midwest, then maybe we'll reconsider.

I don't think you have to worry about that. The -- finally, the common parts, you said, we're in short supply between the Cranes and the Mining business. Could you be a little more specific on what those are, because it certainly would not include, I wouldn't think, the large tires. But what are the other things?

I think a little bit of a confusion. It's not necessarily common parts, but it's definitely common suppliers.

And types of suppliers.

And types of suppliers. And that over time we believe that we can move towards more common subsystems, gear boxes or otherwise hydraulic systems, as an example, because today virtually all of our business have, based on their heritage, have designed their own systems without thought of commonality between Cranes and the Mining Truck business or the Construction business, as an example. So a key piece of our initiative with Jacob, as we mentioned earlier, is to find working with the high level engineering teams around the globe to make sure we understand fundamental subsystems that we can begin to commonize and therefore gain efficiencies in terms of cost and delivery.

On the supply base.

Right.

Sounds good. Thank you.

We're wearing everybody thin here. I think, operator, maybe we'd take one more question?

Yes, sir. Your last question comes from the line of Terry Darling with Goldman Sachs.

I was just wondering if we could get some clarity on tax rate outlook for 2008 given the shift down in the U.K. and German statutory. Do we stay down around the 34% range you had in this quarter, or do we move back to a high level?

Well I think, Terry, we're not in a position to give you tax rate clarity for 2008. What we will say to you is we're very focused internally on eliminating our tax material weakness, which we have. And we very much believe there's substantial opportunity in front of us to improve our tax rate, whether we realize that early in '08, '09, but we've got a great new tax team focused in this Company and I think there's opportunities here.

Okay. And so I think you said, just under 36 for the full year would imply something like 36.5 in the fourth quarter, if I'm in the middle of the range?

Yes. I'd say we're around that, 35.5 to 36, full year.

Okay. Thanks very much.

Okay, Terry. Well, I want to thank everybody for their interest in Terex today. We've had a long call, but there's been a lot of interest and that's great. If we need follow ups, please follow up with Phil, Tom or myself, Tom Gelston, and thank you.

This concludes today's Terex third quarter 2007 earnings release conference call. You may now disconnect.