Terex Corp (TEX) 2008 Q2 法說會逐字稿

Good morning, my name is Wes. And I'll be your conference operator today. At this time I'd like to welcome everyone to the second quarter 2008 Terex earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there'll be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I will now turn the conference over to Mr. Ron DeFeo, Chairman and CEO. Please go ahead, sir.

Thank you and good morning ladies and gentlemen, and thank you for your interest in Terex Corporation today.

On the call with me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer, Tom Riordan, the Company's President and Chief Operating Officer, and Laura Kiernan, our Director of Investor Relations.

Also participating on this call and available for your questions are Rick Nichols for the Crane segment, Tim Ford for Aerial Work Platforms, Eric Nielsen for the materials, processing and mining business, Steve Filipov for developing markets and George Ellis for the road building and utilities business.

Housekeeping note to accommodate our audiences in earlier time zones or anyone unable to listen, a replay is available shortly after the live call and can be accessed until Thursday, the 31st of July, at 5:00 p.m. eastern daylight time. To access this replay, dial 1-800-642-1687, and international participants should dial 1-706-645-9291 with a conference ID number 54790569.

So let me begin. At Terex we feel we're building a better machinery company for customers, team members and investors. Terex had an outstanding quarter and first half. For perspective, net income in the January through June 2008 period was about $400 million. This is equal to net income for all of 2006. We've come a long way in 18 months.

We continue to see strength in several of our businesses, and believe that the strength in cranes plus materials, processing and mining, will offset the obvious slow downs in construction and aerial work platforms. The Terex portfolio is sufficiently diverse to balance a wide variety of change in any individual segment with offsetting effects in other segments.

During the quarter, earnings per share grew about 40% compared with year-ago period, and net income was up 35% for the quarter and 39% for the first half relative to last year. These are very good numbers. So financially, the Company is strong.

We do expect the back half of this year, the earnings to be about in line with last year. As Phil will explain, this is a more traditional income split between half years. The full year EPS outlook represents about a 17 to 22% income growth compared with 2007. We are on track or ahead of the rate required to achieve our 2010 targets.

We are importantly committed to our share repurchase program, which recently increased to $1.2 billion through next June. There are reasons for this. We have solid cash flow and a strong belief that this will continue. We have grown our earnings meaningfully over the past several years and believe we will achieve the 12 by 12 in '10 financial goals; that is $12 billion in revenues with a 12% operating margin by 2010.

Our balance sheet is very strong. And of course, the stock price is way down, making this a great time to buy. We have not lost site of making investments in our own global support structure, capital expenditures and pursuing acquisitions on an opportunistic basis. We do realize that our end markets are varied and choppy, but the fact is that we are rapidly growing in developing countries and that our crane and mining businesses are also growing nicely with excellent margins. And this gives us confidence with the outlook.

We're proud of what we've accomplished at Terex over the past several years. Since 2002 the Company has grown revenue from about $3 billion to nearly the $11 billion we expect in 2008, and approximately 90% of this growth has been organic. This reflects the operating company profile that we're looking for.

Investing in our own business remains a priority. We have numerous factory and improvement investments underway, which Tom will explain. Terex has just moved forward, in my view, one additional year and we're entering our sophomore year in high school as we still remain a young company. But we may take some advanced courses.

I'll hand it now over to Phil and Tom, and then I'll add some comments on our outlook before taking your questions. Phil?

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 as such, expectations are subject to uncertainties related to macroeconomic factors, interest rates, governmental actions and other factors. A fuller description of the factors that affect future expectations is included in the press release and our other public filings. I encourage you to read them.

Our second quarter performance surpassed historic levels in several areas. Net sales was a record for the period of $2.9 billion, up 25% overall and 14% excluding the translation impact of foreign currency exchange rate fluctuation and acquisitions. While our income from operations of $371 million increased 30%.

Earnings per share increased to a record level of $2.32 from $1.66 in the prior year period. Cash provided by operating activities was $134 million in the quarter, and a use year-to-date of $56 million which is fairly typical given the seasonality of our businesses. Return on invested capital was 27% for the trailing four quarter period.

The net sales increase in the second quarter was driven mainly by materials processing and mining, and the crane segment, as worldwide infrastructure and commodity needs continue to provide significant demand for our products. Excluding acquisitions and the translation impact of foreign currency exchange rate changes, we had modest net sales growth in our other segments, however the softening of Western European demand is impacting the construction and aerial work platform segments in particular.

Second quarter 2008 income from operations increased to $371 million and operating margin of 12.6%, compared to $285 million with an operating margin of 12.1% in the second quarter of 2007. Volume growth in our more profitable segments, the impact of prior pricing increases and the trends toward higher capacity crane and mining products, as well as increased mining parts volume, contributed positively to the result. However, we are also experiencing margin challenges, primarily from input cost increases and efficiency challenges.

SG&A expenses were comparable to the prior year period at 9.5% of net sales, but up on an absolute basis, representing the impact of acquisitions, the translation effect of foreign currency exchange rate changes, our investment to improve our business processes and build supporting infrastructure for developing market opportunities. You should note that our cranes and materials processing and mining segments, where we expect sustained strength in global end markets, contributed 61% of the segment operating profit in the period, while we maintain excellent AWP results.

The effective tax rate in the second quarter was 33.1% compared to 35.6% in the prior year period. The effect of recently reduced statutory rates in several European countries and certain discrete items related to the favorable resolution of statutory audits, had a positive effect relative to the prior year period. We expect the effective tax rate to be somewhat higher for the remainder of the year.

Return on invested capital reached 27% for the trailing 12-month period, as we benefited from the excellent trailing profitability, partially offset by recent acquisitions. Our 2008 target, which will have a higher weighting of the increased invested capital related to acquisitions, is 23%. The level of working capital, the trailing quarter annualized net sales reached 22.1% compared to 21.5 in the prior year period. The difference relates to the inclusion of recent acquisitions.

Days sales outstanding is flat with the prior year period and accounts receivable aging is reasonably stable given the current credit challenged environment. Inventory turns are down from the prior year and we are actively adjusting production levels to reflect projected demand. We anticipate ending 2008 at close to 20% of working capital to trailing quarter annualized net sales.

Debt less cash and cash equivalents declined slightly from the first quarter of 2008 to $766 million, as cash provided by operating activities largely offset our investments in acquisitions, capital expenditures and share repurchases in the quarter.

Our net leverage ratio, which I'll define as debt less cash and cash equivalents divided by last 12 months EBITDA, is less than 0.7 times. This low level of leverage and our future prospects provide confidence that we can continue to balance our cash utilization to expand our portfolio through opportunistic acquisitions, invest internally for profitable growth, as well as execute share repurchases. Our weighted average interest rate for all debt was 6.56% for the quarter compared to 7.4% in the prior year period.

With regard to backlog levels, we continue to experience significant overall growth, up to $4.2 billion from $3.8 billion in the prior year period. Backlog represents orders that are deliverable in the next 12 months.

The main contributors to the backlog growth are the cranes and mining businesses, consistent with the strengthening demand discussed earlier. This quarter we have not included approximately $484 million in potential backlog related mainly to rough terrain crane products until we finalize pricing for 2009 deliveries in the third quarter.

Considering our strong year-to-date performance, the challenges and opportunities in some of our end markets, the anticipated input cost pressures and our response to these factors, we are maintaining our full year 2008 guidance with an up sales level of $10.5 billion to $10.9 billion, and earnings per share of $6.85 to $7.15. The pattern implied by this would indicate a more traditional distribution of our earnings throughout the year with roughly 56% generated in the first half. The full year earnings per share mid point in our guidance would represent a 20% increase over 2007 levels.

With that, let me turn it over to Tom.

Thanks, Phil, and good morning everyone. I'll cover our current views of end markets and business conditions as part of reviewing our business segment performance, and then wrap up with a quick overview of some of our key initiatives.

Our aerial work platform business had a very solid Q2 performance in spite of challenges of choppy markets and inflationary steel pricing. As we discussed earlier this year, we expected to see this business grow moderately in 2008, which it's doing, up 5% from last year Q2. We're happy with the 18.6% operating margin in Q2, against a very tough comparison from Q2 last year.

Revenue in the US and Europe were both up compared to a year-ago. In fact, we had a record revenue quarter in the US. The AWP market in Europe has noticeably slower order rates during Q2, and we expect that situation to continue for the balance of the year.

US markets have remained fairly stable and our belief is the order rates will be reduced for the balance of this year. With a slower order rate expected in the second half, we're taking appropriate judicious actions to reduce build rates and overhead spending while keeping inventory in line. Overall we expect revenue for AWP to be flat to slightly up for the full year 2008 versus 2007 results.

The operating margin for AWP in the second half is expected to be reduced based on input costs, primarily steel, and a time lag for product pricing increases to take affect. We have announced a 7.7% average price increase on orders after September 1 and shipments after December 31. Overall we still believe we are well positioned competitively, and are continuing with our previously announced plans for expansion in Europe and China.

Our construction business has done a very nice job in growing its top line. Eastern Europe, Middle East, Africa, Russia and other areas continue to be strong as compared to softness that we see in Western Europe and the US. Even when you take out acquisitions and foreign exchange, we are up single digit revenue growth year to date versus last year.

The construction operating margin is being compressed due to cost pressures, primarily steel pricing, along with the increase in SG&A spending on initiatives to improve our global competitiveness. We've had reasonable success to date in passing through equipment of parts pricing increases, and we're very happy that ASV continues to perform as expected and the integration process is right on track.

Our cranes business had a truly remarkable quarter with revenue up over 48% and operating income more than doubling to $126 million. The crane segment is now our largest business.

While the smaller products are showing some softness in orders, the mid and larger sized cranes continue to have a strong order book globally, and many of the supply chain restraints are significantly improving. Backlogs are up to over $2 billion and continue to climb.

We continue to improve our capacities and throughput based on talent and tools from our Lane Terex business system processes. For those of you who were able to attend the Waverly, Iowa, rough terrain crane plant open house recently, you saw the results firsthand. Similar transformations are underway elsewhere.

The material processing and mining segment also had a great quarter. Revenue up 32% and operating income up 75%. Mining orders continue to accelerate and we are seeing increased interest in longer term partnerships agreements with customers. This reflects the strong end markets we're participating in. Similar to cranes, our higher end products, such as larger hydraulic shovels and ultra capacity trucks are seeing robust demand.

Material processing is seeing continued strong order rates outside the US and Western Europe. Backlogs for the segment are over $950 million, up 24% from a year-ago. We're continuing our plans to increase capacities in both businesses through Lean Terex business system improvements and footprint expansion.

Our road building utility segment had a solid quarter with revenues and operating margin up nicely. The road building business remains challenged with tough end markets in the US and solid markets in South America. We expect the US market to remain soft and we are continuing to stay focused on cost reductions and pricing to offset cost inflation. Utilities had a very nice quarter and we're expecting the underlying trends of gradual revenue and margin improvement to continue.

Moving on to a quick review of some our key initiatives, we're very happy about the Terex management system start-up in three of our businesses. Phil and I are excited about the enthusiasm of the results since the implementation started, not only as the businesses affected, but throughout the rest of Terex.

Now that the ERP system is up and running, we're getting plenty of businesses looking to move up on the schedule for implementation. Our success was based on a great job by all the various business and IT teams that made this happen.

Our Terex business system activities are playing an increasingly important part of how we run our business. We have examples around the globe of setting up lines running to tack time to drive throughput, reduce cost, ease transfer of lines between plants for flexibility, standard work processes and so on. All of this makes it easy to ramp up production as needed, or ramp down with less disruption.

And as you might guess, our supply management team has been very busy lately. We've grown this group from starting up last June to currently over 50 talented people throughout the US, Europe, India and China, working to mitigate the cost inflation that steel and energy prices are causing. While there is a significant impact, we are not seeing the overall price increases that some media publications would suggest.

Our corporate and business sourcing teams are working very closely together to leverage the size of our total Terex commodity spend pretty effectively. In addition, the significant efforts to develop new supply partners in lower cost regions. These actions, along with targeted spending and overhead reductions taking place throughout Terex, give us reasonable confidence in understanding our current cost structure.

We're aggressively passing through price increases in all of our businesses, and expect to be successful overall in offsetting these cost increases over the near future.

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

Thanks, Tom. As you can hear, we have challenges, but significant opportunities remain in our business. Obviously things have evolved and the market conditions for us are different today than a few years back. Frankly I think this performance should be instructive to investors, as a diversification of our portfolio is illustrated in this challenging economic environment. We are less dependent on the earnings of one segment, though aerial work platforms remains a strong and excellent business for us.

Incremental margins from cranes and material processing and mining are expected to make up for the short falls with construction and AWP. Though the match-off won't be perfect, we believe that over time our strategy and goals will prove out.

The 2010 goals we set for ourselves look like they are within our reach, remembering of course that we set them when our revenue was around $7 billion about 24 months ago. Stretch goals were set and we continue to stretch. This is not going to stop at Terex, no matter what the economic environment. We are holding our full year outlook and remain confident about the future.

We are not forecasting 2009 at this point, but believe that cranes and MP&M will remain strong, and that we will see AWP have a steady year. Construction will stay on course to improve in a challenging Western European environment, plus road building and utility improvements will continue. We feel still that the best is yet to come.

Now I'd like to open it up for your questions, and I'd like to encourage one question and only one follow-up. So Wes, could you open it up, please?

(OPERATOR INSTRUCTIONS). Your first question comes from Jamie Cook of Credit Suisse.

Good morning and congratulations.

Thank you Jamie.

My first question, Ron, if I think about the guidance the back half of the year implies, sort of flat EPS growth, so what I'm trying to figure out is, how much of this is material cost in the back half of the year? And then my follow-up question to that would be, what I'm trying to figure out is if I look at the flat EPS growth in the back half of the year, trying to extrapolate and see what that means for '09, because I guess my concern is while crane and mining continues to be strong, is it enough to offset the weakness in AWP so that you can still grow your earnings?

Yes, Jamie, let me comment on both of those, and then Tom or you, Phil, want to comment further, feel free. Material cost is very hard for us to handicap at this point in time. We know the number is going to be a significant number. We know that it will impact our businesses in various ways.

We have, as Tom mentioned, taken a 7.7% price increase for our aerial work platform business, but really don't expect to see any of the benefits of that price increase to, until the first of 2009. And really this was led by our competitor who essentially took a 7.5% increase and indicated that they would have that price increase effective on shipments beginning the first of next year as well.

Obviously it is in our Company and in our market's best interest for price discipline in the aerial work platform business, and for that matter across the range of our businesses. But this is the one that we're most sensitive to and is hardest for us to predict.

If you back up and look at the total impact on Terex, we think that we can price to recover the material costs that we're going to experience and it won't be that significant across a 12 month period. But in any particular quarter or so, it does present a somewhat more challenging thing for us to forecast.

So as we look out to 2009, our view is that mining materials processing and cranes continues to be quite strong. Aerial work platforms will be steady as I indicated. I do believe we feel positive about the total Company's prospects, and in order for us to achieve our 12 by 12 in '10, we're going to have to continue growing the Company, growing our earnings and progressing toward that goal.

And while I don't know what the quarterly splits will be in 2009, or what the absolute number will be at this stage, we remain reasonably positive.

I think it would have been hard for me to say with credibility 18 months ago that materials processing and mining plus our crane business would represent 61% of our earnings. I'm not sure anybody on this call would have believed that. But here we are. We had a second quarter where that's happened.

So I think we've got opportunities in still many pockets of our business. And as we keep working them, those pockets will come to the top.

All righty, thanks, I'll get back in queue.

Your next question comes from Terry Darling of Goldman Sachs.

Thanks, good morning.

Good morning, Terry.

Hi Ron, I wonder if you could talk about the materials and mining and cranes margins in the second half of the year. It kind of looks like the guidance would imply that the very impressive performance from this quarter might come off a bit. You did make some comments about positive mix in the second quarter. But if you could talk about whether this quarter signals a watershed of higher sustainable margin performance for those two businesses or where we are in that journey around there.

Frankly, I think the opportunities in both of those businesses, to keep solid margins, I don't know if they'll be exactly at what we achieved in the second quarter. Historically, second quarters have been moderately higher margin quarters for our businesses, but I think the margins will remain impressive in both of those businesses.

And I think conversely, there'll be meaningful margin erosion in our aerial work platform business in the short-term, but that's the kind of value in a little bit more diversified enterprise.

I guess as a follow-up, a number of companies also struggling with the price raw material continuing providing, kind of a timeline in what their expectations are in terms of that balance, and wondering if across Terex as a whole, you might be able to give us a sense for what was price up incrementally year over year, what was raw materials up, kind of how that, at least in the guidance that you're providing here for the second half of the year, looks.

Yes, Terry, I would love to be able to give you a breakout exactly of that, but frankly, I can't. Terex still is a work in process. As Tom mentioned, we have three sites that went up on our new Terex management system, which is an enterprise-wide system. And to effectively net out currency, volume, separate that from price realization, it is a challenge. I can give you platitudes and generalities, but I can't give you a financial reconciliation that will give you comfort.

What gives me comfort in managing the business is looking and inspecting the individual pieces and comparing that with how they have performed business by business, but to give you a consolidated roll-up, I don't think Phil, you're capable of doing that. At least you haven't given me one yet.

Not yet.

I'll let my colleagues bang on the other segments. Phil, I'm wondering just lastly, if you can give us the foreign currency impact at the EPS level or operating income level in the quarter?

I would say it's about 25 basis points on the operating margin year-over-year.

Thanks, very much.

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

Hi, good morning. I just wanted to ask you about the fairly obvious fact that you beat the numbers in the second quarter by $0.32 but didn't raise your guidance for the year which means, just around the calculation, that the second half earnings will be mid point of the range, about $0.25 below what had been the consensus. And actually $0.03 below the actual for last year.

Now you made reference to that early in the call and you said reason is we're reverting to a more normal split between the first half and the second half, which is around 55%, which is true. That's what you did between 2003 and 2005, but, and it dropped to 48% or so over the next two years, but that's because you were growing very rapidly.

So you grew in the second half, relative to the first half on a secular basis and so it was a lesser percentage. But now reverting back to the normal percentage would indicate slowing growth. Is that correct? And you've gone into the reasons for that, but what would you say 2009 is going to look like in terms of the split, between the first half and the second half?

Alex, it's a little early for me to be able to do that. We don't have a roll-up of any of our 2009 forecasts at all. If I were to look at our business portfolio, I would say 2006 and 2007 were more the unusual periods, less because we were growing rapidly and more because AWP was at an incredibly strong period. And frankly you know it as well as I do, that we had some incredibly strong growth from AWP in part because what was happening is that many of the players that used to be competitors in the early 2000, actually 1998 to 2002 period, really no longer participated. So you had lots of demand on fewer players and all of us were working very hard to keep up with our customer's demand.

Now you see the demand slowing, there's a rational slow down of demand frankly, and a fairly moderate level of our end customers' price realizations, so in essence, not having a lot of orders coming into our customers is probably a good thing for them. And longer term it won't be such a bad thing for us, but it also, that situation at AWP allows the rest of our business to really put back in balance our first half and second half type of splits.

I'm not going to tell you what I think 2009 will be yet, because we don't have that. But if I were to look forward, just given my years of experience, I'd say a little bit more like this year than it would have been in '06 and '07.

Okay, second question is more of an economic question. And I'll ask, I asked this question on one of your competitor's calls earlier this week, but you mentioned your price increase in AWP 7.5%, and let's assume you've got similar kinds of price increases in other businesses in order to offset rapidly rising commodity and materials costs. And you're able to hold those at the moment, but imagine a situation in which the whole world is doing that in order to offset these commodity price increases. We've had 50% increase in price at Dupont for example, huge increases in energy prices in steel and so on. People are going to have to raise prices substantially in order to offset that.

What will be the response of the monetary authorities around the world to this sort of thing. You can't just assume there won't be any response, and if there is a response, that says we're going to slow this down, we're not going to allow wages to rise by a similar amount and get embedded in our cost structure. We've got to get rid of these commodity price increases and slow the whole worldwide economy down. Do you think there's a possibility that could happen and are you preparing for such an event?

Okay, Alex, as I'm not an economist unlike maybe others in our industry, but I participate in this industry for a fairly long time. I think your question creates an economic scenario of which doesn't fully consider the new growth that's taking place in the world. And that growth is what's going on in the developing economies. China, India, Russia, Brazil, all the, and many of the African nations want to participate in a global growth environment.

It will require a shift in wealth and I think we see that taking place, which results in significant commodity increases. I think commodities will continue to be strong for many years. I think the mining companies believe that and are investing accordingly. I think our energy policies have been non-existent. So I think energy cost is going to continue to be high for a while.

I don't see a knee-jerk reaction to increased interest rates, although some monetary policy may happen in selected markets. If interest rates go up dramatically, our business will go down. I mean, there is a correlation there over history. I don't see that at this point, could it happen? Maybe. But I think the difference today is the growth in the rest of the world.

Okay, thank you.

Your next question comes from Martin Sankey of Neuberger Berman.

Good morning, can you hear me?

Yes, Martin.

Okay, I would like to focus for a moment on the share repurchase activity. First of all, since the end of the second quarter, has Terex been active in the market?

We can't comment on trading activity in that period. We report it quarterly.

Oh, well, other companies have commented that they've been in the market, so it's not an inappropriate question.

No, we don't mean that it's inappropriate, we just, it hasn't been our practice Martin, to comment. Because, of course if we're buying shares, it's something that we're doing tactically in line with the program that was already announced. So, we expect you to draw the appropriate conclusions.

Okay, the timing of the share repurchase announcement, coming during what is ordinarily a quiet period for you is somewhat suggestive. What was the inspiration behind doing it?

Government rules. We had a board meeting, the board approved it. After the board approved it, we're obligated to announce it.

Okay, thank you. Now, in extending the share repurchase program, were you considering the accretion and the cash flow positive effects with the stock at current levels or you just felt that it was, stock had gotten too depressed?

I think we are economically oriented. We look at a dollar of investment from a balance sheet that is fairly under-levered, and we looked at our own equity and feel that buying our own equity is a good investment. And given where the stock is and has been trading, that continues to be how we feel.

But we feel also that we can buy back our stock as well as invest in our own Company through capital expenditures as well as continue to make acquisitions without any real concern about our overall balance sheet.

Well, I congratulate you for making the commitment that you have made to repurchase the equity of Terex at such an accelerated rate. Okay, thanks for answering my questions and I'll get back in queue.

Thank you, Martin.

Your next question comes from David Raso of Citigroup.

Hi, good morning. Ron, you said something a little troubling to me, that you think aerials will be steady in '09. I think you can grow earnings, even if your aerial business gets her profits cut nearly in half next year. The key is to make sure you prepare the business for that kind of downturn, and we know you were laying some people off a week or two ago, and I know they were mostly temp workers. But I'm trying to connect the dots between laying people off, steady comment on '09, orders imply down 48% in aerials for the quarter. I know the market doesn't seen as prone to a dramatic hit when it comes to pricing that we saw seven or eight years ago when a lot of other aerial companies were going belly up, and there was stuff at auctions going at, brand new, half of the normal new price. So I'm not trying to be draconian on '09 for aerials, but how do you connect the dots what we're seeing in the marketplace in your orders and layoffs with a steady '09 comment?

Well, steady is of course subject to interpretation, and at this stage, we think holding a firm handle on the balance of things between revenue, margin, material cost recovery, are the things that we are trying to keep in balance. I am not sure where the total revenue will be in aerial work platforms for 2009 at this point in time. It is clear that order rates are down.

What is not clear to me is how our competition is going to react and whether or not there will be, if there's a substantial amount of equipment sold off by our competition at substantially lower prices than expected, that will either require that we react to that or that if a lot of product is sold, our customer base will end up with too much equipment and then lower their prices, which will mean that it will be a more protracted recovery.

If there is some discipline in the market, it's likely that the first half may be a little bit light, but the back half may be stronger than we expected. So that to me is a more balanced view.

Right now I have the more balanced view of what the aerial work platform of the business should be. But since we have six months more really to go before we give you specific guidance on 2009, I don't want anyone to think that it is a draconian situation, nor do I want anyone to think that we believe things are great. I mean we've laid off hundreds of people, hundreds of temporary workers that we had in both North America and in Europe, and we laid off over 100 plus salaried workers at our aerial work platform business.

So Tom, you want to comment on that?

Yes, I think, David, the other key point is, per the comments we made, we're still going full speed ahead with our plans for expansion in Europe, in China and other parts of the globe. So we believe there may be some softness and transition while we move to that newer footprint here, but fundamentally, again as Ron had suggested, it's a good business, we're well in tune with our key customers and their buying plans. And obviously taking prudent, clear, direct action on both pricing as well as reducing our build rates and our cost structure to reflect this aberration in the market at the moment. It is going down and it's a question of, to your point, recovery, which we're comfortable with at some point of time in the future but obviously too soon to call.

I just want to make sure on the margin degradation potential in '09, that Tim is running the business assuming down revenues. That's not a leap of faith to think revenues are down next year. I just want to make sure the cost structure's being altered proactively. We're not going to wait until December to say, look, '09's down, now we have an overhead absorption issue in the first half of '09. I assume Tim is preparing for down revenues.

I suspect Tim and I are very much in tune with that concern, David.

Okay. I appreciate it. Thank you very much.

Our philosophy, just to summarize is, if you think it's going to be bad, assume it's going to be worse, take the action now and then evaluate as you go. It's easier to add back than it is to reduce.

Exactly, that's what I wanted to hear. Thank you.

Your next question is from Henry Kirn of UBS.

Good morning, guys.

Good morning, Henry.

Europe for aerials seem to change on a dime. Could you discuss when you started to see that and what may have changed things?

It may have changed on a Euro as opposed to a dime. I do agree it seems to have turned down reasonably quickly. It was probably less quick than may appear to the external world.

I think the first quarter was generally pretty good. But as we got into early parts of the second quarter, both in our construction business and in our aerial work platform business, we saw core markets like the United Kingdom, Spain, Italy, just really back up. Spain probably was first and really there's very similar housing issues in Spain and the United Kingdom as we face in the United States.

Okay, and not to beat a dead horse on raw materials, but have you actually seen any steel companies walk away from contracts or have they been honoring the contracts you had?

Henry, we've had, frankly, I think very good success in having our supplier partners honor their contracts. I think there candidly have been a few smaller suppliers that have suggested we'd have a fundamental problem and they would walk away, but I wouldn't say there's anything that's been disruptive or unusual as we go through what, as you would expect, some fairly tough negotiations with the broader supply chains starting with steel mills and working through fabricating partners that we deal with. So at the moment, I would say the vast majority of our supply partners are honoring their agreements and we're working in good faith together to come up with the right answers going forward.

Okay, thanks a lot.

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

Ron, you like jingles, so I've got a little jingle to describe where I think we're at. You said so often 12 by 12 in '10. We've come accept this as doctrine. What about 2009? Will we be stuck withholding dime?

God bless us. That's why I'm long Terex for a long time, not short immediately.

Can you comment Ron, about the M&A environment out there? What's changed, if anything?

Well the obvious changes, that is that there's not a large presence of private equity competing with strategic buyers for assets at 7.5 times leverage. I think that's a good thing for our business.

I think there is still an overhang of fairly high price expectations on certain properties and that's probably, will change depending upon the performance of some of those businesses. I think in our industry you really have to scratch beneath the surface and explore in developing markets, explore Europe and some of the older product categories to try and get value oriented acquisitions. And so I think, I've been doing this now for 15 plus years, I don't think the market is as good as it can be for M&A activity yet, but it's improving a little.

And compared with 12 months ago, it looks like there might be more opportunities.

Yes possibly, possibly, although we have a funny industry in that it should be consolidated, but isn't, okay? And so you want us to ask the question, why is that? And I'm not sure I still, I have the answer for that.

You're defining yourself as a machinery company, no longer just a construction machinery company.

Yes, well that's a nuance that I've always felt that perhaps may be a little bit more obvious to the external world today than before.

Okay, thank you.

Your next question comes from Joel Tiss of Buckingham Research.

Hey guys, how's it going?

Good Joel, thank you.

Two things, can you give us a little help on the margins in the crane and the mining business in the first half. Just sort of, I know you didn't really want to talk about this before but volume, leverage versus pricing? Just to get a feel for the sustainability of those margins as we go forward?

All right, Joel, I'll give you some character on those. I would say that in cranes first, they have been very active in working continually on their pricing through the backlog, so I think out of all the segments, I think they've worked that the hardest. But I would say that some of their improvement is definitely coming from price realization year-over-year, which I would expect it would be sustainable. In the efficiency side relative to cranes as well, they were able to catch up on some of their production in our larger cranes. Supply constraints have started to ease a little bit. They're not gone, but they've started to ease. So that provided some throughput capability.

In the materials processing and mining group, I would say the mining activity, they got some volume leverage year-over-year, they also were able to catch up on some of the Australian deliveries that were delayed in the first quarter on flooding, but they weren't at unusual margins relative to the total portfolio.

Our parts activity in mining continues to grow as our installed base grows, and that's obviously at higher margins than others and I would expect that's going to continue. And material processing has had some level of softening, mainly in the US, but they as well have been very active about managing their margins and getting the price recovery necessary and effectively managing their production base too. So I think it's, I don't see much that's not sustainable. We'll certainly have some lumpiness as the bigger equipment deliveries occur.

And some seasonality in the business.

Some seasonality, but in general it's a solid quarter.

I wanted to go back to something Tom said earlier about aerial work platforms are going to be down. I wonder if you could, is that versus the first half or year-over-year? Just a little more color there.

Well what I had said was we expect the full year '08 to be at or slightly above '07 revenue numbers, and we think the second half of this year will be down. As Ron had mentioned earlier, we're not making any predictions at this point in time on what '09 looks like.

And at the same time, we're obviously making sure inventory's in balance and that we're continuing the manufacturing activities of expanding footprint in other markets. So in general, I don't know if I can give a whole lot of specificity in terms of specific revenue in the second half of the year for AWP but I think we're very prudently working it.

Tim Ford is actually on the phone from the UK and spent the week talking to customers, gaining additional insights, and I think obviously that's an ongoing part of our process and how we try and run our business with lean tools to make sure that as the market flexes, we're able to flex very rapidly with it.

I'm sorry, I must have asked it wrong. I'm just trying to zero in on your margin down comment, is that versus the first half of 2008 or is that year-over-year?

Specifically my comment was related to the first half of '08.

Thank you

Your next question comes from Tom Brinkman of BMO Capital Markets.

Good morning, just curious about your road building segment and I guess sustainability of margins there. Should we expect they can remain in the mid-single digits? It was a nice increase from recent quarters?

Go ahead.

Tom, we've got what I would describe as a bifurcated business. Meaning, I think the utilities business as I mentioned on my comments, continues to have solid growth, some interesting new products coming on board, reasonable margin expansion that's going with that.

The road building side continues to struggle from a volume standpoint, specifically our cement mixer business continues to significantly struggle. We think that will be down a little farther than the first half of this year. We're taking appropriate changes in overhead structure and approach to that business, and candidly in the balance of the road building business, we also see a fairly tough second half of the year with obviously energy prices, oil prices driving road building activity in the wrong direction.

So, until that somewhat stabilizes and the highway funding situation increases, we think road building will continue to be depressed. So I think they had a very solid Q2. That being said, I don't know that I would expect any radical change up or down, but potentially could soften a little bit in the second half of this year as well.

Little progress, but not Herculean.

The other thing Tom, in that segment we have the other, which last year we had a rerental business that we closed down basically, so there were some losses in that business that we don't have this year. Non-operating losses, basically.

Okay, the non-operating losses, I guess when are those going to sunset like year-over-year? Does that just completely happen?

By the end of, the fourth quarter of last year, there were still some charges there.

Okay, I see. Thank you very much.

Your next question comes from Chris Weltzer of Robert W. Baird.

Good morning, everybody.

Good morning, Chris.

I was wondering if you could give us the international versus North American split in AWPs for the quarter, and how you might think that plays out by the end of the year?

Do you have that off the top of your head?

I'm looking.

Tim, do you have that off the top of your head?

I do. Let's see here. I would say, well, I would give it to you as North America versus the total.

Yes, versus the balance of the business, international.

Right. North America was just north of 60%.

Okay. That's helpful. And then given, the relative suddenness of the downturn in Europe, how comfortable are you with inventory levels, specifically for construction and then also AWP in the channel. And do you think, do you plan on under-producing relative to retail demand in the second half of the year there?

In the construction business, we have too much inventory in our view, ourselves. Less about the channel and more the inventory that we have. And we are going to reduce production and it is affecting our near term outlook. And I don't think our customers, like other industry participants, have a lot of floor planned inventory. We just don't have the dealer network that a Caterpillar does, where the forward view of Caterpillar or Volvo or other companies that do a lot of floor planning, have. So the inventory issue we have is our own issue. And in the aerial work platform business, we're cutting production in order to get our inventories in line.

Gotcha. But do you plan on, so you're saying to reduce inventories you'll be under-producing relative to demand in the second half of the year in both those businesses?

Somewhat. I don't think we've got a gross problem as I would describe it, but it's an area of concern that obviously is part of our working capital commitments we're working on. The aerial work platform business in particular has been clearly known within the industry and frankly within Terex, as kind of the lean leader.

I think we'll have some, what I would describe as displaced inventory. A la if Europe is slowing down and obviously there's a lead time of product going into, on a boat over to Europe, that will slow our plans down, but our production plans down, but I don't view this as a significant issue in the second half of the year. It's something we're clearly working on.

Thank you.

Your next question comes from Steve Barger of Key Bank Capital Markets.

Good morning.

Good morning, Steve.

As you think about the geographic makeup of the backlog, is there any region of the world that's really under-represented right now or are the pockets of growth that are big opportunities relative to where your segments are in the cycles?

That's a good question. I think, where we're under-represented is also hardest for us to really penetrate. So there's, we're under-represented in China, clearly. But the Chinese manufacturers have a clear advantage, as do the Asians, the Koreans and the Japanese in the Chinese market. They have a good presence.

Caterpillar's been in China an awful long time, but they still are, they have a good business there, but they're still working it. Our business is okay on the product categories where we have clear and specific unique characteristics, but on the main line construction, equipment business in China, we are an insignificant player.

In India, the market is fairly strong but it's got a fairly dominant United Kingdom player in JCV who's got a good presence there. I think we are building a factory in Hosur. We have a joint venture that we just brought on balance sheet that we now are 70% owners of that we're working. We're working to hire a new leader for ourselves in India. So I think that's, there's more opportunity there.

South America.

South America's another example, South Africa. South Africa's got tremendous opportunity. Our business has grown by the, I think the hundreds of millions of dollars.

Correct.

Through a dealer down there. Our Chief Marketing Officer has really taken the lead in helping to coordinate some of our business in South Africa. In fact she's there as we speak.

So we're working, the pockets of the world, Steve Filipov, who's on the call here, is actually in India today and Steve is head of our developing markets. I think, in the press release we indicated that 22% of our overall revenue was in what we'd characterize as developing markets. This business has our fastest growth rate, but we obviously assigned Steve, who used to run our crane business until about a few months ago, to this in order to accelerate our growth and business plans. But I think it's going to take him a little while.

That's good background. Thanks very much. My follow-up, you expressed confidence in the stretch goals, I think with reasonable caveats, but conceptually does that road map include a step function up from 9 to 10, or do you generally think about it as a more normal, linear walk?

Yes, I have always liked beating my numbers, okay? So, it's hard for me to say, I would hope that in 2009 I set some new goals, okay? So, we'll see what happens.

Thanks very much.

Your next question comes from Seth Weber of Bank of America Securities.

Thanks, good morning everybody. Most of my questions have been asked and answered. But just real quick on the aerials business, can you talk about have you seen any change in the used equipment demand or pricing from the international contingent that's been so strong recently?

Tim, can you comment on that?

I would say on a holistic basis, no, we're seeing some additional requests for trades, but not anything that I would characterize as unusual or out of bounds.

On the mining and cranes categories, typically bigger, longer lead time stuff, you've given us your next 12-month backlog there, but can you give us any indication what customers are talking about. Are they trying to lock down build slots into 2009, 2010, can you give us any color there?

Rick, why don't you give some color on the crane business relative to that, and I don't know, Eric, if you have enough experience yet to make any comment, but Rick, why don't you comment on the cranes at least?

I would think Seth, from a crane's perspective, certainly customers are trying to lock down 2009 and to a large extent 2010. So there's certainly activity in those years to support the continued growth.

Eric, do you have any comment on that?

I don't feel qualified yet to jump into that. I'll defer to you or Tom.

Okay, okay. I think what I would say is depending upon our business, we're very active in negotiations with our customers well beyond the current periods. There's a lot of planning on the horizon in our hydraulic excavator business and in our mining truck business. I think the expectation of our customer base is that they need to bring additional capacity onboard.

In addition, we know that, from a mining perspective, many of the mines that are going to be brought on board are not going to have the capability for electrification, so therefore the kinds of shovels we make, which are hydraulic and mobile, are going to be quite desirable for that size mining class.

So we're pretty optimistic about this business. In fact, we're going to be a little bit challenged to figure out how to make, how and where to make the product.

Okay and then just a follow-up on same two categories, the cranes and mining, do you have your steel on the ground at this point to make your, fill your backlog through the end of the year, I guess. Or are you still buying steel?

We're going to keep buying steel of course, because we don't have that much, enough for the next six months, but we have really benefited from pretty decent planning in our crane business on steel procurement. And I'd like to tell you we're brilliant and that we have a large inventory hedge of steel, but we have a larger than we'd like inventory hedge on steel.

We have too much raw material, that's for sure.

So it's somewhat positive, but probably not for the reasons I'd like.

Understood. Okay, thanks very much.

Your next question comes from Larry DiMaria of Sterne Agee.

Hi, thank you. Just wondering as it relates to the guidance, what kind of macro assumptions you're looking at globally, as far as GDP. And also, share count for the guidance? And then also, as it relates to the backlog, are there any, seeing any cancellations in any parts of the backlog? Obviously probably not cranes and mining, but anyway else, are there cancellations that could accelerate throughout the rest of the year?

I think we've seen the cancellations in our aerial work platform business and a little bit in our construction business, but that's in as reported numbers. And Phil, do you want to comment on--

Larry, I'm not going to give specific guidance on share count. I think we provided in the release a level of what you can get at the end of the second quarter, looking at the average for the quarter and then the amount of 1 million 1 shares that cash effect happened in the third quarter. I'm not going to give specific guidance on the share count.

How about global GDP assumptions for the remainder of the year?

We don't really consider GDP. It may sound strange to you but we'll look at it from an interest perspective. I don't like to give too many excuses to our organization, and GDP is one of those classic ones. When the GDP is strong, nobody says that's the reason there business is good, when the GDP is weak, everybody says, well it's the economy. We don't like to talk about that around Terex a lot.

Okay, thank you.

Your next question comes from Kent Grether, private investor.

Good morning, I'd like to first of all thank the Terex team members for the hard work and good success on behalf of the shareholders. Also like to thank you for the share buyback program. I hope you keep buying back until I'm the last guy that owns any shares.

There may be a couple others of us.

Well, okay, I'll let you in on part of the deal. My question is if you would comment maybe from a, taking a step back sort of view, we've talked a lot about input costs and raw material costs, and how that pinches your margins. But there are some observers who, when looking at commodity costs would say, well, higher commodity costs pushed demand on the mining and materials processing side of the business, higher energy costs are pushing alternative fuels like the wind farms and nuclear.

So if you, if you were to be asked if there's a 25% rise or a 25% drop in commodity costs generally, whether it's gold and copper and steel and oil et cetera, which direction is better for your business? Are higher commodity costs that drive demand for your services better or lower which lowers the raw material costs?

I prefer higher commodity costs to be perfectly blunt about it. I think it is a primary driver of our demand. I think it's good for global growth because it reflects the fact that there is growth in the world. And it's better for us than to try and get pricing in the marketplace, although it represents some temporary disruptions because price increases never happen in a straight line.

I know commodities will go up and down meaningful amounts, but if I look over a period of time, I would prefer them to be rising rather than going down. It helps our business.

Okay, thank you.

Your next question comes from Andrew Obin of Merrill Lynch.

Thank you very much. Most of my questions have been answered. But just want to follow up on Martin's and Larry's questions on share buyback. Given the timing of the share buyback announcement, is it fair to assume that the earnings outlook for '08 assumes at least some incremental share buybacks. Is that a fair statement?

That would be a fair statement.

Thank you very much.

Some.

Yes, some.

Your next question comes from Joel Tiss of Buckingham Research.

Joel? I think he may have dropped.

Joel, are you there?

Your next question comes from David Raso of Citigroup.

Quick question on the working capital opportunity. Can you help us a bit with by business segment the working cap as a percent of sales, roughly. I know you don't want to give exact. I'm just trying to think through the aerial business no longer shipping as much from the US to Europe, with that slow down, should be a great help to your working capital. But you had a lot of working capital tied up on the water at the end of every quarter, but I also have to believe the working capital turns are not fantastic in the crane business or mining business. I'm trying to juggle some puts and takes to get some validity around, can you really get that working capital target hit? Because obviously it would do a lot for your cash flow.

Here's the way I characterize it David, and maybe Laura at some point could get more specific if need be, but our aerial work platform business actually planned for a stronger Europe. So therefore we have a bit of a dislocation given manufacturing lead times with more inventory on the water and/or in Europe than probably we need at this point in time. So that represents a meaningful opportunity for us.

Our mining and materials processing business always has challenges, particularly the mining business in working capital because of long lead times, long lead times for engines, for drive systems, and for hydraulics and that's no different today. So actually big working capital, actually is a reasonable prognosis of positive future sales.

Our crane business working capital is good, but I think it can always be a little bit better. Tom, you wanted to add something?

No, I think directionally correct, and a lot of it is also related to manufacturing lead times. And as you'd expect, our longer, larger products, cranes and mining in particular have slower inventory turns.

Let me comment on, I do have the numbers here, David. I'm not going to give you exact specifics, but I'll do above or below the corporate average, how's that?

That sounds good.

AWP would be below the 22.5%, or 22.1% we had in the quarter. Construction would be higher, and mining and materials processing would be higher. Cranes would be lower. And road building would be about right on.

That's helpful, I appreciate it. Thank you.

Your next question comes from Joel Tiss of Buchingham Research.

How are you doing guys? Just a quick follow-up on inventories, where we're up about $600 million. I don't know if you addressed it or not earlier, but I just wondered if you could give us a little color what's behind that.

Remember inventory, you're looking year-over-year, Joel? You're going to have a couple hundred million coming from currency if you're just looking at the balance sheet figures on that. You've got some coming from acquisitions and back to the comment Ron made a minute ago, we've got obviously some dislocation on product at AWP heading to Europe and frankly some slow down in the construction business.

It is an opportunity for cash generation.

Right.

We know that, and so it's a concern, but not a huge problem.

Okay and just again, what's the thinking on why not put in a permanent dividend as opposed to just doing so much repurchase?

Our thinking on dividends Joel, at this stage is, we have been a growth company, we continue to be oriented to long-term growth. We think we can deliver better shareholder value by reinvesting in our businesses, and when necessary, to repurchase shares like we're doing today. As the Company matures, this is a question that we discuss at our board level with a reasonable amount of frequency. But our orientation generally remains, invest in your business and deliver shareholder returns that way and I think over time that's worked for us. I won't rule it out, but I'm really not ruling it in right now.

Okay. All right, thanks for staying on the phone so long. Thank you.

All right, we've exhausted all the questions, which is an hour and 15 minutes of Terex dialog. So I want to thank everybody for participating with our Company today. If you have any additional questions or follow-up, I'd encourage you to call the Company and follow-up with us. Thank you very much.

Ladies and gentlemen, that concludes the second quarter 2008 Terex earnings conference call. We appreciate your time. You may now disconnect.