Terex Corp (TEX) 2011 Q1 法說會逐字稿

Good morning, my name is Brooke and I will be your conference operator today. At this time I would like to welcome everyone to the Terex Corporation first-quarter 2011 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ron DeFeo, Chairman and CEO. Thank you, Mr. DeFeo, you may begin your conference.

Thank you, Brooke, 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 and Noah Weiss our Senior Manager of Investor Relations. Tom Gelston has been ill the past few days and we wish him a speedy recovery although I do think he is on the call as well. Also participating and available for your questions are Kevin Bradley, for the Crane segment, Tim Ford for our Aerial Work platform business, George Ellis for the Construction, Kieran Hegarty for Materials Processing, and Steve Filipov for Developing Markets as well as Ken Lousberg for our China Operations. A replay of the call is archived and will be archived on the Company's website under audio archives in the Investor Relations section.

I would like to begin with some overall commentary in the business followed by Mr. Widman who will provide more detailed financial report. I will return and summarize and open it up for your questions. During the Q&A period it would be appreciated if you ask only one question and a follow-up. The presentation we will be referring to is accessible on the Company's website. Let me begin by referring to the forward-looking statement and the commentary on page 2, which I encourage you to read and review as well as our other disclosures that are available in our public documents. Now let me turn to page 3 which was marked as overview.

As anticipated, frankly, as anticipated, the recovery is underway and continuing at Terex. Net sales increased 34% in the first-quarter of 2011 and three of our four segments increased compared with the prior-year. Order activity -- order activity continues to accelerate with the strengthening backlog in all of our segments. This has led to increased production levels which, of course, help improve our year-over-year absorption of our manufacturing operations which are returning to a more typical pace following the ramp down in 2009 and the ramp up in 2010. This has resulted in both pricing and cost challenges at the moment. Key components such as steel, hydraulics and tires have had significant price increases and we have put pressure -- and this has put pressure on our margins and in some cases caused short-term delivery issues. Consequently we have implemented price increases in virtually all of our product categories, but as normal these increases take effect over a future period of time.

Of particular note are the cranes port equipment lines of businesses which experienced a larger than expected loss and we will discuss this in a little more detail later. There is a lot more work to do to cut costs although we do see increasing order rates from some of these products lines, as being helpful for later this year and early next year. The last point on page 3 is that we have executed a partial sale of our Bucyrus holdings to help balance our geographic cash position between North America and Europe. Turning to page 4, we are certainly seeing a more positive environment -- market environment in most if not all, of our products -- product lines and markets around the world. Let me comment by product category.

First our aerial work platform business. The backlog increased 123% with last year and 45% compared with the prior quarter or about the same level as backlog that we had in June of 2007. This increased backlog has caused us to adjust our production levels, which we thought we were going to get ahead of but at this point we are just keeping pace with a higher demand. We also implemented at least a 4.5% price increase on most of our models during the quarter. This will have little effect in the second-quarter and more in the third and fourth-quarters. The market recovery has tended to be broadly based geographically.

In construction products, we see solid demand for our compact equipment, material handlers, and our off-highway trucks. We received solid orders for the recently introduced new products and the lead times have been lengthening somewhat as our backlogs increased. The operating losses from this business have now narrowed and we expect Q2 profitability. There remains a lot of work to do to continue to improve this franchise, but we feel we are on the right path for achieving our longer-term goals. The cranes market has experienced a notable recovery in North America with rough terrain boom truck, all-terrain and even some power crane products showing improvements. Power cranes have yet to bottom in the EU with a soft market been experienced in particular for wind power.

Additional cost reductions are required in our European crane operations and these are underway. But in general we have been surprised by a stronger backlog in our crane operations than we had initially expected. Turning to materials processing, dealer inventories continue to be low due to end-user financing programs that created a good environment for new equipment to be sold into the marketplace. The materials processing group has a good track record of continually upgrading their equipment and the marketplace generally responds to improved productivity and the advancements led by our team in this category. So to summarize, the operating environment is clearly better today than we have seen in quite some time. It is a little better in some areas than we expected, but we remain a bit cautious with a number of challenges that are being addressed. Let me turn it over to Phil who will review the numbers for our continuing operations. Phil?

Thanks, Ron and good morning. Page 5 displays the quarterly year-over-year and sequential results for the continuing operations of the Company. I will cover some points here and cover more detail in the bridge later. Net sales increased 34% from the prior-year quarter, but declined 5% sequentially. The increases over the prior-year were significant in most segments with 75% in AWP, 68% in Construction, and 41% in Materials Processing, while Cranes declined 4%. Sequentially the increases were more modest than the recovering segments and were more than offset by the impact of timing of cranes orders and deliveries where net sales declined 28%. Most significantly in large crawlers, all-terrain and port equipment products.

We had a loss from operations of $9 million in the first-quarter compared to loss of $67 million in the prior-year quarter. The favorable effect of increased net sales volumes improved manufacturing utilization, reduced restructuring and related charges were partially offset by increased SG&A and inventory charges. SG&A expense increased primarily due to the reinstatement and accrual for certain performance-based compensation programs and the cost of ConExpo in March of 2011. Sequentially, the significant net sales decline in cranes mentioned above, was the primary reason for the increased loss from operations.

Overall working capital increased through the typical seasonal pattern and due to the delivery delays in the cranes segment both year-over-year and sequentially. Working capital as a percent of the trailing three month annualized sales increased to 37%. We expect to reduce working capital in our cranes segment as production and demand are more effectively matched. Overall, we expect our working capital sales ratio to improve in 2011 as the other three segments increase their volume. We continue to take advantage of early payment discounts with our suppliers to improve our returns and this has had a 1% to 2% negative impact on the working capital to sales ratio when compared to the prior-year quarter.

Net debt decreased to $693 million from $792 million at the end of 2010 mainly due to proceeds of $166 million from the sold shares held in Bucyrus, partially offset by the use of cash and operating activities. Overall liquidity remains strong at $1.2 billion with cash balances of $700 million and availability under our revolving facility of slightly under $500 million. During January we redeemed the 7.375% senior subordinated notes of approximately $298 million principal value. Page 6 displays other financial items for comparison purposes. Ron will discuss backlog shortly. The net interest expense reduction for the prior-year reflects the positive effect on the debt repayments made over the last six months of approximately $570 million. Other income in the period includes the gain on the sale of Bucyrus shares, of approximately $52 million, partially offset by approximately $6 million per cost associated with the redemption of the 7.375% senior subordinated notes. The weighted average share count is diluted this quarter given overall profitability and includes 5.7 million shares for the effect of the convertible notes and 1.7 million shares for compensation programs.

The earnings-per-share effect of the unusual items for the quarter, includes the benefit of $0.28 per share for the after-tax gain on the sale of Bucyrus shares, partially offset by $0.04 per share for the costs associated with the redemption of the 7.375% senior subordinated notes. And there was $0.03 per share for charges related to restructuring and in customer insolvency. Turning to page 7, we have outlined the bridge between last year's loss from operations for the first-quarter were approximately $67 million, to the loss from operations of approximately $9 million with segment details displayed as well. The most significant changes as are expected, in the largely favorable volume effect from the recovering segments, partially offset by cranes where reduced crawler crane demand and port equipment delivery delays, negatively effected the results.

The $20 million positive effect on manufacturing absorption, continues to provide an uplift in all segments compared to the prior-year quarter. The SG&A increase of approximately $16 million is mainly due to the restoration and accrual for certain performance-based compensation programs and the cost of ConExpo that I mentioned earlier. We have split out the effect of the change in management allocation compared to last year for the segments on a separate line so you can see with better clarity our methodology change from prior periods.

Let me refer to page 8 for our working capital trends, where our overall net cash days increased to 144. This is partly due to our seasonally strong -- stronger second-quarter demand, the mix of business, and the significant March level of net sales. The decrease in DPO compared to the prior-year is mainly due to the early payment discount program. We still expect to achieve a working capital for fourth-quarter annualized sales of approximately 28% at the end of 2011. Let me turn it back to Ron.

Thank you, Phil. Turning to page 9, the backlog performance Terex is actually quite positive. At nearly $1.8 billion in backlog that is deliverable and 12 months, this is the highest level we have had since December of 2008. In total our backlog grew 38% compared to the fourth-quarter and 46% compared to a year ago. Approximately 5% of the year-over-year increase is FX related. It seems that customer confidence really did start to build in the mid-to latter part of the first quarter, with March be one of the most positive months we have seen in a long time. Compared to many first-quarters, shipping performance was fairly poor in January and February, but significantly changed in the month of March. I believe this is a reflection of the seasonality built into our business, but also the care our customers took in planning when they wanted to receive their products.

Turning to page 10, I would like to provide some insight on each one of our businesses by segment. While the numbers are there and presented clearly some commentary about what is going on in each segment may be helpful. First, with regard to our AWP business. We continue to see our customers getting healthier. This is fundamental towards longer-term improvement through this product category. The net sales increase of about 75% compared with year ago is the beginning of a very solid recovery. Particularly encouraging was the strength -- was the strength of our business in Western Europe. There are still Eastern European markets and parts of Europe that are still very slow, and we expect these markets to remain slow for most of the rest of the year. Nevertheless, replacement capital is currently driving our improved demand. Said simply, fleets are old and our customers are buying.

From an operational perspective we have hired approximately 649 additional manufacturing workers compared with September 30, 2010. And this 22% increase was required in order to get production levels back to meet demand. These ramps, of course, are always less efficient than ongoing production levels. And we expect to see improved productivity through our operations in the coming months. Last month, Tim Ford and I opened our new facility in China. This facility is entirely focused on shipbuilding boom manufacturing and will eventually support a number of our other products, some regional and some global. We are excited about our new utility -- utilities hybrid trucks that recently received a new US patent. And lastly, we are now realizing some of our investments in the parts and service support area, as we are at excellent levels of performance in this category, and building the Genie heritage of being the most customer responsive company in this product category.

Turning to our construction business, during the first-quarter we introduced a rubber tired skid steer loader and a new loader backhoe product line. Both of these products have received excellent customer response and net sales expectations are higher than initially planned. From a geographic perspective, this business has benefited nicely from sizable orders in North America, Russia, and developing markets in general. Our material handler product line for the Terex-FUCHS product, had an outstanding quarter and is the best performer of the business within this segment.

We believe we are turning the corner in profitability from our German compact construction operations, reflecting the restructuring and consolidation that took place there last year. Our Latin America operations are performing well and a new factory is in process of being started as permits have finally been secured in Brazil. Turning to our cranes business, as expected, this product category had a difficult first-quarter. It was actually a bit more difficult than we anticipated with a higher than expected loss of approximately $6 million, from the port equipment products which affected our cranes segment in total. The losses are reflected from a twofold issue. First, net sales in the quarter were about half of what they were in the prior year and the prior quarter. There were also -- these were as a result of some customer delivery push outs due to the frankly lumpy nature of this business. Furthermore our cost structure in the port equipment product lines remains too high as well. This is being addressed as initial expectations for a turnaround in Italy in particular have lagged our expectations.

All is not bad news, however, as they backlog continues to grow. We expect to begin benefiting from this increased backlog later this year and early 2012. For cranes overall, we did expect North America to begin improving, but we have actually seen the backlog go up beyond just North America. We had a great ConExpo, while our entire backlog presented years for delivery in the next 12 months, I want to be clear that we still have cost reduction work to be done within our crane operations in particular within our German crane manufacturing locations.

We have not flexed this business sufficiently. Getting costs further down as sales increase, will be the formula for returning this business to solid profitability in the future. Last year -- lastly rather, the materials processing business had a solid quarter and is the leader of the pack in terms of performance from my point of view. Net sales were up 41% compared to the prior year. Profitability was at an 8% operating margin, still below the level this team is used to operating at, and the backlog is at a solid level. So as I look across our core segments, I expect substantial operating profit improvements from our aerial work platform business in the second-quarter as well as the continued improvement in construction. Materials processing should also deliver a solid quarter. And the losses at cranes will be reduced or turned to modest profitability.

So turning to page 11 and summarizing. Results for the Company are basically in line with our expectations and we are continuing to grow our business fairly broadly but developing markets are remaining a source of strength, representing 28% of the Company's net sales in the quarter. The backlog is growing in all segments as indicated previously with the crane backlog frankly better than expected. Further cost reductions, especially within our crane businesses are being worked on and the overall outlook for 2011 is slightly better from a revenue point of view at $5.2 billion to $5.5 billion and we our maintaining the EPS guidance at the $0.60 to $0.75 per share for the full year, excluding restructuring and unusual items of course, like the sale of the Bucyrus shares. We continued targeting the longer-term goals we set for the company in 2013 of $8 billion net sales company with approximately a 12% operating margin. This, of course, is not guidance but rather what we feel is the operating potential we are working diligently to capture.

We look forward to updating everyone more completely at the May 16 analysts day at the Marriott East Side in New York. Please reserve your space by contacting Investor Relations via the contact information on the IR section of our website if you have not already RSVPd. Now I would like to open it up for your questions. Again, I would like to ask that you limit yourself to one question and a follow-up. Thank you very much. Brooke, could you open it up?

(Operator Instructions) Your first question comes from Jamie Cook with Credit Suisse.

Just a couple of questions. One, Ron, I mean you said results are general, I mean you said the outlook should be generally in-line -- you reiterated this, the $0.60 to $0.75. Last quarter you gave a little more granularity on how we should think about the sales and operating profits by division. I'm just wondering if there's any material changes -- if there's any changes within the different segments even though the total -- you are saying the total's the same. And then my second question. Just, are you going to give any range? It sounds like the second-quarter will be profitable. Are you comfortable enough to give a range of how you think, of how profitable I guess you think you will be in the second-quarter?

Jamie, I do not want to comment specifically on our net income expectations for the second-quarter. Obviously it is an important quarter for us and we clearly expect to be net income profitable. I just indicated basically I expect significant improvements in AWP -- meaningful improvements in construction. Construction will be profitable in the second-quarter is our expectation. Materials processing continues to be solid and cranes is a little bit of a wild card from the standpoint of just how good they can be.

I think the increased backlog will allow us to capture additional revenue but maybe more toward that latter part of the year than in the second-quarter. That is just not clear to us 100% at this stage. If I were to characterize how I see the year-over-year performance by segment compared with where we were when we reported the last quarter, I would say pretty similar in terms of quarter-by-quarter guidance that we provided, although generally I would say the AWP will tend to be a little bit more positive, construction on track. Maybe pretty much the same. Cranes, we gave a pretty broad bandwidth of cranes outlook at the last time. And I see them coming in still within that bandwidth. Materials processing may be a little bit on the higher end. And I think there is a pretty substantial push for cost reduction around the Company and in cranes in particular. And the cranes performance is somewhat dependent upon back ended cost reduction efforts that are underway right now.

All right. Thanks, I will get back in queue.

Your next question comes from Charlie Brady with BMO Capital Markets.

Ron in respect to the price increases that you've but through that are kind of going to hit kind of I guess in the back half of this year, across the segments, do you expect those price increases will fully cover the cost increases you are seeing today?

That is our expectation, Charlie, yes. I think there is always a bit of, an attempt to figure out where the puck is going to be. And we are taking cost increases, I'm sorry, price increases in anticipation of current material cost levels and maybe a little bit higher levels. I would say you know, if we overshoot it a little bit it will be fine. In any recovery, what happens is that suppliers tend to increase price first so our component suppliers give us increased prices, they see the demand coming. We are unable to get pricing at our customers initially, but then we begin to get pricing at our customers and we simultaneously begin to pushback our supply base. And I think we'll be in that period in the latter part of this year. And, that may be where we are next year. Okay, so we plan to cover our material cost increases generally across the board. Steel is a bit of a wild card for us because steel spiked and then you can ask five people what the steel forecast is and you might get five different responses. So, it is a bit of a wild card for us. So generally speaking I think I answered your question, Charlie.

Thank you. If we could just talk about the crane business for a second. How much of the backlog in cranes, little over $1 billion, is in fact just North America?

Yes. Well, about 50% of the increase from the fourth-quarter came from North America.

Okay. Great. I will hop back in the queue.

Your next question comes from Ann Duignan with JP Morgan.

I wanted to ask the backlog question in cranes in a different way. If you were to strip out the delayed shipments at customer's request, what would the backlog had been? I am trying to get a sense of what really were new orders versus delayed shipments.

Well, m st of the delayed shipments took place in the port equipment business. And the effect of the port equipment business was that our business was about $40 million off of where it had been. So we do not have an exact number of that. We saw a reduction in cancellations in our basic crane business. Historically each quarter we had seen some cancellations and I think that is substantially reduced. But I would probably use the number of about $40 million. Would you Phil?

For the port equipment fees. We had some at our other German facility but I do not have an exact quantification of that, Ann.

Okay. So, the $1 billion was whether we call it backlog or call it orders, it's not that much different?

What do you mean?

I am just trying to get a sense of, again, absolute new orders.

The absolute new order intake was pretty good.

Yes. That is why I say. If you adjust by $40 million, it's not -- in the other businesses not that much higher than that number.

Okay, and then my follow-up question is, can you talk Ron a little bit by business? How much of the products being sold today have Tier 4 Interim Engines and how should we think about that progression as we go through the next couple of years?

Okay, this is a complicated question that I'm going to try to give you a simple answer to. Okay, we are in the early stages of the Tier 4 conversion. Typically speaking, most of our bigger equipment is in -- is moving in to Tier 4 Interim shipments today. So, the bigger the equipment the more we are in the Tier 4 Interim products. That would include product lines like materials processing, our Articulated Trucks, the bigger rigid trucks that we sell. We are also in a period where we are using some credits as everyone is. We expect the midsize products to go full bore into the Tier 4 in 2012. So it is a process that will go through our product line, 2011 biggest equipment, 2012, midsize equipment, and then we get through that by probably '13 and '14. I hope I have answered your question. It's a complicated one.

Yes, and I totally appreciate that. So if I were to take a step back and just assign enough timing by segment, I think you alluded to kind of material processing, construction, maybe even some of the cranes impacted this year, aerial work platforms maybe -- ?

Next year.

Next year, in '13 and '14?

Right.

Okay.

Okay.

That is all --

Ann, and just to follow-up on your first question, it looks like $40 million out of equipment and probably $30 million of delays in our other businesses for that backlog question you had.

Okay.

$70 million roughly.

Thank you and I'll get back in line. I appreciate it.

Your next question comes from Andy Casey with Wells Fargo Securities.

I apologize if you touched on this already. But I kind of have a detailed question. You commented about the need to reduce the crane cost structure with specific reference to the port cranes area. Can we drill into the comment about competitive pricing environment that you are seeing currently? Are you seeing a more competitive environment than typical with some of the nontraditional companies trying to gain traction in the aftermarkets? Specifically in what seems to be a smaller segment for you in crawler cranes.

Okay. Yes. I will comment and if Kevin Bradley is on the line from our cranes business wants to add anything feel free, Kevin, when I'm finished. I think in general the crawler crane businesses still not -- it has gone through a slower period, pretty much as expected, given its exposure to nonresidential construction. I think the only place in the world where crawler cranes are not slowing down at all is China. And, of course, the Chinese manufacturers pretty much control that market although we have a couple of ventures started there. Nothing material enough to really comment on at this stage. I believe the crawler crane product line is a lot less price sensitive, but not insensitive than many other parts of our product line because the bigger the crawler gets the more technical the requirements are and the more purpose built as well as confidence required in the residual value of the asset.

Of course, when you buy bigger cranes you are buying an asset and you are buying the confidence of the manufacturer and the manufacturer's history. So, I don't think the issue is price competition in the crawler crane product category. I think it is simply a moderate slowdown in particular in the EU. And we really have not seen a large presence in most of our high developed markets of foreign players really driving that price down. Kevin or Ken Lousberg, do you guys want to comment, particularly Kevin?

Yes, I would be happy to. I think that's right. I think the areas in the world where we are traditionally strong on the crawlers, we are seeing a slowdown and that is what's affecting us directly. But I think it's less about price and more about the macro demand that we are seeing right now.

Okay. And then as a follow-up, and thank you for the clarity, could you point out where you are seeing the pricing competition within cranes?

Yes I think what we feel is the biggest issue for us is the pricing we are getting from our supply base. Okay? And the need to take prices up and we are actually taking prices up in North America and we will take them up from our European operations 3% to 6%. There is talk in the marketplace, and I would use that word talk, importantly from Chinese crane manufacturers coming into the United States in the rough terrain crane products segment offering very attractive and low prices. There was at ConExpo, merchandising that some large customers have bought some of those products that we found out subsequently many of those orders were canceled. So, there is sensitivity to the pricing discussion at this stage, but we are not seeing huge or aggressive pricing actions taking place that's hurting our business.

In the port equipment business, it is a bid business. And because it is a bid business and you go through a recovery process, many of the bids that were won six, nine months ago, won by ourselves for example, were price oriented and price bids against some aggressive players. Particularly some of the European players are pretty aggressive and in a couple of product categories, ZPMC from China is very aggressive as well. So, but as that business recovers, pricing will also recover.

Thank you very much.

Your next question comes from Seth Weber with RBC Capital Markets.

Just flipping over to the aerial business, you mentioned customer concerns about availability. Can you just give us any kind of idea where lead times currently stand in that category?

Tim, why don't you address that?

Sure. Our lead times are -- it really depends product line by product line. But we are anywhere from four weeks on certain products in certain regions because we have inventory, to as far out as 15 to 20 weeks on other products in other regions. Our best inventory position today is in Western Europe where we have a pretty strong inventory position based on a ramp in the fourth-quarter and the first-quarter. North America is probably second and then our Australian, Brazil, and China operations for the products we are not making in China are probably the furthest out at this stage. But, generally speaking we are anywhere from four weeks on some products out to 15 to 20 on others.

Thanks. Thanks for that. And, so do you plan on adding capacity, adding shifts, or are you comfortable running the business at these types of levels?

No, we well, we have, in fact, been adding capacity and adding shifts. But, as Ron mentioned in his comments, our head count is up 22% since third-quarter we have been ramping quite aggressively to try to get in front of the demand. Our belief right now is that the demand rates and the production rates are at a position where we should be able to get in front of this a little bit and pull some of those leadtimes in. The biggest wild card at this point, however, is material availability. We have not had major effects of material shortages but we have had what I'd call some wildcats or brush fire type activity where we are scrambling to produce products that is in the plan. And so the biggest issue right now is less our ability to hire people and more the ability to get materials to support the demand.

Okay. And when you talk about bookings accelerating, I think Ron made that comment. I mean, does that hold for April so far, month-to-date through April versus March? Is that a fair characterization for the aerial business?

I think we feel like the trend that we've been on is one that we'll continue to see. I do not think the numbers that you saw in the first quarter should be the kinds of growth rates we should expect going forward, but the trend is pretty positive.

Okay. And just lastly, were there any strategic sales or -- in past quarters you have had some big sales to Brazil for example that depressed margins a little bit. Was there anything like that in the quarter?

The only thing I would say is that we had a significant portion of our revenue in the first-quarter that went to some of the large North American customers that tend to have somewhat better pricing than maybe the midsize and smaller players. So I think when you look at the margin position in the business, in the first-quarter we had a lot of revenue that went to those larger customers. As we go to the second-, third-, and fourth-quarter we expect more normal distribution between the large customers and some of the mid and smaller customers.

Okay. So as this all kind of rolls together is there some kind of incremental or pull-through margin that we should think about for 2012 for this business?

I do not think you can use a standard pull-through margin analysis so readily here. I think what I would encourage you to do is to look at the history of how the margins progressed in this business. Again, what happens is those that order early get the best pricing. We've now announced at least a 4.5% price increase which is going to impact our business in the latter part of this year. It will have a pretty meaningful impact on our margins in 2012 and then we will push back on our supply base and try to get cost reductions there. So I think that is how you drive the margin up on this business.

Okay. Thanks very much guys.

Your next question comes from Alex Blanton with Clear Harbor Asset Management.

I have got some questions on AWPs as well. On that price increase that will have the impact next year, you are indicating that by saying that, that it is more than offsetting to the materials cost increases or the combination of the materials cost increases in the productivity gains. Is that correct? For next year?

Well, let's just stick with this year and then we'll get to next year. What we said is that we took at least a 4.5% price increase. Which means that it is probably more than that. And that it will impact our business more the latter part of this year than in the first part of this year. As Tim just explained, a good portion of our shipments in the first-quarter went to the bigger customers which have better pricing. So we think that the pricing actions we have taken this year will offset our cost increases this year. And as far as a flow-through to the P&L in 2012, of course, we will have 12 months of that new pricing compared to, I don't know, an average of six months, pick a number, I am not really forecasting that, in 2011. So net year-over-year, it will be a meaningful increase on pricing. We will also evaluate our costs, of course, going into 2012 and take additional pricing action if the cost increases are justified. I hope, Alex, I've answered your question but I will throw it back to Tim to see if I missed anything.

No, Ron. The only clarification I might make is that we have in the first-quarter begun to take some material cost increases. So, we're probably about a quarter offset from the material cost increases to the implementation of the price increase. So there may not be exactly a one for one in 2011. There's probably about a quarter to a quarter and a half lag between the material costs increase that we've started to receive and the market influence of the price increases.

Okay. So if I understand it correctly, the price increase will offset your cost increase for the entire year even though it is only in place for half the year. Therefore it's going to have a bigger impact next year? Is that basically what you are saying?

You want me to take that one, Ron?

Yes, go ahead.

I think what we ought to clarify here is the price increase on a 12 month basis should more than offset the cost increases that we are seeing on a 12 month basis.

Got it. Okay.

As I just tried to explain maybe, maybe not clearly. But, what I tried to explain is that we are about a quarter to a quarter and a half behind on the price increase versus where we are on the cost increase.

Got it. Okay. Now, second question.

Alex, I would like to add to that one thing. Pricing is market dependent. Okay, so we are assuming that our competition follows us.

Yes. Okay. They probably will. On the geographic breakdown of sales I do not think I heard that. Where is the strongest sales increases, break it down by Europe, North America, emerging nations, China, whatever?

Tim, why don't you do that, Phil has got some backup if you don't have the information in front of you Tim.

North America was by far our strongest market as we would expect given where we are in the cycle and in some of the orders that we have received from some of the large North American customers.

Got it.

Europe actually was surprisingly positive. Orders doubled in the first-quarter versus fourth-quarter of 2010. Brazil remains a very good market for us. It was strong in the first-quarter versus the fourth-quarter from an orders intake standpoint and Latin America, you know or excuse me, Asia Pacific was a pretty healthy business though we did not see significant order intake difference from fourth-quarter largely because you have -- we had the floods in Australia and the Chinese New Year and so forth. Our utilities business had a good quarter though compared to fourth-quarter you have to remove the effect of the sale in the fourth-quarter to kind of get a comparative. So on balance pretty much as we would've thought with a little bit of positive surprise from Europe.

Yes, and the Asian part is the weakest then in terms of percentage change?

Asia is just not that big to drive anything.

Okay. Got it. Thank you.

Your next question comes from Andrew Obin with BofA Merrill Lynch.

I apologize if you've answered this question. Could you comment in terms of your inventory, how much of it is finished goods and within that if you could give us a big breakdown by big categories? I guess what I'm going to as cranes improve, how much working capital we free up just on finished product from cranes over the next couple of quarters?

It is an opportunity. Phil, why don't you -- ?

Yes, total finished goods new is about $430 million. We had about $40 million of used.

Cranes is about 40% or 45% of that.

Hold on a second. Cranes is about $115 million new, $24 million used.

So how much do you think we can get rid of in the next couple of quarters?

Well, I would hope that we could cut that in half.

Okay. Just total new equipment inventory?

Yes, part of our issue is though, Andrew is not just finished goods. We have with the jockeying around of orders period to period our work in process and material gets out of balance as well, so that the schedule changes are also affecting that. And that's probably a more significant opportunity in the cranes area.

Okay.

Again, between raw and work in process, the total cranes inventory is about $600 million to give you an idea.

Oh, wow. Okay.

That is a better number to think about than just the finished goods.

And can we say that 50% reduction is a goal for that number as well for the year?

Not quite. I would say it's probably $200 million to maybe a little more than that. One of the wild cards in there is that we have some new products and new prototypes that are being developed on fairly expensive materials that we are carrying for a little while. So, that, as we address that we have a couple of technical issues on some of that new product and as we address those issues, we will have a little more clarity on when we can get that working capital investment down.

And just a follow-up question on AWP. Given your hirings in the sector, what are your expectations for recovery in 2012-2013 or how far below normalized level do you think we will be at the end of 2011 even as things recover?

This is the peak to trough question really, Andrew. I think what we have said and I am going from memory but I'm sure we will recover it a little bit more at our analyst meeting, is that we think this business peaked out at about $2.6 billion at the at the last peak. And that we have said we are not sure we will get quite back to that level. I think maybe in the $2.2 billion range. And so if you take a look at where we are right now, we did $376 million in the first-quarter see what we do this quarter. I think it is a business that's been operating in the $1.5 billion range at this stage. You have got $1.5 billion to $2.2 billion level, $2.2 billion to $2.3 billion level that we can expect.

Okay. Thank you very much.

Your next question comes from Henry Kirn with UBS.

I am wondering if you could chat a little bit about where you're seeing the risk across the supply chain and maybe dovetailing with that the impact of the events in Japan?

Before I do that, Phil, do you want to -- ?

Yes, Andrew on your question I was looking at one wrong column in my massive spreadsheet here on the cranes inventory. For the period that we have today, the inventory for cranes about $750 million in total, net inventory. And of that finished goods was about $190 million.

Yes, that was the number I was remembering. That's why I said it was about 40% of the -- .

Kind of the $600 million is maybe where or better to get to.

Okay so we corrected that for Andrew. But Henry, I am sorry. Your question is about material and supply chain issues and potentially the effect of Japan.

That's right.

Japan is a bit uncertain to all of us. I think in the frontline apparently affected but it's what's a second or third tier supplier to our suppliers that are of a concern. There's a couple of suppliers that we are trying to get clarity on. Mitsubishi Engines being one of them for our compact construction business. But George, maybe you want to comment on that and see what, if there's any supply related comments and then since our supply-chain team works for Tim Ford I'll ask Tim to follow-up. So George first? Or maybe we lost George.

I am here, Ron.

Okay, I'm sorry. Go ahead.

We have, as Ron commented on the engine supply, we do have clarity through the second-quarter. We are into the second tier supplier with the Mitsubishi engine that goes into our compact equipment and working recovery plans to get there. We do have second tier supplier component issues with some other products within our handlings that we are addressing. So, short-term in, I do not see a massive problem but he longer-term there is some concern that our teams are working each of those everyday to mitigate them.

Okay George. Tim?

Yes, the only additional comment I would make is, we have a little direct supply. We do have a few pieces as you are talking about, or a few components that we're talking about the we are concerned about. I think the probably the most significant concern is going to be a supplier that we buy a controller from who buys a chip from a supplier that is made in Japan that would just have no visibility to. And that is the unknown that we just can't forecast at this point.

Yes, okay.

Thanks. That is helpful. And then the backlog increases, was any of that in anticipation of your price increases or should we just view it as the natural rebound of the market?

It is hard to say. I do not believe much of the Q1 backlog increase was in anticipation of price increases. As we go through Q2 there may be some of that, that takes place. But in general it is hard to handicap. So I don't think there is much price increase related in Q1 but maybe a little bit in Q2.

Thank you very much.

Your next question comes from Robert Wertheimer with Morgan Stanley.

I will just be brief. You have had two quarters of very solid crane orders and I wanted to ask you sort of how it feels behind the scenes. Whether it feels like a genuine bottom in turn or whether it is still lumpy enough and scattered enough that it still feels uncertain, Ron? Part of the reason for the question is that I think you mentioned that Q2 is still a wild card for cranes revenue. I was not sure why that would be given how things have been trending.

Yes. Okay. Clearly in North America it does feel like the customer confidence is there and that we have secured orders. And frankly we think we're probably building a little bit of market share in North America recapturing some lost market share, just getting closer to our customers. So, the North American piece feels a little bit more predictable to me. The European business is where my uncertainty sits. We have had customers come in, push out orders, not cancel orders, some order cancellations historically. But recently, not cancelled orders, but just pushed them out. And so our ability to actually see those things through to the end this quarter makes me a little bit nervous.

The port equipment side of our business, if I took a minute, I would just explain that we bought that business about 18 months or so ago. And you know when we bought the business there was a pent-up demand, the backlog that had not been able to be realized. We sold off that backlog and there was a period of time where it took us a while to rebuild the backlog. And right now we are actually experiencing a sales decline and a backlog increase.

And so we are at we are kind of at an odds trend. We think that turns around and in the latter part of this year backlog will drive our revenue increases and the kinds of customers we deal with our very, very large customers and we do have some visibility into that future. So if you combine the European comment with the port equipment product line comment, that is where my uncertainty rests and then if you add to that the fact that I think we did not get at our cost structure as aggressively as we needed to in a few places and we are doing that now, it really is the right mix to get the profitability and the revenue going for later this year and next year. I hope I answered your question, Robert, I think I gave you a flavor for it if not quantitatively.

Yes, that was helpful. Thanks, Ron.

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

Good morning everybody. I will keep it quick. In the aerials business I do not have to tell you that the traditional seasonal pattern is, would say that you saw the peak in order activity in the first-quarter. But, as you know, sometimes as cycles are turning, customers order and take delivery of product closer to when they actually need it and that can distort seasonal order patterns right at the turn. So that is the set up to the question of whether AWP order activity on an absolute basis could be consistent with first-quarter levels in second-quarter or should we expect to see some seasonal moderation in order activity?

And I will answer this because I have a little bit more experience than even Tim at this, but Tim has got certainly more day to day or current experience as to what he's seeing. So I will start and maybe Tim can follow up. My expectation is that we will probably see a more typical seasonal pattern for this business this year. Meaning, a little bit as you articulated that the Q2 orders will moderate and be high but the growth, quarter-over-quarter, won't be anywhere near what we have recently experienced. But there will be really solid orders as demand -- as demand is driven by replacement of old equipment. We don't really see a very large pickup in what I call growth capital, at this stage. And I don't expect to see much in the way of growth capital in this year. I expect to see a little next year and quite a bit more in 2013.

The facts in the AWP business are that the end market growth isn't really happening that much. It's just that fleets are darn old. And they need to be replaced. And so when we get the US growth happening and to a lesser extent the European growth happening, coupled with the age of the fleet, we will see a pretty substantial increases still in this business. Tim, did I get that close, or what is it that you're seeing?

I see exactly what you have said. I think that is a pretty good characterization of what we think.

So, if something like what I described is going to happen, it is still ahead of us, it is not this year?

Right.

Okay. That's all I had. Thank you very much.

Your next question comes from Ted Grace with Susquehanna.

The first question coming back to orders. And I think people have come at this a couple different ways. But could you just speak to what your perception is of real end-market demand improvement, for your products, versus dealer destocking? Particularly on the cranes and the construction equipment side. I feel like some of the comments I have interpreted inconsistently to some degree. And particularly Ken talked about, if I heard him correctly, some macro concerns were weighing on crawlers yet in the press release you highlight energy and commercial construction in the Americas as strong. I'm just hoping to better understanding exactly what the message is.

Okay. Sure, Ted. First of all, just to get grounded. Unlike many of our other bigger players in the industry, a lot of Terex's business goes direct to the first line of consumption. Virtually all of our AWP business goes into rental. Virtually all of our crane business goes into rental. Virtually -- probably half of our construction product lines go into application use, our material handler, our articulated trucks, although some of those also get rented. Materials processing goes into distribution. So there is a dealer network between us and the end customer. So we see a lot of impact from actual end demand and end demand fluctuations. In North America, the crane business has responded to the energy sector and we think to some large construction activity, even though the basic construction activity in North America remains somewhat depressed.

It's depressed but it's bottom. I think we have seen for the first time a little movement in housing and I think non-residential and the Architectural Billings Index is beginning to turn. So, I think those are encouraging signs for us from the North American business. But I don't think we internally are handicapping much in the way of end-market substantive growth, at least not this year. Okay? And I think the same comment would be true in Europe. So a lot of our demand increases are simply a reflection of the fact that we have been through in some cases, five years of pretty negative performance.

The housing market that affects the small compact construction product started to decline in 2006. So after you have gone through as an industry, five years of virtually no growth, any growth seems like it is big and important. And some of that is what we're experiencing now. So, I guess my basic message is, the business is turning, we're seeing some positive signs particularly as we ship into customers that need to change their fleets out. But it's not because we are seeing a spike in end-user demand.

Sure, that is helpful. So, but if we bring that to cranes; if I have got my mind kind of calibrated I usually think about North America being about 10% of your crane revenue so even at that is improving, it is a pretty small part of the pie, correct?

Well, North America on a trailing 12 month basis last year in 2010 versus -- 2010, it was only about 10%, 9% of our total business. On the other hand at its peak it was about 25% to 30% of our total crane business. Okay? So I think it is not unreasonable to think that we are going to get a disproportionate part of our short-term growth from the North American business. As I indicated, half of our backlog increase compared to the prior quarter took place from North America.

Sure.

That is a pretty substantial amount of backlog increase.

Europe is I think, usually about 40% of sales so the uncertainty there, I guess, gives us some sense of that market. The other 50% you didn't really touch on. Can we just get a sense for how you are thinking about that?

Well, that is a large portion of that's coming from developing markets. So and that's split everywhere. It split to Russia to India to China to Latin America, the Middle East. It really goes everywhere. And I think generally speaking that portion of our business is remaining fairly strong. Steve Filipov is on the call. Steve, do you want to comment on that?

Yes, maybe just take a couple areas. Latin America, I think Ted which you also have to consider is we put a brand new team in place about six months ago. So we didn't have a team there before. We are starting to see, we are starting to get some traction from that team in Latin America. I think the other piece is in Russia. We signed up a new dealer there and they are starting to get traction there in Russia. And then you have the Middle East, which is kind of a mixed bag at this point. But it is a big part of the business. So, maybe that is just a couple areas that, that we are investing in and changing our distribution model.

Okay. That is helpful. And just as the second question, could you just touch on kind of that what happened to Terex Financial Services? The capital extended in this quarter where it was focused by segments or whether it was AWP or construction equipment and just kind of the give us a sense for how 1Q progressed there?

We had, Ted, about $10 million of expansion on the balance sheet in the first-quarter. So, not a very large quarter change there. It is pretty well across the segments. In the US cranes and construction I would say are the predominant ones right now. But again it was fairly small in the quarter on balance sheet.

And would we expect that to ratchet up in the second quarter? Or do you think it's something to be -- ?

Yes, as indicated overall for the full year is we will probably grow about $150 million, but some of that is Europe and China. So the US probably for the year up to about $100 million growth.

Okay, but should we look for that to hit in the back half, most of the $150 million?

I'm not going to spread it exactly. It's going to climb as we're adding additional capabilities on a flow business and some other things that will help construction mainly and then the timing of the cranes orders are the things that will be the other big impact, but generally, yes, it will climb.

Great. Super. Thanks guys. Best of luck this quarter.

Our next question comes from Charlie Brady with BMO Capital Markets.

On AWP I just want to make sure I understand kind of the business model looking out in this recovery. Because right now you have the large rental companies are the predominant buyers of the equipment to replace the old equipment that they have got sitting in their lots. And we do not have any underlying really strong end-market demand driving those sales. And I guess my question is, is there a concern that once we fill out the old equipment from a large rental companies that there is perhaps a lag between when the underlying market demand comes in as well as replacement demand for those smaller and mid-tier operators who really probably are not back in the market in any meaningful way right now?

Charlie, what I would say is given the age of the fleets of most of our customers, we think that there is plenty of room for opportunity just in the replacement of the fleets. They let them age too long and now they are going to have to replace them. But Tim, you probably have a more current handle on it than me.

Yes, what I would say is you have effectively a two-year hole in the fleet age that is in the field. And that was true in North America and Western Europe where we have historically had the bulk of our sales. So you have got at least a two-year process of replacing what has aged, before you get the growth capital. I think the view of this next cycle is going to be somewhat different. Maybe a couple years out. But I think the growth pattern is going to change where you are going to start to see an acceleration of some of the developing markets like Brazil, like China, like Middle East and so forth at a rate that is going to maybe compensate for what might be a little bit more slow recovery in North America. So I think when you -- when you look at the gap in fleet buying over the past couple of years plus the opportunity in some of the developing markets, I am pretty optimistic about where this is headed.

Thanks. That is very helpful. Thank you.

Our next question comes from David Wells with Thompson Research.

Just continuing on the kind of AWP line of things. I guess I'm trying to get a sense of the backlog that you have right now, how much of that is effectively price fixed and if we are not seeing growth CapEx return in a meaningful way, what is the ability -- I mean, at least for that 4.5% price increase. What is the ability to actually realize that if right now it's pretty much the larger folks that who arguably have greater power, purchasing power?

Well, I think I'll Tim comment on the price fixed and what is and what isn't with just kind of a general comment there. But, I think we have the ability to take pricing up because our costs are going up. And I think our customers are not insensitive to the fact that their costs are going up. So the fact that rental rates have stabilized if not begun to increase is what is going to allow that change. But, Tim, do you want to comment on that?

Yes,. When I look at the order book we have, the pricing on the go-forward is pretty well set in the backlog. So whatever is in the backlog is set. The way we instituted the price increase was, orders received by April 15 or delivered by June 15 will get the old pricing. Orders we're taking now are coming in at the new price. I would say on balance we have been pretty good at making the pricing stick. We had a couple of cases, or we have a couple of cases where we have customers, that will see delayed impact of the price increases due to previously negotiated agreements. But for the most part we are making this price stick in the marketplace because the market needs the equipment as I talked before. Lead times are extending out, we are starting to run into some material shortages that are causing some availability concerns. So, we are able to work this through and customers need the equipment.

As we look into the second-quarter I expect we'll start to see many of these mid-sized and smaller rental companies start to increase their orders. They tend to be a quarter or two behind the larger guys and that will help us as we go forward. So again, I'm pretty optimistic about where we are. I think we should start to see some positive effect of price increase as we go through the second-quarter or get through the second-quarter into the third- and fourth-quarter.

And, David, what I would add to that is any of our material shortages are typically our competitors material shortages also.

Sure. And I guess, and then a follow-up,. If we look back about a year ago I think the kind of common element to a lot of these calls was discussing the cost saving measures that you had taken in the permanency of a lot of those cost cuts. And just using kind of the AWP business as a microcosm, demand seems to have come back fairly robustly, almost V-shaped like. Does that make you reassess your estimates of the permanency of those cost cuts? And my concern is that if the market comes back stronger, we may not see the margin benefit from the hard work you have done over the last 18 to 24 months on the cost side.

Yes, this is akin to figuring out how to sail appropriately with shifting winds. And I think that your question is a legitimate one. I think we have clearly taken some very hard cost reductions and it's up to us now to make sure we do not add back cost just in anticipation of a great future market. I think we did maintain some cost because we didn't want to cut it, to have to add it back again. So, that's somewhat affected our trough negative margins. But it is going to require the discipline and productivity management on the part of Tim and his team to see that through. Tim, I am kind of speaking for you I guess that is the -- that's the privilege I get. But if you see it differently, please comment.

The only thing I would add is that as we globalize the business and add manufacturing in different parts of the world, there is a certain amount of overhead that comes with putting a factory up in China versus distributing product from the United States to China and other places around the world that we're looking at manufacturing more aggressively. So, the only difference would be, we took a lot of cost out in North America. We might put some of it back, though not, hopefully not at the rate that we took it out, in other parts of the world. But that should also give us a market advantage or a market opportunity to be more competitive where customers want product more quickly in those local markets.

Thanks for your time.

Our last question comes from Matt Vittorioso with Barclays Capital.

Phil, I guess if you could just touch upon from a sort of high level standpoint how you see your cash balance developing over the rest of the year. I know you talked already about the investment in Terex Financial Services. I think you expect to pay some cash taxes on the asset sale over the balance of the year and ultimately, just trying to get a feeling for whether the business is generating or burning cash for the rest of the year? I think you said there was some opportunity on the working capital side?

Yes, the key parts of your model if you want to think about it that way, I would still hold to the 28% of fourth-quarter annualized sales to be our ending working capital position, from 37% today. So the mix of businesses which will be largely more related to AWP construction and material processing have a less intensity of working capital and cranes, the one as we've talked about before, probably the most opportunity to get dollars out. I did mention in our guidance about $100 million of cash taxes. Some of that related to the sale of shares of Bucyrus which will happen more third-quarter in the US, fourth-quarter timeframe. And then we have the European gain on sale from the mining business that we had last year. The timing of that cash payment actually is towards the end of this year, beginning of 2012. PFS I had mentioned $150 million net, of adds to the balance sheet. So those are kind of the key variables. With the accelerated sales as we kind of go quarter-to-quarter, first to second, receivables will go up so the inventory shifting from inventory to receivables, the second-quarter tends to be a usage of cash from the patterns that we have. I would expect that is still the case in general, taking out these other factors. Then the cash generation will start back -- occur in the third- and fourth quarter.

Okay. Great. And then just as a follow-up. Ron and sorry if I missed it. Could you just comment on your -- what you're seeing in the M&A market? I know I ask this every quarter, but if you could just give us an update there, I think last quarter you had said that a second half acquisition was certainly a possibility. What are your thoughts at this point?

Well, I think we you know continue to look at the -- at the opportunities. They are difficult to come by. But you know there are opportunities out there. It's impossible to handicap. I think we are going to try and be fairly diligent and our expectation is that, we have debt that costs us 6%, 7%. And if we can gain confidence that a transaction could deliver in the range of two times that on a return on capital point of view, those are the kinds of things that would be value creating. We are looking at those and can't really handicap that anymore at this point in time.

That is fair. And is there any kind of update on what sort of businesses you'd look at? I know in the beginning when he talked about M&A after the mining asset sale there was some talk of trying to diversify into other industrial products businesses. Are you still looking at sort of away from the heavy equipment business or have you kind of brought that back into businesses that you are currently in?

I have not been able to find businesses away from the kind of businesses that we are in that I thought made economic sense for us at this stage. And so while we'll look at things, I would say the probability of anything out of our core is highly unlikely at this stage.

Great. Thanks very much.

Gentlemen, are there any closing remarks?

I would just thank everybody for their interest in Terex and please follow-up with Noah or Phil or myself or one of our team. We wish Tom a speedy recovery and thank you for your interest.

Thank you. This concludes the conference. You may now disconnect.