Terex Corp (TEX) 2011 Q2 法說會逐字稿

Good morning, my name is Chasity, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation second quarter 2011 financial results conference call. All lines have been placed on mute to prevent any background's noise.

After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you. I will now turn the conference over to Mr. Ron DeFeo, Chairman and CEO. You may begin, sir.

Good morning, ladies and gentlemen. Thank you for your interest in Terex Corporation today. On the call with me this morning is Phil Widman, our Senior Vice President, Chief Financial Officer; Tom Gelston, Vice President of Investor Relations. Participating on the call and available for your questions will be the leadership of our Business Segments, Kevin Bradley for the Crane Business; Tim Ford for Aerial Work Platforms; George Ellis for Construction; Kieran Hegarty from the OSHA Materials Processing; Steve Filipov for Developing Markets; and Ken Lousberg for our China Operations.

As usual a replay of this call is archived on the Terex website, www.terex.com, under Audio Archives in the Investor Relations section. I would like to begin with some overall commentary. Phil will follow-up with a more detailed financial report. I will provide an outlook and summarize and open it up for questions. And as usual during the Q&A period, please 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 commentary on page 2, which I encourage you to read and review as well as our other disclosures available in our public documents.

Now please turn to page 3. In general this was not the quarter I was hoping for in terms of bottom line performances. Nevertheless the quarter reflects real progress, an adjusted net income of $0.10 per share, some tough restructuring choices that we've made, and recognition of the challenges that we face, and the issues that we believe we are fixing.

Specifically in the quarter, net sales increased 38% compared with 2010, and 30% excluding the effect of currency. Incremental margins were not in line with our expectations as input costs were higher than planned and manufacturing variances greater due to supply shortages and the productivity deficiencies.

A rapid ramp-up of production, particularly at our Aerial Work Platform Business, caused labor inefficiencies; and in construction, shortages caused us to miss net sales and be less efficient. We feel we are now in more balance and that the efficiencies are improving meaningfully.

We announced restructuring and aggressively reduced some costs in our Crane Business. This is consistent with what we previously said we would do. We are going to optimize our facilities and reduce or eliminate loss-making operations. We are not going to discuss the specifics or particulars here, but the consolidated efforts result in annualized savings of over $70 million.

Lastly, we used $142 million in cash from operating activities in Q2, mostly in working capital due to business growth and TFS financing. This is normal for this time of year. We are expecting significant working capital burn-off in the back half of the year. Phil will explain.

The Demag Cranes AG purchase, that offer has met our expectations and was done within the parameters that we set for ourselves. We think this is going to be a great acquisition and meaningfully improve our Company in ways we have yet to fully forecast. This is a business where we can have a market leading position, make profits in good times and in bad, and help diversify net sales and services. It has been difficult to get here but I think the destination will be worth the journey.

Now Phil is going to cover our specific performance.

Thanks Ron and good morning. Page 4, displays the quarterly year-over-year and sequential results for the continuing operations of the Company. I'll cover some points here and cover more detail in the bridge later.

Net sales increased 38% from the prior year quarter and 18% sequentially, or 30% and 15%, excluding the effect of foreign currency translation, respectively. The increases over prior year were most significant in AWP, Materials Processing and Construction, as we continue to experience positive signs of an industry recovery. This recovery is somewhat fragile in particular geographies and product areas, however, as demonstrated by the Crane Segment relatively flat year-over-year performance. Sales increased sequentially in all segments. However, production was somewhat hampered by supplier constraints particularly in the Construction Segment. We are working through these issues and expect the situation to improve in the second half.

Net sales of the Crane Segment fell short of our expectation due to timing of orders and deliveries, most significantly in large crawlers, all-terrain and Chinese truck-crane products.

We had income from Operations of $7 million in the second quarter compared to a loss of $10 million in the prior-year quarter. Excluding the impact of restructuring and other items, the income from Operations would be approximately $43 million in the current period, versus approximately $8 million in the prior-year quarter.

The favorable effect of increased net sales volume was partially offset by higher input costs, cost inefficiencies from supplier shortages, and the quick ramp-up in production. This was most evident in AWP where we did not obtain our incremental margin objectives.

SG&A expense increased primarily due to the restoration and accrual for certain performance-based compensation programs, increased engineering for new products in Tier 4 work, as well as certain insurance recoveries in the prior-year period.

Overall, working capital increased partly due to typical seasonal pattern of deliveries in the summer months. Some delivery delays in the Crane Segments and in Construction due to supplier constraints.

Working capital as a percentage of the trailing 3-month annualized sales was 33% in Q2. Overall, we expect our working-capital-of-sales ratio to improve in 2011, to below 30% as we bring our production in line with demand and the step-up in Crane's second-half deliveries.

We continue to take advantage of early payment discounts with our suppliers to improve our returns. And considering this action, we are basically flat with last year's working capital for sales performance.

Net debt increased to $725 million from $693 million at the end of the first quarter due to the use of cash in operating activities, mainly on working capital and increased financing receivables, partially offset by proceeds from $127 million from the sale of Bucyrus shares.

Overall liquidity remains strong at $1.2 billion with cash balances of approximately $700 million, and availability under the revolving facility of slightly under $500 million.

Turning to page 5, we have outlined the changes between last year's loss from Operations for the second quarter of approximately $10 million to the income from Operations of approximately $7 million with segment details displayed as well. The most significant changes are as expected in the largely favorable volume effect from the recovering segments, partially offset by cranes where reduced crawler, all-terrain and Chinese truck-crane demand negativity affected year-over-year results.

Manufacturing utilization provided a modest improvement except in AWP, where the accelerated production ramp-up in people caused inefficiencies relative to the prior-year period. The SG&A increase of approximately $18 million is mainly due to the restoration and accrual certain performance-based compensation programs; as I mentioned, increased Tier 4 and new product engineering and certain insurance recoveries in the prior-year period. For purposes of comparison with last year, we have split out the effect of the allocation methodology change to the segments of Management charges on a separate line for better clarity. Foreign exchange translation provided approximately $4 million of operating income benefit overall.

Restructuring, impairments and related charges increased from the prior year by $18 million, mainly due to the charges for the cost reductions and facility optimizations undertaken in the Crane Segment. Improvement year-over-year in AWP and Construction Segments reflect charges taken in the prior-year quarter that did not recur.

Page 6 displays other financial items for comparison purposes. I'll cover backlog in another slide. The net interest expense reduction from the prior year reflects the positive effect of the debt repayments made over the last 9 months of approximately $570 million.

Other income in the period includes the gain on the sale of Bucyrus shares of approximately $40 million, partially offset by approximately $3 million for costs associated with the Demag AG acquisition and $2 million for a prior acquisition arbitration settlement.

The prior-year quarter included a $12 million benefit for marking the market certain derivatives associated with mitigating the Bucyrus International share risk. Tax expense for the period is at a higher than normal rate mainly due to the increased level of losses not benefited of which the restructuring charges account for approximately 60%.

The weighted average share count is diluted this quarter given overall profitability and includes 4.2 million shares for the effect of the convertible notes and 1.1 million shares for compensation programs. The earnings per share effect of the restructuring and other items for the quarter are explained on page 7.

This schedule bridges the as-reported EPS of $0.01 to the as-adjusted EPS of $0.10. The benefit of $0.22 per share for the after-tax gain on the sale of the Bucyrus shares, offset by $0.29 per share for the cost associated with the Crane's restructuring and related costs, as well as $0.02 for charges related to our intended acquisition of Demag AG. You will note the lower-than-normal tax benefit on the Crane's charges due to the inability to recognize the tax benefit on the vast majority of those charges.

On page 8 our working capital statistics are outlined. And we expect most of our second-half improvement to come from inventory reductions in the Crane Segment as we have better clarity on deliveries, and in Construction where supplier constraints are expected to be largely resolved.

The decrease in Days Payable Outstanding compared to the prior year is mainly due to the Early Payment Discount Program. We expect working capital as a percentage of fourth-quarter annualized sales to be less than 30% at the end of 2011. Improving working capital management coupled with our earnings performance should deliver between $350 million and $400 million of free cash flow for the second half of 2011.

Referring to page 9, we feel that there are several signs of recovery in the marketplace, but it is still fragile as evidenced in certain products and geographies. AWP first-half demand came mainly from the large rental companies in replacement capital spending.

Our pricing increases are taking effect for Q3 deliveries. And in Construction, the situation is product and geographic specific, with continued solid demand for material handlers, backhoe loaders, and off-highway trucks. Road-building products, in particular in Brazil, were soft as government financing tightened. For Cranes, North America was a bright spot for rough terrain and truck cranes, while product demand for Straddle Carriers continues to improve. Our German Crane Business continues to experience shifting delivery dates and cancellations in Q2 as we work to solidify our second-half deliveries. Materials Processing continues to experience strong demand for larger capacity machines worldwide, but we are entering a slower seasonal period.

Page 10 shows the backlog trend of the Company by segment. Overall we are basically flat to the first quarter, but up 57% from the prior-year quarter. As mentioned in our Press Release, we made adjustments to the Crane's backlog in Q2 of approximately $219 million to remove orders mainly related to a new product that is not ready for introduction, orders associated with a customer and bankruptcy proceedings, and cancellations occurring in the period. Other segments continue to show solid levels of backlog as we enter the second half.

I will turn it back to Ron now.

Thank you, Phil. As you know, cyclical businesses are difficult to predict and the dramatic changes we've gone through certainly presented us forecasting challenges. Nevertheless, we expected to be meaningfully net income positive in the quarter and I think we got there with $0.10 per share. More would have been better and was expected, but we think the bottom line in the second half will strengthen.

There is a backdrop of economic uncertainty. And as we turn to the outlook on page 11, we have to keep this in mind. But based upon the backlog and current customer inputs, we think we will deliver between $2.7 billion to $2.9 billion of net sales in the second half, and operating profit that ranges between $140 million and $170 million, resulting in an earnings per share of about $0.47 to $0.67 for the half, or $0.40 to $0.60 for the full year considering our first-half performance. This is lower than we expected but does not change our view relative to our future potential for 2013 and beyond. If anything, the Company is going to be strengthened during this period as we force out inventory, cost, and get manufacturing performance back to where it should be.

Staying on page 11 the outlook anticipates our Aerial Work Platform and Materials Processing organizations to deliver, as expected in the second half, with AWP pricing actions in productivity being key to the performance increases in this business. In Cranes, we have people-related cost reductions helping plus both our crawler and port equipment deliveries are expected to improve in the second half. Our Construction Business, that demand is solid; and we think the supply risks are softening and we will have full effects of pricing actions in this business in the back half of the year.

The balance of the assumptions relative to our outlook is noted on page 11. All figures exclude restructuring and any effects of the pending Demag AG Cranes acquisition.

Turning to page 12, relative to our Demag AG progress. As noted in the Press Release, approximately 82% of Demag Cranes shares were tendered as of July 19, 2011, including our 1%. We've received early termination under that HSR Anti-trust Act. The transaction has been filed with the European Commission and the initial review period expires on the 8th of August.

As noted, we are nearing completion relative to the syndication of our new term debt facility. And pending EU approval, we expect to close this transaction in the third quarter.

So finally, on page 13 and to summarize, we are making progress in every one of our businesses. But there is significant work in front of us. We expect that the supplies disruptions experienced in the early part of this year have been slowing or have been mitigated. And we expect improvements in productivity, utilization and pricing. And those are expected to more than offset whatever input cost issues remain in the second half of 2011. We plan to complete, continue and initiate new cost reduction activities. We expect to generate substantial free cash flow, as Phil has mentioned, mainly from working capital improvements. And we remain focused on the profitable growth goals that have been previously established for 2013 and beyond.

We expect each of our segments to positively contribute to profitability in the second half of 2011. We think this positions us nicely for a much improved 2012. We do believe customer replacement rates will continue to be positive and that the actions initiated and that are under our own control will ultimately determine our profitability and the improvements we expect to achieve.

Now I'd like to open it up to your questions. Again please ask a question and a follow-up. Chasity, please open up the lines for our participants as well as opening up for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Ted Grace with Susquehanna Bank.

Good morning. Ron, I appreciate the commentary around the products. I was wondering at a high-level if you could walked through the geographies and your macro observations. I think we all sense the rising concerns in Europe and probably elsewhere. I was wondering if you could just initially speak to, call it, Europe, the Bricks, North America, given the cancellations in cranes, I think most of that was concentrated in Europe, but should we think that there is risk at other elements of your business? That was my first question.

Okay. Let me give you a sense. It is an interesting story because the developing markets remain positive. But the developed markets actually grew faster than the developing markets.

And that somewhat is a product story and somewhat different by each of our product categories. For example, our North American business, that is a combination of the United States and Canada, because we actually include Mexico in our Latin America operations, on an annualized basis for the first half, was up pretty dramatically. Probably in the range of 45% to 50%.

But that was mainly driven by our Aerial Work Platform Businesses in North America that were up nearly 3 times, whereas our Construction Business only moderately was increased in North America. Crane Business for us had a pretty substantial increase in North America. Materials Processing was good, but Materials Processing is really doing well in markets like Australia and to a degree North America.

Europe on the other hand was also a mixed bag, depending upon the product categories. In our Aerial Work Platform Business we showed a pretty nice increase, a surprisingly nice increase in our European business.

But Construction Business also had a pretty nice increase in our European business but our Crane Business was meaningfully down, not dramatically, but meaningfully down but that's where we had some of the cancellations. Our Materials Processing Business was relatively flat in Europe.

Overall, it continues -- I would say our Chinese business was slower than we wanted in part because our own Chinese crane, truck-crane venture is struggling a little bit at this point in time.

So the characterization by geography I would say is positive, more positive in the smaller equipment for our business in Europe and in North America. The bigger cranes in particular in Europe struggled. If you dissect Europe, the markets where there is more economic difficulty, Spain, Italy, Portugal, were pretty soft, even in the smaller equipment area. And in those markets that we normally would expect a more positive economic situation, Germany, France and to a degree the United Kingdom, those markets were generally positive. Does that help?

Yes, that is helpful. Then the follow-up question I was hoping to ask is, is there any way you could just provide us, Phil, a bridge of your first-half performance to your second half performance to reconcile to the, call it, the implied $0.47 to $0.67 of earnings power in the back half?

Just wondering how we should think about revenue, the underlying profit, the timing of restructuring benefits, seasonality, et cetera.

I will give you a high-level breakdown of that. As we mentioned, order magnitude is probably $120 million roughly. $140 million to $170 million identified here in the outlook that we have. Of that, I would say about 30% to 40% is going to be related to price.

We do have volume and mix benefit which is also a considerable amount and I would say is in a similar range, 25% to 30%; and that's mainly Crane that's picking up in the second half. We've strong MP, but it's basically volume relatively flat; AWP pretty flat and Construction coming through.

Cost reductions including efficiencies in the facilities is probably close to 40% to 50% of the improvement that we have first half to second half. And there's some headwinds on material costs that make up the difference related to that.

That is the split in terms of what we have. And I guess I'd characterize it as the positives would be maybe we could do some more volume than we expect. We are balancing that with the working capital push in reduction, did not to try to schedule production for optimistic order projections. But schedule production for reality to drive the cash flow generation.

I would say if there is a little bit of a mix difference, maybe there could be a little bit more volume than what we've got in the outlook at this stage to help solidify the earnings power.

Okay. So the last element is, so Cranes should do well in spite of the fact that you've had $220 million of, call it, cancellations or numbers removed from the backlog. You still have a high degree of confidence that you can see an acceleration in topline there?

That's right.

Cranes will get there. Also the port equipment, we talked before, they had very low first half versus second half, and the deliveries there, their profits improved quite a bit from first to second quarter and we expect that they'll get the deliveries that we have out there which are profitable business.

We have made some changes in how we are looking at the port equipment business. Those changes I think are coming through. Profitability of the losses were cut in half in the second quarter. We have a profitable Vertsberg facility that actually was net positive in the second quarter.

We have taken a level of Management out in that business. And frankly we expect to be profitable by the end of this year; and that does not include any of the future benefits we expect to get by combining that business with the Demag Cranes Port Equipment Operations.

Absolute best of luck this quarter.

Thank you, our next question comes from the line of Ann Duignan with JPMorgan.

Good morning guys. Just a question on the AWPs, your price increases, pushing them through in the back half. You know that a lot of the orders in the front half of the year came from your large rental customers. Can you talk a little bit, Ron, about how sustainable that price increase will be as we go into 2012, when those large rental companies are back buying large volumes again?

Sure. Let me give you my sense and then Tim has a closer picture of that, not that we really can completely answer that question.

The first half of the year, there was a pretty substantial mix of orders to the very large rental companies. The second half of the year, we implemented the price increase and we anticipate the mix of the business in the second half of the year to reflect a good or meaningful piece of that price increase.

Obviously, we are entering conversations with the large rental companies right now, some of them wanting to get into conversations about 2012. And there's going to be a push from our side to have those price increases stick and for that to be the pricing of the day for 2012.

I think there is a requirement that replacement rates continue among the large rental companies, but there's also a reality that we have had substantial increases on components; that we have to pass those price increases along. And, I think there is the dilemma in the market. We think we will get the pricing. Tim, you want to add to that?

The only thing I would add, Ron, is that nobody ever likes a price increase, but our customers understand the need for it. The conversations we've had with our customers has actually been positive.

One of the most significant positive things that we can see in the marketplace is our customers get a price increase in the form of rental rates and we're seeing that all over the place. Utilizations are strong. They're yielding better results; and as a result of that, there's, I guess, an acceptance that price increases are inevitable.

And while they don't necessarily like it and don't want them, I think we are pretty confident that we are going to be able to pass that through.

If I could just kind of wrap this up and put a bow on it, I would say the combination of pricing and a more consistent throughput from our operations will have a pretty meaningful increase on the incremental margins.

I'm just wondering what color bow that is, Ron, that you are wrapping around it.

You can put whatever color you want on it, Ann.

Hopefully it is a nice, bright color. My follow-up question then is more on the construction side. You noted the supply constraints. Ron, were those really components, supplier constraints and could you expand on that or were they, as Terex says, inability to forecast and therefore just didn't order components in time?

If you could just expand so we can get some read-through, what were the components and is it an industry wide problem or is it a Terex specific problem, that would be great.

That's great, Ann. Thank you for giving us a chance to defend ourselves. George?

Ann, thank you very much for the question. Relative to the question around the forecast, as we saw the demand begin to increase Q3 of last year into Q4, we reached out to all of our suppliers and basically gave them a rolling 12 month forecast, some of which even asked for a 18 to 24 month forecast due to the long lead times they projected based on the total industry demand increase worldwide.

Most of our suppliers have stepped up to the table, delivered on time, and we have been able to put machines together and deliver. We have had a handful of significant component issues around engines early in Q2 which have now improved. We have pumps, drive motors, dozer blades, smaller components that are hit and miss that we have been chasing every hour all around the world to try to get improvement out of.

If I walk through the 3 months of Q2, it improved greatly by the end of June. And to the magnitude in the quarter, I would say that created about $40 million to $45 million of revenue mix in the quarter, which also could be reflected in our increased working capital within the quarter, which I anticipate that we'll flow that out.

The factories all around the world are running very hard, very long days, very long weeks to try to get back to the forecast to improve our position in Q3. I do still seeing challenges as we move into Q3 particularly with a couple key suppliers that we are working at my level and at Ron's level even with support there. But I don't think that's unusual anywhere else in the industry. And that kind of gives you a flavor for what you're working through.

Just a point of clarification, your engine supplier will be Scandinavian or UK or German?

All of the above.

All of the above, okay. That's helpful. I appreciate the color.

Your next question comes from Jamie Cook with Credit Suisse.

Quick questions. One, just a follow-up on Ann's question on the supply-chain issue. How big of an issue was Japan in the quarter? Naturally we get some benefit in Q3 as that works its way out.

Ron, a follow-up question on, you have been pretty vocal about some market share targets you had. At your Analyst Day, you spoke about the market share achievements you made in Cranes in North America, some double-digit increases. You were going after some pretty aggressive increases in the area of Work Platform Business too before. Has that subsided at all? Is your market share where you want it to be on a relative basis, or are we still going to be pretty aggressive, and that's what is driving some of the, underperformance or lower than expected profits that you guys had hoped?

Thanks, Jamie. Japan, really not a huge issue for us. A small issue in general. We can't really blame Japan; at least we don't have the visibility through our supply base to think that was Japanese related.

We think most of our supply issues tended to be just the substantial ramp-up in demand. We're in very similar product categories that are others are in, and everyone sees the same issue, and everybody ends up chasing the same demand and wants those components all at once. There's got to be a balancing act.

And as in any recovery, what happens is, is the supply base has an upperhand initially; that's where they get their price increase early. And so I think that is mitigating now as demand is a bit more stable.

But more importantly to your other question, the market share, I guess I would like to have Tim and maybe George address it, but what I would to tell you -- and Kevin. Our market share objectives we've secured and we are improving. We are happy with the progress we are making there. But the issues we have are probably not market share oriented.

We might say a little bit pricing related to get the market share, but I don't think that's the main issue. I think it's mostly operational. But Tim, how do you feel the market share's progressing in AWP? And we will go, George and Kevin.

I think from where we were at the bottom of the cycle to where we are now at the beginning of a recovery, we feel pretty good about the improvements we are seeing in market share. In most categories, not all, but most categories in most markets around the world. I think we are pretty pleased with where we are.

There has -- much of the market share that we have came at the inflection point last year when we had to make some decisions. I think we feel pretty good about where we are.

Whatever we lost in the downturn I think we have recovered.

What about Cranes as well because that's another area you pointed out at the Analyst Day.

Kevin?

Jamie, we feel good about our market share progress. Ron called out North America, just to give you a couple of examples. Boom trucks, RTs, ACs, really the core of our product line, we are up significantly on a year-over-year basis anywhere from 60% to 100% increase in market share across those products.

Again I would say I would repeat what Ron said, although would like more, our real focus right now is getting yield out of that revenue that we do have. So we are focused highly on our cost structure and making some choices that we have to in that area.

Great. I'll get back in queue.

Our next question comes from the line of Robert McCarthy with Robert Baird.

Good morning, everybody, can you hear me okay?

Yes, Robert.

My first question has to do with the Crane Business. I wonder if you could help us with some kind of rough break on how much of the $219 million backlog adjustment related to new product delay cancellations, et cetera, versus the bankruptcy issue, and whether you could give us some visibility on whether the $36 million of restructuring expenses in the quarter is all we are going to see to generate the $70 million or is there some more to come as you announced specific facility actions?

Sure. Phil?

Okay, Robert, on the first question of the backlog of $219 million, the new product introduction accounted for $73 million. The bankruptcy was about $31 million. The remainder the related to cancellations. This is all in backlog relative to within the 12-month delivery, they way we define it.

Right, of course.

On the restructuring activities, the $36 million charge basically is related to the $70 million. In other words if we do additional actions, there should be additional benefits associated with those.

The facility closures that were referenced that you're not prepared to identify yet, are they fully reflected in those numbers?

Yes.

Okay. Then, I just wonder if you could speculate a little bit on order prospects in the AWP Business. Order book looked very strong in the quarter. But of course in front of fairly significant price increase that's taking effect, do I need to have some concern about having pulled some demand forward into the quarter and are we going to see -- I mean, does this translate into or should we prepared for a significant sequential deadline in orders next quarter before we get the traditional seasonal rebound in the fourth?

I'm going to let Tim answer that question.

I would say the orders that we saw in the second quarter, Robert, were strong. In think there is -- we're in that period now where customers are saying do I want to place an order now for delivery in the fourth quarter or should I wait and place the order in the fourth quarter for delivery in the first quarter? I think the third quarter profile is going to be pretty consistent with historical patterns. If we look back over a normal seasonal pattern.

I am hearing and talking to customers about some of fairly significant future orders. So I'm not overly concerned that we are going to see a dramatic drop-off in the third quarter orders. But I feel pretty good about where we are from a backlog standpoint and I'm very confident that we are going to be able to show continued delivery against the orders we have. And as Ron has commented and Phil has commented, we will see meaningful margin expansion as we go through the year. I'm actually pretty bullish about where we are now.

Okay, thank you.

Thank you. Our next question comes from the line of Andrew Obin with BofA Merrill Lynch.

Can you hear us?

Yes, Andrew.

Just a question and little bit more understanding. You highlighted negative absorption capacity by variance on AWP. Can you just give us more detail on that and how that's going to work out into the second half of the year? Sorry.

Yes, Andrew, the schedule that I showed on the absorption is a year-over-year comparison. So getting a little technical, they were fully absorb this year. We just had over absorption last year because we were producing with fewer people a similar lower revenue -- or unit level.

So the inefficiencies in adding cost and people, really, and the ramp-up time frame in the second quarter with the significant increase in revenue, we should have over absorbed as the way I would think about it in the quarter based on the increased volume.

Basically that goes to Ron's comment on absorption capacity as sort of incremental margin improving significantly in the second half of the year?

That is correct.

Because we expect that number to turn positive?

In terms of the absolute as we go through this year, again that slide that we looked at was a comparison to prior year. I don't remember exactly the third and fourth quarter, but yes, sequentially absorption should improve pretty dramatically.

Think about it this way, Andrew. Our business pretty much doubled in the some cases. And in order to produce that level that fast, we hired a whole bunch of people and put those people to work and productivity wasn't at the defined rate that it really should be.

So as the demand now is not going to double anymore, although it would be a good problem to have if it doubled, but it would also not be an easy one to deal with. It's not going to double again. So what we are going to do is we're going to rebalance the people that we have, in a certain sense drive efficiency and productivity.

So, it's about squeezing things out and putting the productivity metrics in place now that you've got a more stable future revenue outlook.

Got you, so when we get these numbers -- and I understand that we have VRVR comparisons. When we get these numbers next quarter, is it fair to expect the absorption capacity variance for AWP will be a lot closer to the zero?

It will be -- again, think sequential. It'll be improved sequentially. Looking back at third, fourth quarter, there is some effect of change of rate, but sequentially it will improve.

And just one of machinery companies today reported weak numbers out of Brazil. What is happening there?

George, what don't you comment? It is mainly road building related.

Specifically in Brazil, we are still seeing a lot of demand on our compact equipment which is generally more privately funded. What really took us pretty hard in the quarter, and basically for the last five months, has been where our road building equipment is 90% funded by government subsidized interest rates to the user.

Early in the year, they began to tighten that subsidy to the point where they basically shut it off in Q2, which has created a chasm for me relative to the volume for that business.

We have some glimmer of hope we have seen in July of the releasing of some of that. I am not predicting that it will be back to where it was December, January. But it really put a hurt on us significantly because of the subsidies were provided for particularly my road building product.

They're going to have to release that money or more money at some point in time. It is just a matter of when given all the work that has to be done in Brazil.

Okay, terrific, thank you very much.

Thank you. Our next question comes from Seth Weber with RBC.

Thanks, good morning, everybody. Just first a clarification maybe, Ron, is the adjusted to the EPS number really just related to the second quarter coming up short of where you thought or is there some tempering in the second half as well?

And this is not a quantification answer. I would say it's more 75% related to what happened in the second quarter, and 25% related to some slowing of our expectations on the Crane Business.

And I think the actions we are taking in Cranes are intentionally driven to try and get the working capital out of that business. Okay? We know we have got to get the cost out of the business; we have got that identified. But we want to make sure we don't just keep producing to hit a revenue number. We want to make sure we get the working capital out of that business. Most of that working capital is sitting in large products that are in our German operations.

Right, okay, thanks for that.

Just for perspective, Seth, one of our big cranes we expect to ship this quarter will be in the range of over $30 million; and it's been in our working capital now for probably a year. So we need to clear that out. There is a couple more of those.

Okay, that's helpful, thank you. I guess switching over to the AWP Business, maybe for Tim. As the cycle migrates towards more the second tier, mid tier guys, can you talk about the ability for those customers to buy equipment these days? There's been some discussion about the financial health of, once you get out of the top tier rental guys, can you just shed some color on that?

Tim?

Yes, the financing markets for the mid tier guys is still a challenge. I would say those that were troubled going into the downcycle are still troubled. Those that were healthy, and became troubled, are recovering and their ability to buy equipment is reasonably strong. We have had some challenges getting paper placed in this market. Though as recently as the last couple of weeks, we are starting to see some of the financing companies step back into the market, very tepidly, but a step back into the market and begin to buy some of the paper for some of the healthier next tier companies.

I think as the market continues to recover, we saw results yesterday from one of the large rental companies, where their utilization was at an all-time high in their rental rates were increasing. As that kind of result affects or impacts the entire market, we will see the financing companies step back in and the ability for our customers to keep buying will grow.

That's a critical comment, Tim. Critical comment. The pace is being set by a couple of the big tier guys; that gives confidence to the financing market for the second tiers.

Okay. If I could just ask a follow up on the Crane Business. I just want to make sure I am hearing this correctly. Maybe for Kevin, what is the message that we are supposed to be hearing on the crawler business? It is good in North America, but slow in Europe, is that what I am hearing?

I would say on the crawler business, our strength has been actually in the developing markets. Not Europe and not North America to date on crawlers.

Okay, so developing market strength, Europe is relatively weaker?

Going back to the prior question if you don't mind, Seth. Just a little bit of clarification, the question earlier about the drop, the cancellation levels. We called that specifically an insolvency situation for the $31 million. But the reality is, a reasonable chunk of the remainder of the cancellations were also credit related. Not insolvencies but customers specifically in Europe and their inability to attract financing from the outside capital markets or from Terex.

Okay. So do you feel that the cancellations have basically washed through at this point or have you kind of scrubbed the backlog?

We believe we have much higher predictability in our backlog in that our expectations going forward are less reliant on the key areas where we've experienced the cancellations, i.e., Europe. A higher percentage of it is in areas like port equipment, where although there are longer lead times, our translation from backlog to revenue has been much, much higher.

Okay, thanks. That's good clarification, thanks very much, guys.

Thank you. Our next question comes from the line of Henry Kirn of UBS.

Good morning, guys. Can you talk a little bit about how disciplined your competitors are in the global crane markets if we're in a pause period?

Kevin, do you want to talk a little bit about what you're seeing from the competition?

Sure, we see fairly good strength in our competitors. We have a lot of respect for them. I would call out specifically, progress has been made by our Chinese competitors, in several areas. So again we keep a close eye --

He's talking about pricing.

In terms of pricing?

Yes, is there a competitor that's out there that's just --historically, Liebherr, it has been most difficult to predict in terms of pricing in our Crane Business. And I think the North American market has shown better pricing discipline than I have seen in some time. And I haven't seen a huge amount of pricing issues in Europe, in general, although in some developing markets I'm sure we still see some aggressive pricing from the Chinese in particular.

Obviously the Chinese are waving the flag here in the United States and in Europe. But most of their action is in the developing markets.

I would agree, in general I would say there's a fair amount of price discipline from the larger competitors with the exception of where our Chinese competitors are entering new markets, trying to establish distribution in a footprint. That is what we are seeing more aggressive behavior on price.

That is really helpful. Your construction backlog was up nicely. Can you talk about any successes in gaining penetration there in the US rental companies or North America in general?

George?

Yes, thank you for the question. We are seeing success particularly through the relationships with our AWP larger customers. We have multiple rental houses that are now as we talked during the Analyst Day that are buying our equipment, filling gaps within a lot of their product ranges.

Also I would like to point out our relationship as I described in the Analyst Day, with compact power in North America is really progressing well through the Home Depot stores through their rental, which is a totally different approach for our traditional dealer only on the compact equipment. We see that gaining momentum and I anticipate that to continue to grow.

Thanks a lot.

Thank you. Our next question comes from line of Jerry Revich with Goldman Sachs.

Ron, congratulations on the Demag shareholder approval. To the extent that you're comfortable, can you talk about from a high-level standpoint the extent of distribution location overlap for the Fantuzzi business with the Demag sales organization and touch on the manufacturing facilities as well. And also, I am wondering if you can talk about what proportion of the structuring charge this quarter was of port cranes. I know you mentioned you wouldn't site specific facilities but I'm wondering if you can give us that piece.

Relative to where the restructuring charge was in our Cranes Business, I really don't want to comment on that because people's lives are affected here and we want to make sure we do the right thing and handle it appropriately from that point of view. I'd prefer not to get into that detail.

On the other hand, the Demag Cranes AG is an exciting business. The fact that 82% of the shares have tendered is a good thing. We think we will be a world leader in a growing product category which is always a great place to be. And the growing product category is port equipment. Both Demag recognizes that as well as Terex has recognized that. We will have the broadest and we believe the best product line.

Demag brings a very high level of market share in the mobile, harbor Crane business and a very well established install base and services. The Fantuzzi business we acquired and renamed Terex Port Equipment has been struggling with the cost burden of probably 15 different sales and service locations around the world required to be in the business but insufficient volume relative to justify those.

There will be an opportunity to really combine sales and service locations to improve customer service and drive profitability between both locations. We have got the number one straddle carrier product line. We've got ship to shore product line, we've got super-stacker product line added to the number one mobile, harbor crane product line.

So all in all it's going to be an exciting time to be in the port equipment business for Terex. And I think it will take us some time to harvest those synergies and efficiencies. But I think the teams are beginning to gear up for that as we speak.

Relative to the rest of the Demag Cranes Business, there's 222 service locations. And those service locations for the Industrial Crane Business are producing an EBITDA of 19.5%. And our expectation is that we will learn something from those service locations and be able to work with them to find new synergies to grow some of our other business and the other product categories.

I can't forecast that at this moment in time. But we know there will be synergies there. Regarding manufacturing operations as part of our business combination agreement, we knew that we would maintain the German manufacturing locations. That's pretty fundamental to the Demag Cranes Business, in terms of technology, productivity, cost; they produce pretty solid components.

But there are a number of regional manufacturing operations that we are going to look to synergize over a period of time. Right now it is too early to say. Our focus in the next few months, once we get -- once we close on the business will be to get alignment in the basics. They report on an IFRS basis. We will need to report on a US GAAP basis. There will be accounting analysis and adjustments that will have to take place. There will be technical issues relative to the Supervisory Board and how we approach the capital structure and the governance of the business over the next several months. So there is a lot of work to do on a technical basis.

But at the end of the day it's going to be a terrific business addition for us. I think it is the kind of business I was looking for when I sold the mining business. I didn't have a chance to be number one in the mining business particularly with those guys that sell yellow iron from Peoria, but I got the chance to be number one in the port equipment business and probably will be; and it is a business that will grow, because there will be more ports and there will be more movement of material to places in the world that are growing.

Okay. I appreciate the color. I recognize it's early in the process. Thanks for sharing that. Phil, I'm wondering if you could talk about the extent of cost inflation by business that you saw in the quarter and just step us through how the comps back up over the balance of the year. I know pricing is picking up. Can you talk about where you are seeing cost inflation as well?

As I mentioned in terms of first half, second half, we are going to get about 30% of our operating profit improvement over the first half, second half from our pricing. The cost headwinds are probably in the 10% to 20% range relative to the first half.

We saw in general cost increases largely in the US businesses and largely AWP was the most significant. That continues in the second half of the year in AWP and a little bit in the European operations. We will be ahead of price to cost relationship in the second half of the year. Supplier side, when we were behind in the first half.

Again some of the commodities we talked a little bit about the shortages; those also had some price pressure in hydraulics, but steel and tires tended to be some of the other areas that we had some pressure on.

That's helpful, thank you.

Thank you. Our next question comes from the line of David Raso of ISI Group.

Good morning. I'm trying to triangulate the cash flow working capital color with what you were implying about the fourth quarter revenues. You are looking for free flow of $350 million to $400 million in the back half. And if you are looking at the working capital now, a shade below $2 billion, I have to believe a large bulk of the $350 million to $400 million is lower working capital?

Yes, probably in the range, David, of $250 million to $280 million.

Okay, with that in your comments, Phil, that fourth quarter working capital will be 30%.

Less than 30%.

Less than 30%, okay. I'm basically just using and implying the fourth quarter revenue at a level that is implying only 5% revenue growth year over year in the fourth quarter? Is that -- I'm roughly the numbers there a little bit, but is that how we are -- (multiple speakers)

Again, think of the fourth quarter AWP would typically be a lower fourth-quarter on a traditional bases. And as -- (multiple speakers)

I'm talking year over year though on that 5%, though, Phill. You're basically implying roughly about $1.4 billion-ish for the fourth quarter?

Right.

Is the order book -- (multiple speakers)

We did about $1.3 billion in last year's fourth quarter.

Correct.

What I indicated was in terms of our guidance, the expectation on sales is one that we probably have the opportunity to exceed, but I'm trying to hold down the production levels to get the working capital down.

I appreciate that.

If there's some revenue extra in the fourth quarter, it's possible, but we are trying to control our production and make sure we are not just building inventory in the fourth quarter.

Secondarily, while I appreciate the sensitivity around it, the implied cost savings for the second half, you're talking roughly about $50 million.

Yes.

Roughly 45% of the $160 million of sequential improvement in Op Income?

Yes.

Again I know you can't detail it, but for a $36 million restructuring in Cranes to get $50 million that quickly, I'm just trying to get my arms around it, how believable is that? And then I would also ask the second question, why didn't we want to do this earlier?

If I can get $52 million in 6 months with one charge of $36 million, and if anything Cranes has been weak for so long, thankfully you are seeing our [offshore] orders get better. What is new about the business that takes that kind of charge now and can I believe $50 million on a $36 million charge?

The $50 million, David, was totally Company. That gives that some of the absorption/cost issues in AWP and the other businesses as well. Parts shortages, that's not just a Cranes number. Ron had indicated that of the $70 million about half would be this year; that's not necessarily all in the second half of this year as we did experience some of those reductions in the first half of this year. That is a piece of it as well.

So it is a bit of an absorption type related number in that cost saving number, so to speak?

That's correct.

And the other thing I would say, David, is decisions to change factories and optimize locations, these are things that we have been looking at for some time. But I think under Kevin's leadership, which is new this year, and a good solid strategic plan going forward for how we want to structure the business, we've made the right choices and these are the things that we needed to do.

Okay, I appreciate that, thank you.

Thank you. Our next question comes from the line of Charlie Brady with BMO Capital Markets.

Thanks, good morning, Ron, Phil. With regards to the Construction Business, and I apologize if you mentioned this, you talked last quarter about getting it to profitability this quarter. Obviously you missed the mark there. Have you talked in your comments today about a timeline as to when Construction gets to profitability?

And what is the bar now on -- I understand you had some under absorption and you had some components stuff that is getting better, but there's still some of those issues bleeding into Q3. What I'm really trying to wrap my mind around is, is to when Construction gets above that breakeven level; does it happen this year or not? It's kind of a rise where we are seeing the pickup in the revenue side of the business.

That's a fair question; and I will tell you that I'm going to turn the question over to the man that was the most disappointed by not getting to profitability in the second quarter. George?

Charlie, thank you for the question, and I'll walk you through what happened a little bit in the second quarter. To answer your question directly, we don't get to profitability in Q3 of this year.

What really held us back, if you will, around the material shortages as I mentioned earlier, that was about $40 million to $45 million topline revenue that did not flow through, which also challenged our absorption throughout the factory. Also too, the issues that I mentioned in Latin America and also somewhat in North America on the road building side, equated to about $25 million of the topline mix. And through that, and the businesses that were strong, we continued to leverage price as we saw the commodity pricing going up, we were pushing that through.

We started early in Q1 to really forecast and then move through the pricing which should be reflected in Q3. It was a mixture of those two activities along with a couple-of-million-dollar hit to the P&L as we closed out an issue in Latin America with an acquisition from a long time ago. So it's a lot of negative headwinds. Not all of that will go away in Q3. But as I mentioned in the beginning, we are going to get profitable in Q3.

Thank you.

Thank you. Our next question comes from the line of David Wells with Thompson Research Group.

Good morning, everyone. First off, looking at the orders that were removed for the AT that was a newly developed product. Can you give us a sense of what the drivers were? Was it a technical issue with regards to the actual design of the product or was it a supplier availability of the components that go into that? Trying to get a sense if that is an internal issue or an external issue.

Sure, I would be happy to comment on that. Bottom line, very large AC crane that's been in development, a very innovative design for a crane of its size with the boom on, really targeted to drive productivity for end users at the high end.

The reality is, the product is just not ready to deliver to the market. It is very specific quality and load specifications that we are committed to meeting; and we looked at where we were in terms of our delivery and made the decision that we needed to make sure that it met that criteria. At this stage it does not.

There was substantial demand as noted in the backlogs, that we decided to take out until we can comfortably say to our customers that it meets our high standards for quality and their high standards for quality. These kinds of cranes as you probably know, go into very specific high-profile lift situations; and it's not an area where we would ever compromise on the level of quality that we hold ourselves to.

That's helpful. I appreciate that color. Then a follow-up. I look at the Construction Business, the SG&A in the quarter was a bit higher than we were thinking about it. What's a reasonable run rate to think about for that business and was there any kind of one-time things that are going on there, other than the closeout of that one issue that was discussed earlier.

Gorge?

Specifically what you seeing flow through there, the $2 million charge and the road building in Latin America is what's really what ticked that up. We really have been working on the SG&A for quite a period of time. I would see that coming down a couple of points as we go forward, because we won't have the effect of that charge.

Great, thank you.

Thank you, our next question comes from the line of Matt Vittorioso with Barclays Capital.

Thanks. For Phil, just a quick clarification around the cash flow. Have you guys paid the tax bill on the mining asset sale yet? And if not, is there cash taxes associated with that in the back half of the year and is that baked into your cash flow guidance?

Free cash flow that I defined there is EBITDA plus change in working capital less CapEx. So it doesn't take into effect some of the other things that might be in cash from Ops, like taxes, so thanks for asking the clarification.

The large payment regarding the gain on the mining transaction related to last year goes out in the first quarter of 2012; in order of magnitude, it's about $160 million -- one sixty. In the second half of this year, we do have to pay taxes regarding the sale of shares associated with Bucyrus that we will basically complete in the third quarter. But that's factored into our overall US Tax Return. And I would say cash taxes for third and fourth quarter will approximate $30 million to $35 million each quarter. The rest of the world basically.

That's very helpful. On the investments, if you will, into the TFS Business, would that be additional cash outflow in the second half of the year as well?

Yes, that would be. Given obviously the acquisition of Demag AG, we are trying to balance our needs there, and look to partner more with our critical partners that we have and manage that a little tighter. We did add about $44 million in the quarter.

However we also probably sold more than we normally would looking at the balance. I think as we mentioned earlier on the call, we are starting to see more appetite for the construction industry, particularly in the US to take some of the credits. We are going to monitor that very carefully.

I would say the other piece that is in the estimate that I had, CapEx probably going to be $70 million to $75 million for the year. For the full year?

That is the cash flow estimate that I mentioned.

Great, very helpful. Just a quick follow-up around the Aerial Work Platform Business. You mentioned that the large rental companies replacing their fleets as they had gotten older was driving the turnaround.

How do you think about some of the macro numbers that we've seen more recently? The ABI has now been under 50 for 3 months in a row. At some point the fleet ages come down and we're going to be looking for nonres construction to come back and drive Aerial Work Platform orders. How are you think about that as some of this weaker data starts to come into your past few months?

I think we have a ways to go, but Tim, do you want to comment on that?

I would say, Matt, this very clearly is a replacement market. There is no doubt that this is all about refleeting. North American customers are aggressively updating their aging fleets. Until we see more substantive and material improvement in the construction markets, you really won't see fleet additions.

Keep in mind that we are seeing increasing volume in other markets around the world, like Brazil, like China, like the Middle East, where there is construction activity going on. Obviously this is largely a US and Western European market, historically, but we are seeing some construction volume that is affecting our business on a positive basis. But there's no doubt this is a refleeting basis.

I think you'll see this refleeting continue for the next couple of years. I have had in the last 30 days two, very large North American rental companies tell me directly that they expect the CapEx they spend in 2012 and in '13 to be up year over year.

Yes, it is a refleeting market but from our perspective there's a long way to go until they get their volumes where they need to. They didn't buy anything for two years.

That's really helpful. These refleeting cycles can take a few years anyway, so we've got time.

Absolutely. Thanks very much.

(Operator Instructions) Due to the amount of time we have allotted, please limit your questions to one question per caller. Our next question comes from the line of Heiko Ihle with Gabelli & Co.

Thank you for taking my question. Most of my questions have been answered, but can you provide some color on your expected gross margin by segment for orders that came in during Q2 and your expectation for Q3? You mentioned rental companies fleeting up throughout relatively large orders. Does this depress margins in the future?

I don't think it depresses margins for the future, Heiko. I think what will drive our margins at this stage is, as we articulated, the pricing and authority in the marketplace and the productivity that we can drive at our operations.

Since we don't expect the dramatic shift in revenue change that we had in the first part of the year, the opportunity to improve efficiency I think is right in front of our nose. I don't want to get into a handicapping of gross margins or even gross profit by individual businesses beyond what is already out there.

We tend not to look at gross margins in the backlog as consequential, because it is on our pricing. It is really the ability of the Company to get the product out the door efficiently that drives the gross profit number once the pricing is that.

That's fair. Thank you very much.

Thank you, our next question comes from the line of Joel Tiss of Buckingham Research.

Everything has been answered, thank you very much for spending all of this time.

Our next question comes from the line of Brian Rayle with Northcoast Research.

Good morning. Most of the questions have been answered. We discussed how Construction can move to profitability in the third quarter. I guess longer-term as we think about this segment, certainly it's underperformed to the last cycle. What are the steps that are going to be necessary to move it towards industry, even industry, average profitability in terms of what you are thinking about in product or restructuring? Thank you.

Sure, this is a business that is not a simple or single business; it is really a collection of three or four different businesses. As you break it down into the three or four different businesses, the quality of its franchise somewhat varies across those three or four different businesses.

Strategically I think we've got pretty strong position in a couple of really good niches. Our Material Handling product line. We don't report these individually so I know the market doesn't see this. The Material Handling part of our product line, very strong product, very high market share, very concentrated and sophisticated specific customer types, such as scrap handling, et cetera.

That is a particularly good franchise and has done particularly well over the past few quarters, reflecting the turnaround efforts that we have placed on that. It is a keeper; it is really strong; and I think it is progressing.

Our truck business, which we think is also a good franchise for us, we are the number three player probably in articulated and rigid crane trucks up to 100 tons. That franchise has been a core part of Terex for generations. It has a strong franchise combination in China. We are with the number one player with our JV partner.

That business has struggled for profits over the past 12 to 24 months. It is now making money and its ability to improve in profits is right in front of us and that is a good strong business and will continue to be.

The third piece is the compact equipment business. That is a business we have decided that we can grow and make money in and improve and have a decent franchise. That is yet to be proven but we think it is being proven. Okay?

That is a business which has value in cross-selling between our Aerial Work Platform Business; we've introduced a new skid steer loader. And obviously when you introduce a new product, a new skid steer loader, the first few months, cover yourself from glory relative to profitability. We are kind of investing in that business and we're investing in its future.

That coupled with the mini-excavator product line, coupled with the mini-wheel loader product line that we are even private labeling for some very well known, other global players, gives us a chance we think to make money, but that business has somewhat underperformed our near-term profit expectations, but it is certainly one that we think will be profitable going forward. But we've got to prove it. We've got to prove it and I think we will do that.

Lastly you have the road building business and the road building business for us is a collection of two or three different important pieces. One piece is the front, discharge mixer truck business, the cement market in the United States. That market has really dried up and is likely to be pretty bad for a little while. It will come back.

We have a 50% market share. We've got a pretty high install base. Giving up on that business makes no sense to us.

The next piece is the road building business down in Brazil in particular. It has been a highly profitable and highly successful business for us. It hit a revenue wall over the last few months, in part because of the financing as George has mentioned. That was a bit of a surprise to us. But when that comes back, that will importantly contribute to the profit.

Our North American road building business is not at the level that we would like it to be, but we think as a number two type player, particularly asphalt plants and some in the papers, we've introduced a couple of really exciting new products and those are getting some traction.

All in all, I think the question is valid. We're not afraid of the question. But we think there are really better pieces in this business that meets the eye which is why we think third and fourth quarter and in longer-term expectations that we've set for this business are still deliverable.

Thank you very much. Not to drag the question out, but so you are comfortable with the portfolio that you have. Are we going to see restructuring charges over the next year or two as things get rationalized? Are you also comfortable with your current reduction portfolio?

I think in general, we are comfortable but I will tell you that one of the things Terex is going through is, we are maturing as an organization and we continue to be changing the Company from being a holding company to an operating company.

As we implement the TMS management system which gives us visibility and information, and as we implement a complete analysis of our global manufacturing footprint, what we have to do is we've got to drive cost out of our developed market investments in order to afford the developing market investments that we have made.

And to afford and effect the TMS investment, I would say, we don't have a list of restructuring things that we plan tomorrow. But this is going to be a constant evolution for us as we continue to move toward improving our operational capabilities.

For example, at this moment in time, we distribute the Company's parts through very, very different methodologies around the globe. Parts logistics can be consolidated and improved for Terex; it is a real improvement opportunity. So, you will find that we continue to do these things but please be assured that every restructuring charge we look at down the road, we expect them to have very short term paybacks.

Great thank, you very much, I appreciate the time.

Thank you. Our next question comes from the line of Andy Casey with Wells Fargo Securities.

Good morning, everybody, and thanks again for staying on the line so long. Just some clarification in Cranes, can you help us understand how to view the sustainability of the US and Canadian boom truck and rough terrain strength? We continue to hear chatter in the channel about a potential tax pre-buy.

Does the North American backlog for those product segments remain firm beyond the end of '11, or is there a little bit of a drop off in the beginning of '12?

Kevin, you want to comment on that?

Yes, I guess what I would say, our success in those two products in particular, although I would say the market has been improving, I would say the majority of our success has been more in the area of taking share. And again, I'm not saying there's an upward threshold on market share, but at the same time we feel very good about the progress and we don't have concerns in those two products going forward.

We've also been innovating in terms of new product designs. We've delivered some new products as recently as March in ConExpo in both of those categories that we feel very good about. We are getting some real excitement in the market; and I think as long as we continue to innovate and deliver, we will stay strong in both of those categories in North America.

I will add to that, that you're not going to get continued significant increases in revenue unless construction activity begins to come back in this country. Okay, let's just be realistic. The housing market is an important contributor to our business. Nonresidential construction is an important contributor to our business.

A lot of the strength in the crane business is going to industrial petrochemical related projects and those kinds of things. So we do need to get our economy house in order for this business to continue to progress.

Okay, thanks. On that last point that you made, Ron, we touched on it at AWPs a little bit earlier with the replacement demand. But bigger picture on North American and European end market customers, have you seen any sentiment deterioration through the quarter as they look beyond 2011 at their prospects?

I don't see any sentiment impact, deterioration. In fact, I would echo what Tim said, having spent the time with some of the bigger customers and also having gotten direct feedback from some of the big European customers, they need to replace their fleet.

The difference between cranes and aerial work platforms is also pretty striking in that cranes tend to last a generation, whereas aerial work platforms tend to last much less time. Okay? The replacement cycle comment is much more relevant to the Aerial Work Platform Business than others.

But in AWPs, we are not expecting a lot of growth capital over the next couple of years.

Okay, thank you very much.

Thank you. Our final question comes from the line of Steve Barger with KeyBanc Capital Markets.

I want to circle back on a comment from earlier in the call. The Chinese JV is struggling a bit. One of the Chinese PMI indices came in below 50 last night. So just to clarify, is that an operational issue or is there anything to update us on in terms of end market puts and takes in China?

Ken Lousberg, from China -- I would characterize this more of our own operational issue, but there is some slowdown that we seem to be hearing about in China. Ken, do you want to comment on that?

Sure, Ron. To me it is, definitely we have had operational issues with our truck-crane business in particular in China. I would say the main factor though has really been tightening of the financial markets or lending markets in China in particular the residential.

For your guys on the ground, is it their expectation that's going to be persistent or how long do you see this lasting and I guess how much worse could it get?

To be honest with you here, it is tough to tell how long it will last. Things change very fast. The slowdown was pretty quick, although not that significant in the grand scheme of things. But certainly relative to our forecast it was significant.

All right, thanks, appreciate it.

All right. Then I think that does it. We are 1.5 hour into this mission and appreciate everyone staying on the line that long with us. Thank you very much. Please follow-up with any questions for any and all of us, thank you.

Thank you for joining today's conference call. You may now disconnect. Presenters, please remain on the line.