Terex Corp (TEX) 2011 Q3 法說會逐字稿

Good morning. My name is Brandy, and I will be a conference operator today. At this time, I would like to welcome everyone to Terex Corporation's third-quarter 2011 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ronald DeFeo, Chairman and CEO. Please go ahead.

Thank you, Brandy, and good morning, ladies and gentlemen. Thank you for your interest in Terex today. On the call with me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer, Tom Gelston, Vice President of Investor Relations. And participating also and available for your questions will be the leadership team of our business segments, Kevin Bradley for the Cranes business; Tim Ford for Aerial Work Platforms; George Ellis for Construction; Kieran Hegarty for the Materials Processing business; Steve Filipov for Developing Markets; and Ken Lousberg for our China operations.

As usual, a replay is archived on the Terex website, www.Terex.com, under Audio Archives in the Investor Relations section.

Before I begin, however, I would like to acknowledge the recent passing of John McGinty, a person who long covered Terex, mainly as a sell-side coverage analyst and more recently on the investment banking side. He was an influential thought provider for over 30 years to our industry. He was an astute observer of trends, a friend of Terex, one that had a great and fun personality and a person I respected very much. He will certainly be missed.

I will begin with some overall commentary on current performance, as well as commentary on the market environment. Phil will follow me with a more detailed financial report, including an analysis of the Demag Cranes acquisition and the related accounting for this quarter.

Following that, as usual, we'll take your questions. We will enforce the one question rule with a follow-up. That will allow as many people as possible to ask their most important questions within the timeframe of this call.

As we have done in recent calls, we have prepared a presentation as a guide through our commentary. It was e-mailed last night to those on our Investor Relations contact distribution list and is available for download from our website for those who do not have it.

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 let me turn to page 3. This quarter we continued to improve performance. Net sales increased significantly with and without the Demag Cranes AG acquisition. But more importantly, in my opinion, the company performance improved in terms of profit and cash flow. More specifically, each of our segments showed increased sales versus the prior year's period led by the AWP segment at 59% growth and the balance of the businesses reported between 20% and 50% growth. This is good performance in the face of what we believe are some less than certain times for the most part. But again, and more importantly, all the businesses improved in terms of profitability, and we are looking for continued improvements in profitability as actions we have taken are paying dividends and most evident in our Cranes segment over these results. We continue to expect profit and cash improvement as a result of cost reduction activities and pricing actions across our various business segments.

New this quarter is the inclusion of the Demag Cranes AG financial results as we closed on our 82% equity ownership halfway through the quarter, on August 16. Going forward, we will be referring to this business as our Material Handling & Port Solutions segment, and it will be reported as a stand-alone segment.

While the current results were clouded by the effects of acquisition accounting, we are very pleased with the performance of the business, and we are encouraged by the prospects of the different product lines, quite different product lines than Terex has for the most part.

In terms of market conditions, we will continue to see evidence -- we continue to see evidence of improving trends broadly, though the recovery isn't even -- or it isn't consistent across all products and geographies. On the positive side, we see continued replacement-driven demand in most developed markets as well as continuing growth in most developing economies globally. We've seen some recent weaknesses in our Construction truck and mobile crushing business, but it may be premature to determine if this is anything more than a pause.

We continue to be impacted negatively by increased component costs for our products, particularly in the AWP business. As a result, we have initiated price increases on most products. And moving into next year, we would expect price realization to exceed the pressure from cost increases and begin to improve margins further.

Component and engine suppliers took prices up early. And for much of 2011, our customer pricing lagged. This is changing. Plus we are going back to our supply base and re-quoting to get more cost reductions now.

As expected, we are seeing improvements in suppliers' ability to deliver what we need for production when we need it. But expect these to be mostly resolved by year end. While we still have some issues to work through in our Construction segment, we are optimistic that next year we will have a more profit-focused business. And we will focus much less on growth in Construction and more on profit and cash generation in this segment.

Lastly, we generated $106 million in free cash flow in the third quarter as we were able to reduce our working capital investment and generate cash from profitability. We continue to expect meaningful pre-cash flow generation in the fourth quarter.

Now, let's cover a few specific segment and market comments on page 4. Our AWP business is predominantly supplying large North American rental companies, and we are seeing strong replacement lead demand. We were expecting the smaller independent rental firms to be a larger percentage of the overall mix, but this is yet to occur, and we still feel this shift will happen, although it's difficult to say exactly when.

The underlying trends of the industry, as measured by time utilization and rental rate increases remain quite positive. The fleet age statistics continue to indicate a fleet that is relatively old with little ability to put off replacement in our opinion.

Outside North America, we have seen some early signs of a similar replacement beginning to take shape, although it may be premature to call it a trend. However, we do expect growth from markets like the UK, Brazil, and Australia/Asia. We announced price increases effective January 2012. These will average 4.5% and when added to the increase taken this past June, should offset the input cost pressures this business has been facing this year. The outlook in this segment, frankly, is a very positive one.

Our Construction business continues to see strong demand for our material handlers, compact equipment, particularly in Central Europe as well as loader backhoes. However, as we commented earlier, we've seen reduced quotation activity for our off-highway trucks, and when adding in the higher input costs across this segment, including items like off-highway truck tires, this business will likely underperform.

Our US road building business remains at a low level of demand, consistent with the commentary given over the prior quarters and years. We've taken one factory and virtually mothballed new equipment production. However, we have seen evidence that the temporary pause of government financing for our Brazilian-based road building business is coming to an end. And that will be positive for this segment overall.

On balance, not much has changed externally in this business, but internally, we further lowered the cost structure of the organization to put us in a position for profitability in 2012 at current volume levels.

Our Cranes business is probably best described as stable at this time. We've had very positive improvements during the year like the nice recovery of the rough terrain crane business, particularly in North America, as well as the pickup of order activity in our Terex Port Equipment business. We haven't seen any real positive inflection in our European all-terrain crane demand, and this is likely to remain the case until the economic situation becomes clearer in the EU.

Excluding a banking collapse in Europe, which fortunately today's news seems quite positive and would suggest that will be prevented, we feel that 2012 will show marked improvements.

Our Chinese truck crane business again experienced a challenging quarter. Although at the recent [Beithese] Trade Show in Beijing last week, we unveiled two new crane products that were the result of extensive customer feedback. And we earned some extremely positive commentary from our customers and other evaluators of new products.

We have a JV, however, that has not performed, and we are not happy with our JV partner. We are taking steps to fix this, but success here cannot be assured.

Lastly, the crawler crane and tower crane markets have begun to see some increased demand overall. We think this is a natural cycle for mobile cranes. This is consistent with our historical experience. And as we look forward, we want to make sure we continue to emphasize profit improvement and cash flow in this business rather than purely going after growth.

Our new Material Handling & Port Solutions business executed their plan quite well, posting strong sales in Europe and Germany in particular. The service and spare parts business also performed well, as expected. The seasonal summer shutdown in many factories means that industrial crane customers performed service and overhauls during the summer. This usually means that the third quarter is a strong one for this business, the third calendar-year quarter.

And while the reported results reflect accounting requirements associated with the acquisition, excluding these would indicate a fairly healthy business with an operating margin of about 6.5% with business fundamentals improving.

Any meaningful benefits of a business combination will only come, however, after the domination process is complete in Germany.

Lastly, our Materials Processing business continues to supply large-capacity machines worldwide as mining continues to look to our largest mobile equipment as a solution provider to some of their needs. Late in the quarter, we did see a slowdown on our mobile crushing products, and we are watching this closely. Overall, another solid quarter by this business during a time of the year that is traditionally slower.

Now I will turn it over to Phil, who will cover the financial performance in some detail. 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.

The results of our acquisition of Demag Cranes AG reported in our Material Handling & Port Solutions segment are included from August 16 of this year.

Net sales increased 68% from the prior-year quarter, or 35% excluding the effect of foreign currency translation and the impact of Demag Cranes AG. The increases over the prior year were most significant in AWP, Cranes and Construction as we would continue to experience an industry recovery from the prior year. This recovery is somewhat fragile geographically and by product area.

Net sales increased sequentially in Cranes and Construction mainly due to improved production throughput while AWP and Materials Processing showed some seasonal declines. Material Handling & Port Solutions contributed $256 million in net sales for the period.

We had income from operations of $53 million in the third quarter compared to $4 million in the prior-year quarter. Excluding the impact of restructuring, certain acquisition-related and other items in the income from operations, it would have been approximately $78 million in the current period versus approximately $5 million in the prior-year quarter.

The favorable effect of increased net sales volume was partially offset by higher input costs mainly in AWP of about $11 million; the negative absorption effect of manufacturing cost efficiencies and supplier disruption; as well as fluctuating production schedules.

Transactional foreign currency changes year over year also negatively affected the results, most significantly in AWP of about $12 million, mainly the result of a 17% change in the Brazilian real in the month of September relative to the prior year.

SG&A expense increased primarily due to the inclusion of Material Handling & Port Solutions, the restoration accrual certain performance-based comp programs and increase engineering for new products and tier 4 work.

Overall working capital increased over the prior-year period due to the growth in net sales and the inclusion of Material Handling & Port Solutions. Working capital as a percent of the trailing three-month annualized sales was 32% in Q3 compared to 38% in the prior-year quarter and 33% in Q2. Overall, we expect our working capital to sales ratio to improve in 2011, to be closer to 27%, as we bring our production in line with demand and continue to complete large Cranes deliveries. We continue to take advantage of early payment discounts with our suppliers to improve our returns.

Net debt increased to $1.6 billion from $725 million at the end of Q2, primarily due to the acquisition of Demag Cranes AG, offset by the sale of the remaining Bucyrus International shares and operational cash flow.

Overall liquidity remains strong at $1.2 billion with cash balances of approximately $685 million and availability under the revolving facilities of $519 million, including those from Demag Cranes AG.

Turning to page 6 where we display other financial items for comparison purposes, as I will cover backlog on another slide, restructuring and impairment-related charges were relatively minor this period and reflect the continued efforts to trim organizational costs. The Cranes restructuring related to our second-quarter charge is proceeding well and on plan.

The net interest expense reflects the increase due to the inclusion of Demag Cranes AG and the additional debt incurred to consummate that transaction.

Other income in the period includes the gain on the sale of the Bucyrus shares of approximately $76 million, partially offset by approximately $30 million for acquisition-related costs and the foreign currency derivatives associated with the Demag Cranes AG transaction.

Tax expense for the period is at a higher rate than normal, mainly due to the increased level of losses not benefited; and the nondeductibility of certain acquisition-related costs; and the effect on deferred tax assets of the enactment of a reduction in UK tax rates.

Weighted average diluted shares includes 700,000 shares for the compensation programs, but there is no impact from the convertible notes, given the volume-weighted average share price for the third quarter.

Turning to page 7, I will discuss the earnings per share bridge. This schedule bridges the as-reported earnings per share of $0.33 to an adjusted EPS of $0.30. As you can see on the bottom of this schedule, the benefit of $0.44 per share for the after-tax gain on the sale of the Bucyrus shares -- this is partially offset by $0.34 per share of acquisition-related items, including the amortization of the inventory fair value associated with the Demag Cranes AG purchase accounting of $19.3 million pretax and $30.3 million for the acquisition-related costs; and the closeout of the foreign currency hedge also for this transaction.

The acquisition cost portion is not tax deductible. Restructuring, impairment and related items, as well as the effect of the UK tax rate changes, are included in the other items column, having a $0.07 impact on EPS. We believe this presentation is more reflective of the ongoing performance of the company.

On page 8, our working capital statistics are outlined, including the effect of Demag Cranes AG. You will note that inventory velocity has improved as we are driving our sales and production planning processes to get ahead of demand changes. This will help us curtail inventory arriving ahead of its need. We are not building on unrealistic growth expectations, but producing to real demand.

We continue to take advantage of early pay discount programs where they make economic sense.

We expect working capital as a percent of four-quarter annualized sales to be closer to 27% from the current 32% level. Improved working capital management, coupled with our earnings performance, should deliver between $200 million and $250 million of free cash flow for the fourth quarter.

Referring to page 9, we show the backlog trend for the company by segment. Overall, we increased substantially from the prior-year quarter in all segments except for Materials Processing, where we have seen some softening in mobile crushing equipment demand. Sequentially, the decline in Cranes is largely due to the improvement in production throughput relative to the prior period. AWP continues to see reasonably strong replacement fleet purchases.

Turning to page 10, I will discuss the impact of the Demag Cranes AG acquisition. As mentioned, we have consolidated their results since the date of acquisition, August 16, and reflect the results in a new segment called Material Handling & Port Solutions. As Ron mentioned, we have begun negotiations with the management board on a domination and profit loss transfer agreement for consideration in the next shareholder meeting in February of 2012.

On page 11, I have outlined certain financial considerations for this transaction. We have booked our preliminary purchase accounting adjustments to fair value for the assets and liabilities as of the acquisition date. The fair value of the tangible and intangible assets will result in additional depreciation and amortization in our consolidated results as outlined on this page. For the third-quarter period, we recorded an additional $5 million of depreciation and amortization. The fourth quarter will be $8.7 million. And we estimate 2012 to be $35 million at this stage.

Our 10-Q will contain information on intangible values and their lives. For purposes of guidance and results, these additional expenses are included in our performance due to their longer-term nature.

Inventory value is also stepped up to measure fair value that reflects the appropriate allocation of profit margin to the acquirer. This incremental value is charged to the P&L based on future inventory turns. In total, this was determined to be approximately $38 million, of which $19 million was charged to cost of goods sold in the third quarter, with the remainder expected to be charged in the fourth quarter. This charge has been excluded from the as-adjusted EPS and the guidance as it tends to distort the underlying operating performance of the company.

The remaining preliminary purchase price allocation values -- acquisition [dated] goodwill at $865 million for the Material Handling & Port Solutions segment.

As previously mentioned, the third-quarter results includes $30 million in acquisition-related costs, including the settlement of the foreign currency derivative for the transaction.

And until the domination and profit and loss transfer agreement is effective, the Demag Cranes AG credit facility and cash will be used to support their operational needs.

We will be filing an 8-K/A as required by SEC regulations in the next week, providing historical pro forma financial statements for the combination of Demag Cranes AG and Terex as if the acquisition occurred on January 1, 2010. The periods presented in US GAAP will be the 12 months ended 12/31/2010 and the six months ended June 30, 2011. Demag Cranes AG amounts are combined based on their fiscal year end of 9/30, in other words, a 90-day lag. These financial statements will include the pushback of purchase accounting adjustments to the beginning of the first period presented.

So let me summarize on page 12. We continue to make progress in our historical businesses with Cranes restructuring going well and Port Equipment expected to break even in Q4. We continue to be encouraged by the growth in AWP customer demand, as we work to improve our balance between input costs, productivity and pricing. Construction demand inconsistency and supplier issues continue to hinder more progress here, so we are focused on cost reduction and cash flow, items we can better control.

Material Processing continues to deliver solid performance, but we are cautious on recent signs of softening in the mobile crusher equipment.

Free cash flow from operating performance and working capital reductions have begun and are expected to continue with $200 million to $250 million expected in the fourth quarter.

The Material Handling & Port Solutions segment is expected to be accretive in 2012.

And lastly, we have updated our guidance for the fourth quarter to $0.20 to $0.25 per share, excluding the inventory step-up charge discussed earlier in other items. This would result in a full year as adjusted for the items previously mentioned of $0.43 to $0.48 per share on net sales of between $6.3 billion and $6.5 billion. I'll turn it back to Ron now.

Thank you, Phil. Just a couple of comments before we open it up to questions.

In general, I'd say that Terex leadership team and particularly our base business leadership is focused on the items that are going to drive return on invested capital. We continue to put emphasis on lowering our working capital investment through better planning. The sales and operations planning process has been greatly emphasized throughout our organization over the past six months. We see some dividends. We see some benefits. Each and every one of our general managers at all of our factories is pretty focused on this.

We also believe that the pricing and supply chain challenges that we've faced have been both real and have slowed our progress down somewhat. On the pricing side, we are aggressively moving our pricing up to offset some of the both raw material and component cost increases that we face, as well as pushing back on our supply base, every one of our factories has a list of the top 10 suppliers. We know where the increases have come. We know our suppliers took their prices up early, and we're pushing back to try and get as much reduction on that front as we possibly can.

Focusing on planning our business better and on getting our costs down and then lastly, on our SG&A is what's going to drive our margin improvements, which is really the most critical thing for us in planning for 2012. It's not how big our business is. It's how -- what kind of positive returns we can capture from the size business that we have. This is how we get healthy and how we plan to drive performance.

With that, I would like to open it up for questions, Brandy.

(Operator Instructions). Ted Grace, Susquehanna.

I just was hoping you could first touch on third-quarter margins and just kind of give us a sense for how they may have compared to your internal plan on the legacy business. And then the second kind of follow-up question was just in light of all the restructuring that you have talked about over the last few quarters, if you could just kind of give us some update on how we might think about 2012 margin prospects with a particular focus on AWP and Construction equipment?

I'll do the first one. Let me talk about the margin, Ted.

I think relative to our internal expectations, probably the biggest impact we saw that was not there was this currency impact that we had on transactional impacts. That -- again Brazil was a pretty big swing, 70% in the month of September, and that causes a relationship on our outstanding short-term obligations that hit the P&L. Again, I mentioned that was really AWP and a small amount in Construction.

Absorption I think was the other area that affected both AWP and Construction. Some of the disruption in production facilities, and we also took a cost-reduction action in the late part of the third quarter in AWP to reduce some of those costs to get that absorption more in line with what we had.

We had some unusual things; not all of them are excluded in that other items that I mentioned earlier, but stuff happens, I guess, is what I would say. But overall, I think we made progress in several of our segments and reacting to changes in demand to get our cost structure down as quickly as we can.

Okay. With regard to 2012, I'm not going to give guidance on margins sitting here because we haven't completed our planning process. And as you know, Ted, like most companies, you try to complete your planning process as close to the pending fiscal year as you possibly can, and ours really gets done on or about the first week of December.

But as we look forward, what I would say is we're going to have a fairly positive customer demand in our Aerial Work Platform business. And the price increases that I mentioned will be key to offsetting what has been a rather significant run-up in our component costs. We do you see the steel costs abating somewhat, which will be positive for us. And we see an ability to push back and get some cost reduction from our supply base.

So pricing action of 4.5%, that coupled with the June should drive our margins as well as some of the supply cost. This is going to be a big driver of profit improvement I think in this segment and get us back to the kind of leverage in the segment that we would normally expect.

The Construction business, I made a point in my commentary to emphasize that we are not going to focus on growth. We are actually going to pull back from certain markets and not compete in those markets where either the currency or the cost of selling in those markets offsets the amount of margin that we can make. So there will be some change in volume; either the trajectory will slow or in fact perhaps go down. But we believe the margins will go up, and this business will turn positive in 2012.

We're also taking a layer of management out. That has already happened in the business, and we are streamlining the SG&A. And George Ellis and the team has a pretty substantial task to get a large portion of SG&A, a meaningful portion of SG&A, out, but I'm pretty confident he's got at least half of that already done. So that will impact the margins. Can't tell you how big, big is or how small, small will be yet in Construction, but it will be a meaningful change from this year.

The Materials Processing business is almost always a pretty solid margin producer, so I'm confident once we get production adjusted to the moderately declined demand that we may see in that business, we will have solid margins, either high single digits or low double digits.

And lastly, in the Crane business, there's going to be a lot of cross currents that are taking place in our Crane business as we currently have it structured. We will have the benefit from the substantial restructuring that took place in our Port side of the business -- the one factory that was closed plus the sales office that is being downsized in Italy. None of that benefit has flowed through in the third quarter or fourth quarter yet.

We also have a new view of how to go about and price some of this business, again, taking the position that some of our lost leader selling initiatives have now been changed, led by Kevin Bradley and Frank Bardonaro, who was running our sales organization. We don't sell product anymore where we have a negative operating margin, so we have changed and eliminated some of the stuff that we found in some of our foreign locations. So I'm pretty positive about what these guys can do to drive margin.

And you're going to have to do that in the crane business because the actual outlook from a revenue point of view is still a little bit uncertain, particularly in Europe.

And lastly, what business have I missed -- the Material Handling & Port Solutions business -- I guess it's early for me to comment on that business, but I've been very positive about the leadership that -- the leadership team that that business has had. They have driven both growth and profit improvement, and I would expect that to continue.

Great. That was very helpful. Thanks a lot guys. Best of luck this quarter.

David Raso, ISI Group.

Good morning. My question relates to the fourth-quarter guidance and maybe that will give us a little insight into the beginning of 2012.

When I look at the fourth-quarter guidance versus what you just did in the third, the $0.30 going to the low $0.20's of EPS is basically the Demag business being accretive, call it $0.05 to $0.10 -- in the fourth quarter, it will be more neutral. So on the core business, I'm just trying to understand ex Demag, you're basically looking at flat sales sequentially, and really no major change at all in your operating margins. So I'm trying to figure first on the revenue, you are implying the core business for sales in the fourth quarter are up about 17% year over year. But you just put up orders ex-Demag up 26% and a backlog ex-Demag up 38%. So why the sales growth of only 17% if your backlog and orders are running up 25% to 35%?

And my second question is going to be why the margin is really not much of an improvement sequentially if the price versus cost is getting better, because I would like to get a feel for what is in the backlog. Like is the mix in the backlog already reflecting some better price versus cost? So if you can attack that in two ways -- the sales growth and then what's in the backlog on the price versus cost mix.

Okay. David, it's Phil. Let me start and Ron will probably add some comments.

The third quarter to fourth quarter, as you point out, Demag AG, the third quarter is their year end, which traditionally is their largest period, so we picked up half of that quarter in their results. The expectation for the fourth quarter is a very low quarter. So they will have a decrement relative to what the performance was in the third. So -- and we pick up a full quarter of the amortization that's there.

The other impact that we have is that Port Equipment portion of Cranes goes up 50% in revenue from the third quarter to the fourth quarter. Now 50% is a big percentage. That's $50 million to $75 million. And their margins are not as high as the rest of the Cranes segment delivery. That's one of the significant pieces that are in here.

The order rate that we have included -- we had a -- going into the fourth quarter in Cranes, we had 87% of the orders already in backlog, pretty much at the end of August as opposed to September. And the backlog increase overall is largely driven by AWP where most of that is really for next year delivery. Very little for this year in the fourth quarter as it's a seasonally down period, and the deliveries are actually down somewhat from the prior period.

So some of the mix of that higher profitability in AWP versus Port Equipment causes some of the overall margin decline that we have in the group.

We have an expectation that Construction does have margin improvement, but again, they are fairly low levels relative to the rest of the company.

And Material Processing with that softening in crushing equipment, we've taken our production levels down, and that's causing some under absorption relative to the third quarter. So, we feel that we are realistic about the volume expectation and the margin expectation and the combination of businesses that we have there. I don't know if you wanted to add to that.

I would add a bit of color and just say it's important that we set the company up for substantial improved performance in 2012 by not producing more than we need to produce in the fourth quarter, and positioning ourselves to generate cash. And I think that's more important than a couple of pennies here or there. And so what we are really trying to do is trying to get all of our businesses on a sounder, more fundamental footing, again, managing for profit and cash generation as opposed to pure growth.

A large portion of the backlog increase, as Phil has already said, comes from the AWP business. And while we are delighted to have that because it reflects big orders at decent pricing, but mostly for next year, is for next year. So we may get out a little bit more in AWP, but it's not certain at this stage.

That was extremely helpful. That said, the AWP backlog which is more a first-quarter shift, maybe partly second-quarter shift, can you give us some indication of how you feel about the profitability of that backlog versus the margins we've just gotten in the last quarter or two from AWP? (multiple speakers) the pricing is locked in.

Yes. Tim, why don't you comment on that? Tim Ford?

Yes. Okay, David, it's Tim. I think as we look at our performance on a sequential basis, we are seeing continued improvement. And I expect that will -- and you should expect that will continue as well. I think two things to keep in mind here.

One, Ron noted in his comments that when we announced the price increase in the spring, we said that price would lag the costs that we have incurred, and that's absolutely the way this is playing out. The pricing that we have put in place in the spring and the price increases that we have announced for January, we believe are sticking. In fact, just this week, I've been involved in discussions with several large rental companies for their acquisition needs for next year. And while many of them are dangling large orders out there to try and get us to bend, we are holding the line on price and we believe our competitors are as well. So I feel like the direction we're going from a margin standpoint is on the right trajectory. And I think as we keep going quarter over quarter, we will see continued sequential margin growth.

All right. I appreciate it. Thank you.

Henry Kirn, UBS.

Since you're going back to the supply base to resource the components, can you update us on the thoughts related to the tier 4 changeover? And with that, how much cost could you reasonably target to get out at this point?

Tier 4 changeover is a fairly complicated discussion. And what I would say on tier 4 changeover is we're probably not going to get a lot of cost out on the tier 4 topic, but -- so we've got to find cost reductions in other places and other areas.

What Tier 4 is doing to us, however, is it's jacking up our inventory -- just in our Construction business alone will probably have $40 million to $50 million of extra inventory that we carry into next year because we have bought tier 3 engines to carry over a time period for the conversion. And we really had no choice.

The basic engine suppliers have taken the attitude of take it or leave it -- somebody else will buy it. Somebody else will have an advantage over you if you don't want it.

And so this changeover to tier 4 has been -- let's put it this way -- complex, complex. So, at the end of the day, it's driven by regulators, and we have to adapt, and we are adapting. But it means running double production lines because tier 3 markets, Brazil, Russia, the Middle East, Africa, they don't want to tier 4 engines nor can they have tier 4 engines. And then of course the developed markets, that's all we will produce for them, depending upon the size class. So I would say, Henry, tier 4 is nothing but a complication for us; unlikely for us to get real cost reduction from that. But I think we've got it so that it at least is not going to get any worse from here.

That's helpful. And on the Chinese JV partner that you mentioned earlier, over what time frame would you evaluate your steps you'll take? And then would there be any charges or penalties for ending the JV?

Yes, at this stage, we are hoping that we can resolve our JV partner issues without any substantial charges or penalties, but it's difficult to predict. And nothing can be assured, as I mentioned earlier.

What we are trying to do is find a different partner. And we're trying to find a different partner who is focused along the same -- with the same vision that we have. And that is not an easy thing to construct.

This JV is now a loss-making JV, and so we have been suffering losses in the range of a few million dollars a quarter. And so it's fundamental for us to try and fix this. Whatever decision we make, we think it will have a positive return on our performance. But it's likely to take a little while yet.

That's helpful. Thanks a lot, Ron.

Robert McCarthy, Robert W. Baird.

Good morning, gentlemen. I wonder if you could -- we could dig into Demag's results a little bit more and how they influence you. First, can you give us a dollar number for their contribution to inventory and working capital at the end of the quarter?

Why don't you move on and I will come back to you?

All right, while you're looking that up, Phil, the first half of the calendar year for this company featured, I think, something like 25% to 30% year-on-year order growth, but it looks like the comparisons get more difficult in the second half. And so I wonder what you saw in the -- with a view of the full third quarter, did indeed their new order bookings slow down, at least as measured by percentage growth? And if that's the case, was it mostly in equipment, or was it evenly spread across equipment and service?

Are we talking about Demag AG?

Yes.

Okay.

Let me answer the first question. They are a little more than $400 million of working capital, Robert.

Okay.

All right. And I think what we would like to say at this stage is this is a company that is in its quiet period in Germany. I know [Isrowan] is on the phone, and Ron is on the phone, and he could probably give you a feel for the market conditions, but I think other than what's been published and is public information as reported in IFRS, until we get out our 8-K, next week, we really don't want to give any more detail on that, or not comfortable giving any more detail because it's a complicated subject. We want to report in US GAAP, and we have an obligation to go about reporting in US GAAP. And then to provide that all the way back to the beginning of 2010, which we will do, okay?

But so to give you any more information other than what's out in the public market, I think, Robert, would -- we really are not ready to do.

Okay, Ron. Than to follow, in terms of some details that might help all of us, can you break down the nonrecurring items impact on segment operating profit for us? In other words, how much of the unusual items affected Construction versus the rest of the businesses?

And also, could you give us a reminder maybe on how much of their respective segments are accounted for by the off-highway truck business and Construction and the mobile crusher business and Material Processing?

Okay. I will do my best on that.

Give me a minute on the other one because we've got it in the press release.

On what other one, Phil?

Oh, the special items.

Okay.

George, what percentage of your business is rigid or an articulated truck business?

It would be around 15%.

Around 15%. Okay that answers that.

And the mobile crusher piece?

Mobile crushing is what percentage of your business, Kieran?

Approximately 30% to 35%, Ron.

Okay. And in Construction, we had a lot of pluses and minuses in the Construction business to report and reporting at 6.3% or $6.4 million loss.

What I would say there is that $6 million loss probably represents how the business did in the quarter.

And what -- other than the fact that there were a few one-time items that Phil has called out, there were some pluses and there were some minuses.

The problem in the Construction business right now is a road building business in North America that has not come back at all; we're losing money. The Brazilian business has lost money in the quarter, but we expect that to change and improve. Its loss making in the quarter was really a result of a slowdown in the government financing, but that's being resolved. And our compact equipment business has had some production issues, and that's being addressed. Furthermore, we've got too high of an SG&A level in that business, which is why I've said we are taking out an entire layer of management, which George has done. So I don't know if I can give you any more detail than that. Or George, do you want to add anything more to that?

I would say, Ron, I would say you've covered it.

Ron, all I'm trying to get at is if we take out all of the unusual items that were called out for the quarter, did the business make money or not? And I guess the answer is no, and the size of the loss was pretty close to the reported number.

That's what I would say. That's exactly what I would say. But I would also quickly come back and emphasize that is this is the reality we are dealing with. and we're not going to grow our way out of the problem. We're going to fix it by taking cost out and structure out and by selling -- not selling in markets where we lose money.

That's loud and clear. Where are those markets, Ron? Can you be any more specific about it?

I'd prefer not to be more specific about it. We do have competition.

Okay, thank you.

Rob, we're just answering your question by segment on the OP; Material Processing had a $2.2 million impairment regarding one of our facilities. Construction is a little more than $1 million, net of some settlements of litigation and prior equity issues and restructuring. And Material Handling and Port Solutions, it's roughly a little more than $2 million in that segment. It rounds to $6 million.

All right. Thank you, Phil.

Ann Duignan, JPMorgan.

Hi, good morning, and Ron, thanks for the words on John McGinty. I think we all concur.

Can you just give us a little bit more color on the slowdown in the mobile Material Processing businesses -- where, what -- just a little bit of deeper dig on that business, please?

Sure. Ann, I'm just -- I'm going to ask Kieran Hegarty to give some perspective on that because he's pretty on top of his business. I think he can give you kind of a sense of what's happening. Kieran?

Yes, Ann, just to give people a bit more flavor, mobile, in terms of the mobile processing, both crushing and screening, it probably makes up about -- approximately 75% of -- or sorry, 70% of Material Processing revenues, with the remainder being made up by stationary process and equipment. All of that 70%, approximately half of that, would be mobile crushing and the other half would be screening.

Typically a mobile crushers -- the typical retail value would be about triple the price of a screen. And probably the biggest sort of trend we've seen in the last couple of months is probably a reluctance for customers to finance.

For example, in North America, our diggers would ramp the equipment. Typically a sale process would be ramping the equipment to sell it. And what we're finding is a reluctance on many purchasers. We believe it's out like to just the uncertainty out there, many purchases to convert that ramp into a sale. And we're seeing that more on the crusher. We believe it's simply because the capital acquisition cost is about 3 times the price of the screen, and we're starting to see it there.

We are also offsetting some of that decline and demand in crushers by increased mining demand for crushers, but that typically comes from our larger end crushers. So we're kind of seeing a mixed picture, but certainly the decline is probably on our volume end, which tends to be used by the contractors.

That -- I'm not -- and again, we're seeing also the same effect in Europe to be quite honest in the sense that there seems to be a reluctance from purchasers to finance larger crushers. Maybe on screens, they tend to finance out of their own cash flow as opposed to bank finance. So that's the main issue.

Okay. All right.

Okay. So customers, Robert, to summarize, customers who would normally purchase this equipment for aggregates, maybe road construction related and housing related, again, in both regions, is that the right way to think about it?

It is, but what we're seeing is probably strange is the screening demand hasn't really slowed right? Which is -- I think the demand is there, right; there is a reluctance to finance -- typically when they buy a crusher they finance it, and there appears to be more reluctance to finance the asset because of the price of it. So I'm not sure if that's directly related to the finance climate for what is a better word. But we still believe the underlying demand is there, and that's seen -- that's primarily seen in the high utilization that those dealers usually have this product in [rampular] expansion at the moment.

Yes. And historically, we might have just continued to try and push product into our distribution channel, and we're not going to do that. That's just not our plan. We don't think that's a smart thing to do.

So that's why I said it's difficult for us to tell right now whether this is just a pause related to some uncertainty or a real issue relative to end demand. I think it's more of exactly what Kieran said, some uncertainty, some financing reluctance, there's enough product in the channel to do the job, and we will see how 2012 begins.

Okay. That's great.

And just to follow up on Demag then, could you just walk us through, in a normal year, what the seasonality might look like? It does sound like from Q3 that Q3 is significantly higher than Q4. If you could just give us some sense of, as we look into 2012, the quarters, how should we think about the seasonality in the business?

Okay. I will give you my sense from having looked at the business, but then I will ask [Ice] to correct me or reinforce what I've said.

Typically, our third quarter, which is July through September, or historically the Demag fourth quarter, is the strongest quarter of the year. Okay? And that is as we presented in the press release because the industrial part of their business is probably two-thirds of the business and there's a lot of factory shutdowns that take place in the summer. I can't give you a percentage. I'm not sure we can exactly articulate a percentage, but it is the strongest quarter.

And typically, our fourth quarter, or historically the Demag first quarter, is their weakest quarter of the year, with probably our first and second quarters being somewhat similar. Ice, do you want to -- is there anything you would add to that?

Ron, no, I don't think so. You have covered it perfectly. Maybe it might be a hint that if you want, if somebody wants to have a look in history, I can't see that this year we have a totally different development, completely different development, than the other years. But no, you have covered it all.

Okay. And the history is public, so that's just out there. And it won't change from US dollars or euros, looking at it that way. Okay Ann?

Okay, thank you. I'll get back in queue.

Andy Casey, Wells Fargo Securities.

Thanks and good morning, everyone. Question on the Cranes business and your comments about that being somewhat mixed, and a competitor's recent comment about some sluggish demand prospects for the next 12 months. Ex the port crane business, are you seeing any evidence of either a North American rough terrain customer order growth moderation or -- and then an attempt rather to square crane market dynamics with earth moving type producers? Are you seeing any slower regional order activity outside of China?

Okay. I'm going to turn it over to Kevin Bradley in a second, but just to frame it, Andy, historically, the Crane product range usually is a 12 to 24 month lag from the earth moving products. So they usually go down after the earth moving products slow down and pick up after the earth moving products pick up. So, Kevin, do you want to comment on that?

Yes, I would say overall, order intake is pretty stable, right? Actually I think the quality of the order intake is actually improved, from my perspective, specifically on [RTs] in North America, what I would say is changing slightly as we are seeing an increase in export of that product, particularly into Latin America and even into some parts of Europe for global, to supply global demand. But right now we're pretty comfortable with the intake level, and the quality or mix actually looks improved.

Okay, thanks. And could also, if you could, comment on channel inventory for both new and used outside of the Port Cranes?

Yes. Okay, channel inventory I think is in a good place for the Crane business. It's -- we've gone through the major adjustment period following the 2009, 2010 period where I think inventory has gotten to a level where we are into replacement demand. Probably a little bit too high inventories still in Europe, in some of the channels, but beyond that, I think inventory is in pretty good shape. Kevin?

No, I would agree. I think, to be honest, our distribution partners have been very disciplined since the crisis with a lot of actual influence from the banking community, who won't let them be undisciplined. The reality is, channel inventories are not an issue for us. We're seeing much more orders based on real demand and almost pass-through-type sales, especially as you get into the bigger cranes; there's no one that's really stocking big cranes. It's all based on real external third-party demand.

China, on the other hand, is probably an entirely different story, but our position in China probably doesn't warrant much conversation for us here, other than the big cranes required are imported in China that we import, and that's still showing some pretty positive signs.

Yes, I would say what Ron said earlier is very true. We don't like -- we want healthy distributors, right? And our job is to make sure that they don't do things that are going to put them in harm's way from a financial health perspective. So we like to base our capacity on real third-party demand, and the channel is really just a pass-through.

Okay. Thank you very much.

Andrew Obin, Bank of America-Merrill Lynch.

Good morning. Just a question, or just to follow up because I'm not entirely clear -- as I look at core operating profit for sort of heritage Terex, Demag issues are aside, just directionally, which businesses are going to be up in absolute operating profit versus 3Q, and which businesses will be down based on your guidance? Because I'm just not entirely clear what is happening with the core Terex business. I apologize for that.

In Q4, you're talking about?

Q4 versus Q3, just sequentially, right, because I'm still not clear how the numbers work.

Okay.

Andrew, the -- relatively speaking -- I'm not going to get into real specific numbers here, but I would expect that the Cranes business does come down a little bit from the performance in the third quarter. Construction is improving, again, relative to cost performance and the mix of products that are coming in the fourth quarter. AWP -- relatively flat, order of magnitude, and material processing is actually an improvement.

Terrific. And just talking about free cash flow for the fourth quarter, what are the major buckets that will drive positive free cash flow in Q4?

Well, the -- getting to the 27% of working to annualized sales will drive about $140 million of working capital improvement. And the rest will really be the profitability of the company. I don't expect a lot of contribution from customer advances, which we kind of calculate in there.

The other area would be CapEx, which would be a slight drag. We've done $60 million through the third quarter. We will probably have order of magnitude $20 million to $25 million of CapEx with Demag AG included.

So there's not going to be a big shipment of finished goods in Q4, right? It's just pure working capital?

Yes. There will be shifts of inventory. The question is if we do it early enough to get out of receivables, so that's why I've got to kind of look at the total working capital. There will be movement, obviously, through inventory, and that's one of our main drivers. It's just can we get it out fast enough to collect.

A lot of the big shipments are on what are credit terms or progress payments, so like the Port Equipment and the large crawlers, so they (multiple speakers) in the period.

But not just getting it out. It's getting it out and keeping it out.

Yes, the process changes. It's not a one-time event on finished goods. Raw material is the area of activity of shutting down that incoming so we don't have it around if we don't really plan to build for it. And we're taking some pretty significant action there.

Okay, terrific. Thank you very much.

Seth Weber, RBC Capital Markets.

Wanted to talk AWP's and the -- kind of the situation with the independent rental guys. I assume the issue there is financing, so do these customers really have the appetite or the ability to absorb the price increases that you are talking about? And I assume that the bigger customers aren't paying the 4.5% times 2 that you've put through so far.

And I guess the second part of that question is, are you going to use -- start to use Terex Financial a little bit more as a lever to help those guys out?

Phil, you'd started the last question and then we'll turn it over to Tim.

Yes, Terex Financial Services, I would say that in the third quarter, globally, we facilitated about $130 million to $140 million of financing for our customers. The balance sheet went up maybe $5 million to $10 million. So I am consciously trying to use other people's money as opposed to our own.

Now there are some situations where it may make sense for us to participate if we gain share, for example, or restructure a situation that may be some of these independents in particular such that we improve the collateral position and get more share. We have done that in the AWP business, specifically within these independents to facilitate transactions, so again, going for growth there.

We are not being reckless and we are getting collateral positions improved.

There is a hesitancy to finance from third parties -- some of the independents, again, mainly looking at the credit statistics that they have in place. But we work through the ones that we want to do business with and we are taking calculated risk (multiple speakers).

On our delinquency, our delinquency rates have been acceptable, have been not particularly remarkable.

Tim, do you want to comment on the overall health of the independents?

Yes. Virtually every customer we talk to, whether it's a big guy or a small guy, is experiencing very high utilization rates and improving rental rates. And I think you've seen that in some of the public releases that have happened over the past couple of weeks for the larger guys.

That trend is consistent with the medium-sized players and even some of the smaller ones. It's true in North America. It's true in Europe, but to a lesser extent. And I think that the uncertainty in Europe is having a little bit of a drag on things, but it is not materially affecting our business to date.

I would also say that the big players tend to have a bit more visibility out into the horizon and maybe a bit more sophisticated in their fleet planning, and so they are coming to the table sooner than some of the independents are to make those buys.

I think the trend for independent purchases is beginning to change. We saw a slight shift in third quarter versus second quarter in terms of what percentage of our business came from the larger guys. I think the fourth quarter will probably mirror the third, but as we get into next year, we are hearing more and more from some of the medium and smaller guys that they recognize that the business is strong and going to stay strong. So I think that's a healthy sign for us.

On the price piece you asked whether or not we're going to get the full price increase. I think there will be certain cases where we will get virtually all of it, and there will be some cases where we get less than all of it, but we are being very vigilant in terms of holding the line on what we need and what we expect.

The reality is, material costs have been a big problem for us this year, and most of our customers understand that. And frankly, they are getting price in the market and so, therefore, us getting price is something that they can understand.

That's very helpful. Thanks. Could you just remind us what percentage of the business goes to the large national guys versus the medium or smaller independents?

Yes, I know it by region, but I would have to do the math on -- to give it to you in aggregate, so --

(multiple speakers) North America.

Yes, it tends to be about half the business in North America. Historically it's been about half the business in North America. This year it's been somewhat more than that, but traditionally I would say it's about half the North American business.

Jerry Revich with Goldman Sachs.

Ron, Demag management has had a 10% margin target or about 8% if we include the higher depreciation that you're going to be looking at now that you own 80% of the business. Over what time period do you think you can get to that target? And also, can you just give us an update on how we should be thinking about timing on the transition of the Terex Port Crane business to be operated by the Demag management team? Thanks.

Okay. First of all, nothing is really going to be happen until we complete the domination agreement, and I just want to emphasize that -- that we completed a business combination agreement when we agreed to purchase Demag Cranes AG. We're going to live within the confines of that overall agreement, and that we are targeted for a shareholder meeting in February of 2012. And that's when we expect a key step for the domination agreement to take place. And for -- on a followed basis, that should get done a few months thereafter.

I think the Demag public company, Demag AG public company, has very specific and very clear guidance out there on a multiyear plan on an IFRS basis.

The translation from IFRS to US GAAP is somewhat complicated, which is why we are going to put out the 8-K/A next week in order to give clearer -- and as required by the SEC, to go back to 2010. So that ought to provide some specificity there.

I think all Terex businesses inclusive of Demag Cranes AG are going to have a minimum of 10% operating profit guidance, okay, at some point in the future. How fast we get there is going to depend upon specific conditions and the specific situations.

The Port Equipment business we have at Terex, we have made a fundamental commitment to get that business profitable irrespective of any combination with Demag Cranes AG. We're turning the corner in the fourth quarter. The changes we have made will get that business profitable in 2012. Following domination, there's likely to be a combination of management teams, but exactly when that happens I can't say.

Okay, thanks. And can you comment broadly on interim tier 4 that will impact the smaller product lines early part of next year; how comfortable are you with your ability to price ahead of those cost increases, and in terms of any factory transitions that we should be thinking about or changes in production schedule because of the transition as we think about '12?

One of the businesses that's most affected by the interim tier 4 is the Construction business, so George, why don't you comment on that because I know you are deeply engaged in this.

Yes, thank you, Ron. Jerry, what we're seeing is that we are having to, as Ron mentioned earlier, basically set up two production processes to deal with this through next year. Depending on the size class of the machines, we have pre-bought engines to help bridge us as the Tier 4 engines do come in. We've been working plans constantly to be able to meet the expectations from the regulations and also supporting our developing market customers with the existing tier engines. So it's just adding another layer of complexity and also working capital. I don't see a significant impact to our customers, but it is sure causing a lot of extra work and effort within our manufacturing facilities.

And George, can you comment on the pricing point on a percentage basis for some of these product lines? Is it going to be pretty meaningful increases? Are you confident you can pass them through to your customers once you're out of the tier 3 engines?

Yes, depending on once again the size class and the timing, we've been very upfront with our distribution partners and end customers of what the impact we generally see. Some are in the range of 8% to 10%. Some are as high as 15% to 18%. And our expectation is that we will have to move that on to the marketplace.

Thank you.

(Operator Instructions). Rob Wertheimer with Vertical Research Partners.

So, AWP's look to be trending very, very positive. Just one quick question -- is there any chance of a pre-buy in the backlog just given the price increase? And did the price increase come because you had seen more favorable trends on not having to do some of those discounts to get the bigger deals? Thanks.

Tim, do you want to answer that?

Yes, just to be -- make sure I'm clear on the question, Rob, you're asking whether there is some pre-buy in the backlog?

Yes, so whether people have heard about the price increase and that's why yours trended up.

Yes. I think there is some pre-buy for 2012 in the backlog from some customers that have tried to get in front of, frankly, availability and lead times. So we do have some pre-buy in there. It's not -- it was not because of or trying to get in front of the pricing. It was more a leadtime question. So I think as we look at where we are, we feel like we've got a pretty good head start on 2012. And customers are reluctantly -- but accepting the price increases that we've announced.

I think, Tim, we can say with -- in a pretty straightforward basis that deliveries in 2012 will carry higher prices than 2011.

That's absolutely right.

Thanks, everybody.

Charlie Brady, BMO Capital Markets.

Thanks. Just in regard to the AWP business and the price increase hitting in the beginning of the year, when would you expect -- given that you've got a chunk of backlog, maybe a little pre-buy in there, when do you think you get the impact of the new price increase? So are we looking at kind of a back-half impact to when the costs get fully recovered? Or does it happen sooner than that? And then another question would be, what's your guidance on the tax rate in Q4? Thanks.

Okay. Charlie, what I would say -- and Tim can correct me if I make a mistake on this -- is that we're going to get higher pricing from day one in 2012. It may be that some of that higher pricing is our June price increase that finally is taking place on 1 January for some customers, or it may be some that actually get a portion of both right increases. But there is no -- all units that we ship will be at a higher price level in 2012 than 2011. I think that's accurate, Tim. Am I not correct?

That's 100% accurate.

Okay, Charlie, does that answer that question?

Yes, that does, but I'm assuming that as we go through the year, though, that that profitability profile, as the second price increase kicks in for all of the shipments, you ought to see more improvement more in the back half even than you would in the first half, correct?

What I would say, Charlie, is we had some price realization in the third quarter. We're going to see more price realization in the fourth quarter. And in the first quarter, we will continue to see additional price realization in the first and second quarters of next year. So it is a first-half impact, which started really in the third quarter of this year.

That's helpful. Thanks. And then a question on the tax rate in Q3?

The rate we would expect in the fourth quarter, based on how I've done the guidance without that inventory step-up should be about 47%. And it's mainly impacted by losses not benefited on the rate, and the non-tax-deductibility on some of the full-year impact on the acquisition-related costs. So, that's an anomaly from some of the things that we've had this year.

Thank you.

Joel Tiss, Buckingham.

Thanks for staying on the line. Just trying to be fast here -- the mix in Material Handling and Ports between OEM and aftermarket, and also, just from a philosophical standpoint, can you give us a sense of flow in 2012? I'm not asking for guidance, but just is it logical to think that the first half might be a little bit off to a slower start than we would normally see? Thank you.

Overall, Joel, for the company or --?

Yes, when you put everything together and all the puts and takes and inventories etc.

Yes, I think what we will see, in 2012 generally is a strengthening -- second quarter is usually our strongest quarter of the year, but I would expect that to be maybe not the case next year. It may be the third quarter. It really is going to depend because of the impact of Material Handling & Port Solutions. So unlikely that it will be the same trend as we have historically had.

And first quarter is a little bit uncertain at this stage. It's going to depend on some crane deliveries and how we get the year started in our Construction business.

The mix between aftermarket and -- I -- maybe you could just give kind of a general sense as to the mix between what we call aftermarket, what you've called historically the Services business versus the finished goods or the new equipment?

You mean -- Ron, just as a question, you mean for our overall business or just for industrial Cranes or Port?

For the overall business. For example --

Overall business, we have somehow some roughly 50% industrial Cranes, 30% Services and 20% Port.

Right. So the Services represent about 30% of the total enterprise, roughly.

Thank you.

Andrew Kaplowitz with Barclays Capital.

It's Vlad Bystricky on for Andy. Most of my questions have been answered -- just a quick question on the Cranes segment, where you mentioned seeing some improving demand for tower cranes. Can you talk about where you are seeing some of that demand?

Probably mostly in developing markets. Steve, do you want to just comment maybe a little bit on that?

Yes, exactly, mainly developing markets, successes in Middle East, Latin America. And turning to 2012, we'll start focusing on some key markets in developed markets in Europe specifically, so we will target some of those that are coming back.

Okay.

Great. Thank you.

All right, we've got two more questions that we will take because I know it's been a long call for everybody.

Alex Blanton, Clear Harbor Asset Management.

I'm going to be fast. I was off for a minute so you may have covered this, but could you give us some details on the component cost increases? Is it both raw materials and purchase components? And why would those costs for Aerial Work Platforms be going up more than for other similar machines?

Well, Alex, first of all they -- there's not much that I would say is that similar between an aerial work platform and other machines other than the fact that they both depend upon steel.

The component basis for AWP is pretty discrete. You know, you've got some clear suppliers that kind of dominate this product category, and I think those clear suppliers have seen the strength of the category and the consolidation that has happened, and I think they have taken some pretty substantial price increases. And I suspect that has been true to both ourselves and the orange and beige.

And so I think our job now is to push back a little bit where we can, and to benefit from some of the steel reductions that we expect to happen to get further benefits.

North American steel I think has been up more than European steel, and that's been a major contributor to what's happened to our raw material costs there.

Okay. All right. So you and JLG essentially competing for limited supplier capacity in certain specialized components -- that go only into AWPs, is that it?

Well, primarily, yes; and what I would say with that is that's a good news, bad news story. It's a good news story inasmuch as we've both got to get pricing from the marketplace.

Right.

One thing I would add, Ron, is that during the recession, when we slowed our demand to 10% of what it was before, many of those suppliers that were supplying us went out and said I've got to survive so I'm going to go find new customers. And they've diversified their customer base, so when we go back to them and say we want to buy the same materials that we wanted to buy before, they are saying well, I'm selling to other industries now as well, so I'm going to charge you a higher price than I did before. So that's also playing into this as well. They're discrete products that are serving this product space but the suppliers have diversified somewhat as well.

Okay. Thank you.

Matt Vittorioso, Barclays Capital.

If you could just talk about the cash that you've got on your balance sheet, it looks like you're going to generate a bunch of cash in the fourth quarter. I know that your credit agreement allows for more flexibility around the use of that cash once you get leverage down to I think 3.75 times. So maybe just give us some of your thoughts on what this big cash balance might be used for.

And then secondarily, I don't know if you can provide the EBITDA that your credit agreement would have you at today pro forma for all the acquisition activity, etc. Thanks.

I'm not going to provide the EBITDA for the bank facility. It's a separate calculation. but I think you can read our public document to kind of figure out -- the credit agreement is public from that standpoint.

From a cash utilization standpoint, I've previously mentioned that we have a large tax payment in the first quarter of 2012 related to the sale to Bucyrus of our Mining business. And since that was largely in Germany last year, the timing of the cash outflow is in the first quarter. And that will range from about $160 million to $170 million. So I have to put in the piggy bank an amount to cover that in the first quarter.

In terms of the leverage where we are at and the 3.75, we are unfavorable to that in the third quarter. Again, I won't give a specific amount, but it's order of magnitude a little over 4 times.

And then, the other restriction on use of cash that I mentioned in the release, the Demag Cranes AG facility is used for their operating needs until we have a domination agreement in place. And the effectiveness of that domination agreement will basically cause that credit facility either to go away or we'll have to replace it -- would be the other nuance regarding the ongoing potential cash needs that we have.

So at this stage, and I'm saying 3 to 6 month kind of timeframe, I will keep the cash as we go into next year to watch the demand that we have coming in and look for opportunities is necessary to repay debt if we have the opportunity.

Right. No one should interpret that we are in active hunt for acquisitions.

Right.

Okay. No one should interpret that. We have done a small bolt-on in Brazil. We have a small JV investment in Russia that is planned, but beyond that, no one should walk away thinking that our priority is anything but balance sheet improvement.

And the other nuance, given we have 82% of Demag Cranes AG, we would be required to -- if we take out the remaining 18%, obviously, that would be another cash utilization that we would have and that would be our desire.

Okay. And if I can sneak one more in, just around the construction, and I guess specifically road building, I know awhile back, you'd talked about either fixing road building and I think the Construction segment in general or shutting it down or selling it. I cant remember exactly what you had said. But road building just seems like you've been waiting for a while for that to come back and it's not materializing. Any consideration to either sell or shut that down?

Well, I think evaluating strategic alternatives on a business is something you have to do pretty regularly. I don't think now is the right time to do that. I think what we are doing is basically strapping the business down, getting it in a position where it is not a drain to the company. And then once we get that in that shape, then we will look to see what the improvement prospects are. But our first priority is to kind of get it into that shape. And I think we are still -- we've still got a little work to do there.

Great. Thanks and good luck.

Okay, thank you, Matt. That should be it, Brandy?

Are there any closing remarks?

No. Thank you. Thank everybody for their interest in Terex, and please follow up with us as you need to.

This concludes today's Terex Corporation third-quarter 2011 financial results conference call. You may now disconnect.

Thank you, everybody.