Terex Corp (TEX) 2012 Q3 法說會逐字稿

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation third quarter 2012 financial release. 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). I would like to turn the call over to Ronald DeFeo, Chairman and CEO. Please go ahead sir.

Thank you. Good morning ladies and gentlemen, and thanks for your interest in Terex today. On the call with me this morning is Phil Widman, our Senior Vice President and CFO, Tom Gelston, Vice President of Investor Relations, and participating on the call and available for your questions is our leadership team, including our business segment presidents, and geographic representation from China and the developing markets. As usual, a replay of this call will be archived on the Terex website at www.terex.com, under Audio Archives in the Investor Relations section. I will begin with some overall commentary and highlights. Phil will follow-up with a more detailed financial report. And I will provide some summary comments before we open it up to your questions. And as normal, we would like to request that you ask one question and a follow-up, in order to give everyone a chance to participate.

We also plan to limit this call to about an hour today, and thank you for your understanding. For this call we have prepared a presentation which will guide our commentary. This is available on our website. Let me begin with the forward-looking statement on page two. Please review this statement as we will be discussing forward-looking information and nonGAAP measures relative to Terex's performance today. So turning to page three. We are generally pleased with the Company's performance in the third quarter of 2012. On an adjusted basis we have achieved an earnings per share of $0.62, and a reported EPS of $0.27. The difference is primarily related to one-time costs associated with the repayment of debt in the quarter, as well as other costs associated to realign production in a few of our businesses.

We remain focused on our 2012 objectives to improve our margins and generate cash. Operating margin increased to 7.2%, up from 2.9% in the third quarter of 2011 as reported. Price realization and cost containment continued to be our focus, and we have made substantial progress throughout the year in these two areas. Free cash flow of $176 million in the quarter and $415 million year-to-date, reflect our intended progress for the year. However, we still have additional cash opportunities in the balance of the year. Next, our 2012 EPS guidance remains unchanged. We expect $1.95 to $2.05 per share on an adjusted basis, with approximately $7.5 billion of revenue. Clearly there are some near term challenges reflecting the uncertainty in many markets.

This has caused orders to slow in certain of our segments, and we have made or are making appropriate adjustments. Nevertheless, the year has developed moderately better than we expected going into the year. And as we look forward to 2013, we do anticipate moderate growth and stronger EPS, and returns on capital for the Company overall. We will continue to stay focused on the things that we believe we can control, and adapt for those that we cannot. Turning to page four, a few more comments about our market and our business environment. In the third quarter of 2012, net sales by geography for Terex, reflected the diversification that we have attempted to achieve over many years of our revenue base.

North America represented 35% of our net sales. Western Europe 27%, Asia 18%, Latin America 7%, and the balance of the world of 13%. We continue to grow in North America, and our EU sales actually grew 6% year-to-date, excluding the positive effect of the Demag Cranes AG acquisition. The rest of the world, Australia, and the Middle East remain strong. And the BRIC countries, the BRIC markets are clearly mixed in performance and outlook. As we look at our net sales by segment, aerial work platforms represented 29% of our total revenue, construction 19%, cranes 22%, and MHPS and material handling, actually I want to correct that. I think construction represented 16%, material handling and port solutions 26%, and materials processing 8%.

The near term market demand for these businesses is positive for AWP, negative for construction, positive for cranes and I am sure we will discuss that. Positive for material handling and port solutions, and slightly negative for materials processing. It is with this market backdrop that we close the year and prepare for 2013. I will come back and summarize, but I would now like to turn it over to Phil, who will go through the individual performance measures on an adjusted and reported basis for the quarter. Phil.

Thank you Ron, and good morning. As we turn to slide five, I will review our financial results for the quarter. During times of market uncertainty, we continue focus on those items we have more control over. Margin improvement, cash generation, the integration of our MHPS business, and improving our capital structure. We have made considerable progress in all of these areas as reflected in the third quarter results.

Overall net sales for the quarter increased 1%. However, when excluding the impact of the Demag Cranes AG acquisition, which was included from August 16th of 2011, net sales decreased approximately 8%, of which 5.4% relates to foreign currency fluctuations when compared to the third quarter of 2011. Our construction and material processing segments declined most significantly. Gross margin as adjusted, expanded 4.6 points to 16.4% in Q3 2011 to 21.0% in Q3 2012. Reflecting our focus on pricing and cost containment. We continue to remain vigilant on SG&A, with the increase and spending from 2011 levels related primarily to the inclusion of the Demag Cranes AG business for the full quarter.

Adjusted income from operations for the quarter of $140 million, or 7.7% of net sales, increased close to 80% when compared to Q3 2011. Net interest expense, although up when compared to prior year, related primarily to the acquisition of Demag Cranes AG in Q3 2011, and the issuance of 6.5% senior notes in March of 2012, and is in line with expectations for the quarter. The benefit of recent refinancing actions will have a positive impact as we head into Q4. Other income which is primarily driven by foreign currency movements, and difficult to forecast was in line with expectation and current run rates.

The lower effective tax rate is primarily attributable to the year-to-date true-up of jurisdictional mix of income, and reductions in the provision for uncertain tax benefits. The discrete items had a positive effect of approximately $0.04 per share in the quarter. We expect the 2012 full year effective rate to be approximately 34%, as the weighting of losses not benefited will have a larger impact in the fourth quarter rate. For the quarter, earnings per share as adjusted was $0.62, compared to $0.30 in 2011. I will walk through a bridge detail in the adjustments in a moment. Networking capital as a percentage of annualized sales was 30%. An increase from the 27% reported in Q2 of 2012. The increase was largely due to the seasonal decline, and softening demand in some segments. Networking capital as a percentage of annualized sales did improve from the 32% reported in Q3 of 2011.

Return on invested capital of 7.7% declined sequentially, as the average invested capital includes the acquisition related debt for the full trailing 12-month period. Our profitability continues to be the main improvement factor when compared to the prior year period. In the Appendix we have included pages for individual segment performance. I will briefly comment on each of them at this point.

The aerial work platform segment continued to post strong results. Net sales increased approximately 17%, or 21% excluding the impact of currency fluctuations. Driven primarily by replacement demand in the North American rental channel, as well as moderate growth in our European and Latin American markets. We do believe there are some early signs of fleet growth in North America, as a few customers have discussed location expansion in their 2013 planning. Operating margin for the current quarter was 11.3% compared to 6% in 2011, as improved price realization as well as leveraging the SG&A spend levels, led to incremental margins of over 40%.

The market environment for the construction segment remains negative. Net sales for the third quarter of 2012 decreased approximately $105 million, as end market demand for many of the segment's products have declined significantly. Although the management team has been aggressive in decreasing production levels in the cost structure to be aligned with the current market demand, we still reported an operating loss for the period of $8.3 million, of which $1.3 million related to downsizing actions taken.

The crane segment net sales increased approximately 2% after adjusting for foreign currency movements. As the Company continued to see strong demand from North America, Australia, South America, and the Middle East, while its remaining markets have stayed relatively stable. The real story for cranes is about the margin expansion it has achieved. On effectively flat sales, the operating margin doubled to 12.1% in the third quarter from 6% in 2011. Approximately 4% came through improved price realization and product mix. And the remaining 2% from cost reduction actions the management team aggressively implemented in 2011.

As of July 1st our material handling & port solutions segment includes Demag Cranes AG, The Terex Port Equipment, and our Reach Stacker businesses. All numbers presented have been recast to reflect this management reporting change. MHPS sales for the quarter increased approximately $86 million compared to Q3 of 2011, primarily driven by the inclusion of the Demag Cranes AG acquisition for the full quarter. From an earnings perspective we are starting to see the benefits of the integration and cost reduction actions, as operating margin improved to 5.7% in the quarter, excluding the charge of $6.9 million related to the production realignment actions taken. MHPS EBITDA of $34.3 million, accounted for roughly 21% of the total Company in the third quarter, largely driven by strong material handling results.

Material processing net sales decreased in the quarter approximately 12% as continued softness in Western Europe and India for mobile screening products, was partially offset by strength in North America and Australia. Although experiencing a drop in sales. operating margin for the quarter increased to 10.1% from 7.2% in 2011. Reflecting improved price realization and cost discipline. In particular during the periods where we have been experiencing softer demand.

Turning to page six, we have displayed the results adjusted for certain items for Q3 2012. A similar presentation for Q3 2011 is included on page eleven. Results for Q3 2012 were impacted primarily by three items. Costs associated with the early extinguishment of debt, certain downsizing costs related primarily to our MHPS and construction segments, and a change in the statutory tax rate in the UK. The column labeled debt reduction primarily reflects the $49.9 million of expense associated with the redemption of the Company's 10.875% senior notes, and the purchase of 25% of the Company's 4% convertible notes. This had an impact on EPS of $0.29.

The next column labeled other items, reflects the downsizing actions implemented in both MHPS and construction of 6.9% and 1.3% respectively. As well as an adjustment for the change in the UK statutory tax rate that unfavorably impacted net income by $1.6 million. The impact of these three items on income from continuing operations was $7.4 million, or $0.06 per share. The combination of these items results in income from continuing operations of approximately $70 million as adjusted, or $0.62 per share.

As we turn to page seven and look at backlog, there are a combination of factors impacting the trends, such as product and geographic diversification, seasonality, and also the uneven nature of orders of some of our larger sized equipment or businesses that negotiate large contracts or annual agreements, such as Port Equipment, Large Crawler Cranes, and AWP. Starting with AWP, the fluctuation in backlog reflects the impact that large rental companies in North America have with respect to the timing of when orders are received. For the big North American rental companies late third quarter or fourth quarter is when negotiations generally happen for the following year.

In 2011 large recurring fleet orders were received in quarter three. In 2012 these similar fleet orders did not start being received until the fourth quarter of 2012. If you back out the timing impact of these orders backlog is essentially flat year-over-year, and the seasonal trend between Q2 and Q3 2011 and Q2 and Q3 of 2012 is consistent. Overall we remain confident in our outlook for this business.

The construction segment has historically been more exposed to the European region than several of our other businesses, with roughly 34% of the revenue in western Europe. And the overall uncertainty in that region is reflected in the slow down that we are experiencing. In addition, the truck business and the material handling business, which is closely tied to scrap metal prices, continued to remain soft. In the crane segment, the decline has been driven by the larger crawler and all terrain cranes, where the uncertainty surrounding certain European macro economic factors, including capital markets tightening and declining government spending, has had a negative effect on these products.

However, we are encouraged by improving floatation activity, and the enthusiasm surrounding our fourth quarter new product introductions. Our focus on margin improvement has also put more scrutiny on orders in the backlog that get rescheduled, whereby customers may be attempting to extend prior year pricing. Lastly, 2013 price levels in North America, which have only recently been communicated, delay numerous negotiations into the fourth quarter.

MHPS backlog levels have remained relatively consistent over the past several quarters. Components of the large order related to the European Port projects announced during the second quarter of 2012, with deliveries starting in the second half of 2013 are starting to be included in the Company's reported backlog. Material processing segment continued to experience order weakness in Europe, as financing and end market demands are still challenging. Overall the dealer inventory levels are at historical lows in these businesses, and any uptick in the market will flow quickly to the factory.

Turning to page eight, the Company has recently executed several capital market transactions that allowed us to reduce our outstanding borrowings and opportunistically reprice our term loans. The annual benefit of these transactions is a reduction in interest expense of approximately $44 million. A portion of which will begin to flow through in the Q4 period. We will continue to look for further opportunities to improve our capital structure. Let me turn it back to Ron.

Thanks Phil. So a few summary comments. Terex remains focused on harvesting the intrinsic value that exists in our product portfolio, and dealing with our issues, so that we have a substantially stronger Company in the next twelve to twenty four months. We think that opportunity is quite strong. Our margin improvement remains a key priority for the Company. The price realization initiatives implemented across the Company remain on track. I think you can see this in our Aerial Work Platforms business and in our Cranes Operations in particular.

And frankly, in our construction business, despite the negative volume trends which are very substantial, we are not going to chase pure volume to the net detriment of pricing and value. Consequently, we will see a degradation in that business but it is very volume dependent, and you can be assured that we are controlling our costs. Next, as anticipated, the input and operational cost reduction initiatives are being realized in virtually all of our businesses.

We have greater leverage with our supply base today to achieve a more balanced input cost base. And we remain focused on managing SG&A levels on the ratios that we believe are proper for each of our businesses. We also have a better balanced portfolio of businesses which helps us offset weakness in certain products or markets. Cash generation remains a core focus for the Company, and will continue to be a primary area of emphasis.

We achieved free cash flow of $415 million year-to-date, and expect a solid fourth quarter in this area. Remember we guided in the beginning of 2012 a target free cash flow generation for the year of over $500 million, and we think we are executing against this pretty well. The integration of material handling and port solutions is on track or ahead of track. We indicated that we would expect to achieve at least $35 million in annualized savings, and we now believe we may exceed this in 2013. We should realize at least $10 million of savings in 2012 from our initiatives to integrate this business into Terex. The debt reduction and interest savings were anticipated, but I think we have been able to do somewhat better than we were planning in the beginning of the year in this important area. Our capital structure remains a primary focus for us for the balance of 2012 and 2013.

And as we look forward to next year, we believe there are some moderate top line growth opportunities, particularly in Aerial Work Platforms, Cranes, that is the mobile cranes, and material handling and port solutions businesses. And this growth plus other cost and management initiatives should result in meaningful improvement in earnings per share and returns on invested capital when compared to our 2012 performance.

Using external data to support our view, Rental Fleet CapEx for our products specifically, continue to indicate increased purchasing. The Architectural Building Index has returned to levels that indicate future growth. Engineering and construction firms continue to show improving backlogs. Housing in the US has seen a number of favorable trends pointing toward growth. Energy investment continues globally. And the existing fleets of equipment in the field remain quite old and in need of replenishment. At this time we are not prepared to give guidance for 2013, as we are yet to complete our internal budgeting process, but we anticipate we will provide greater insights when we report next in February.

So in summary, I believe you can derive from my preceding comments, the environment is one that presents many opportunities for Terex to be successful despite some short term challenges. Now I would like to open it up to questions. Operator?

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

Hi guys, this is actually Lena Yan in for Jamie Cook. My first question is, could you kind of quantify the magnitude of orders for AWP and the other businesses in the fourth quarter? And then just kind of like a little bit more detail on that?

I don't think we want to quantify the orders because some are still being delivered. We don't really report orders as we get them. But we're pretty confident that all of the customers that we would expect to give us meaningful orders are either giving us or have given us orders.

Okay. I guess for AWP then, what is the mix that you are seeing between the small and large players? I mean are you going to see a mix change, or is that going to stay the same going into 2013?

This is Tim Ford. Thanks for the question. If you look at slide twelve, you will see that the North American business represented 69% of Q3 sales. The large national accounts, those that we typically think of as those with a national footprint, represented about one-third of that overall business. Which means that the remaining two-thirds came from other customers and included our parts and service and used. We have seen a shift from the second quarter, the number of independents that have come into the market has substantially increased. Just as we thought it would when we laid out the plan for the year. We knew that the first half would be strong national accounts. Second half would be stronger independents, and that is exactly the way year is playing out.

Great. Thank you, guys.

The next question comes from Andrew Obin with Bank of America Merrill Lynch

Yes. Hi Ron, hi guys. I want to highlight that when you sold your mining business a while ago people pointed fingers at you. You look pretty smart right now, I just have to say that. Having said that, on aerials the question is, do you see a structural change as the big players are getting bigger, particularly your ROI incrementals were very good in the quarter, as the mix shifts back to more large players which is seasonally what is going to happen in the first half. Can you sustain these incremental margins in the first half of next year?

Thank you, Andrew, for the mining comment. We appreciate that. We are in the process of reshaping Terex to a more diversified company, a more balanced company and we have used the proceeds from the mining sale to do that. Onto your question about AWPs and big companies. Why don't you answer that, Tim?

Okay. Andrew thanks for the question. There was a study recently done by trade magazines that surveyed all of the major manufacturers and compiled fleet sizes. If you look at the impact that the top five players had in 2005 as a percent of the top 50 in terms of total fleet, it is about the same today in 2012. So the top five as a percent of the top 50 in overall fleet has basically remained unchanged for the last seven years. When I look across the market there are a number of players that are growing, but the overall pie has grown too. The impact that one or two or three customers have in the aggregate really hasn't made a material difference from a buying power standpoint. Certainly there are big players. We want their business. We respect their size and their volume, but nobody has yet built the kind of critical mass where they would be in a WalMart type position in our industry.

So you think these incrementals we have been seeing over the past couple of quarters are sustainable?

The incremental margins Andrew, that we achieved this past quarter we actually pretty darn good. How we achieved the incremental margins for 2013 I think will be good, but I don't think they will be as good as what we did in 2012. Simply reflecting, rebalancing between cost and input costs, and absorption of our factories, et cetera. I think we will good incremental margins but I don't think you are going to get 50% incremental margins. Phil you have a comment to add?

Andrew, what I would add to that, last year in 2011 we had started several price increases around the end of the second quarter and going through the periods here, so I would say the incremental margins you have seen in the last couple of quarters had comps that were reflecting lower prices. They have been great. We expected those. We telegraphed that in terms of our guidance for the rest of this year that we would be abnormally high for the total Company, because so much was on price. I would expect they would tend moderate a little bit next year, not be at the levels they were but still strong operating margins in AWP.

Phil, the price for AWP is going up next year, right?

Yes, pricing is going up 3.4% is what we announced. Our competition has actually announced 5% to 8%.

Thank you very much.

Next question comes from Ted Grace with Susquehanna.

Hey guys, how are you doing? Kind a question coming back to aerials. Tom, could you just speak to maybe the tone of negotiations and outlook between the independents and the large guys? I know you commented the third quarter played out as expected. But just as we think about 4Q, and then heading into next year. Maybe as a starting point if you could give us a flavor for the tone or sentiment you are picking up, more from the independent side. Because I think the large guys are a little more transparent?

Okay. Tim.

Okay, thanks Ted. I think as we look into the fourth quarter and planning for 2013, I think we are looking at a solid, maybe not spectacular, but a solid market going for next two to three to four quarters. Let me give you a few data points to support my confidence. First, fleet age, as Ron mentioned, has come down slightly but it is still elevated compared to historical levels. And used equipment, while we have seen a seasonal dip here recently, remain at pretty good overall year-over-year levels.

Second, as you have seen from the rental customers that are out there, rental demand has remained strong with solid utilizations. The customers we are talking to are optimistic about 2013, largely because of the green shoots, if you will, on home construction and ABI. Last, which I think is related to your question around the independents, Ted, is that financing is actually in the US in a pretty good place. A lot of North American banks that were strong in this business, that went away during the downturn, have actively reengaged. Customers are choosing ABL type financing over traditional leasing products. We think the market is in a pretty good place overall. So sitting here today customers are talking about 2013 in very confident measures. As we sit across the table and negotiate deals with our larger customers, I think we are both in a position where we feel the year is going to be good, and we will be looking at a pretty solid fourth quarter, first quarter, second quarter next year.

Most critical point is independents have access to capital. That is huge, because the demand is there, and the fleet age is there. The access to capital will actually play out the business, and I think if you look and I would add to what Tim says one additional comment. You still have very big fleets from 2005, 2006, and 2007 that need to be replaced. While it is difficult for us to predict quarter to quarter, I think at least for the next several years, the market environment in this product category can be confidently said to be strong, barring any kind of calamity that we can't see at this stage.

Sure. Is there any chance we can get Kevin to kind of opine on the crane side as well?

I think he has been waiting to do this so that is fine Ted.

Thanks, Ted. For cranes backlog is certainly an important metric. And I can certainly understand everyone's focus on it. At the same time, what we have a lot of visibility to that is not reported is the commercial activity. What I would say at the macro level is the level of commercial quoting activity is actually fairly stable to strong in most important geographies that we play in. That is one of the reasons that we feel very comfortable right now with where we are, and where we will be going forward for the next couple of quarters.

Now one of the things that is affecting the timing of orders is certainly we remain disciplined on pricing and the level of discounting that we are doing. We have talked about it in the past but we are continuing to reduce the level of variation on discounts, to make sure that we are delivering the margins that we have committed to. Phil mentioned a couple of structural items that have impacted the third quarter in particular. I would say on the small mobile cranes, which for us is largely the [Arkeys]. A couple of things there. One is the fact that we released our 2013 pricing fairly late in the quarter, later certainly than normal and that had an impact in the amount that we were able to get in terms of new orders for next year.

But we expect that to get filled in Q4 and that is already beginning. I would also remind everyone that we did add capacity in our two key plants in North America and in Crespellano, Italy for rough terrain crane demand. So we would expect the normal level of backlog to be shorter. We got to a point where we were not comfortable with what we considered to be an unhealthy level of backlog pushing things out six to seven months. We are much more comfortable in two to three months on that product line.

And by adding capacity we didn't add brick and mortar. We just added shifts or labor.

Correct.

Last thing. Just so we understand the modifications of the backlog, the removals. Can you give us a sense for the magnitude, and if you think that process is complete?

Let me just say the magnitude was important. I think the process is one-sided, in other words, some of it has gone away at least in the third quarter, it will be improved in the fourth quarter as we take orders for 2013. Understand that point. The second thing I think that Kevin will emphasize, and maybe we will get into this with some other questions. Is we are also introducing several critical new products, which carry with them very meaningful advantages, vis-a-vis competitors and margins. So while all of the analysts in this world like to talk about backlog, I have consistently said backlog is an indicator, it is not the sole indicator. We feel pretty good about where our crane business is at this point in time.

That is great guys. Thank you very much. Best of luck this quarter.

Thank you Ted.

Your next question comes from Schon Williams with BB&T Capital Markets.

Hi. Good morning. Congrats on the quarter. I wonder if we can just talk a little bit about the production realignments and some of the restructuring that has been going on in 2012, and maybe where that gets us in 2013. For instance what you did in material handling this quarter, is that already built into the synergy guidance that you have given, or is that above and beyond? Maybe if you could talk especially on construction or material processing. Does the restructuring within construction get us back to breakeven, does that get us back to moderately profitable? Just kind of help us think about where the restructuring gets us as we move into 2013?

Alright Schon, thank you. The material handling and port solutions restructuring really reflects the plan that we set out. When we acquired this business, we had the opportunity to review the business, and until the domination agreement was complete in April, we could not begin that implementation and integration process. We set out an opportunity to do a $35 million cost reduction effort.

That $35 million cost reduction effort, obviously had a pretty substantially higher internal target. We are actually realizing that $35 million, probably exceeding it. I think it will have a pretty nice benefit for the Company overall. We had targeted to offset the step-up amortization. I think we will exceed that when it is all said and done. So $6.9 million approximately in the material handling and port solution segment is a small price to pay, relatively speaking, for what will be at least $35 million or greater savings going forward. With regard to construction, I am going to turn that over to George, who is on the call, George Ellis.

But I would say that restructuring effort is really pretty moderate compared to what this segment has already done. I think the segment really is working on things like the Takeuchi Private Label deal that was recently announced, as well as getting several substantial orders from some of our large customers to reenergize some of the revenue in that business, which I think we have gotten some good indications for in 2013. George, why don't you comment on that?

Thank you Ron. I will continue on. We have continued to focus on the restructuring as you have mentioned, but I see that we may still need to do a little more work as we finish out the year. But I want to caution ourselves that we are seeing some movements in the market, and indications in certain products that we make, that as Ron mentioned through our alternate new distribution that we have with Takeuchi, and also some other activity as I see in some of our larger product lines that could substantially offset some of the negativeness in some of my other businesses. So still a lot of work to do. The market is still kind of shaky in some areas. But I do see some things, particularly around the comment made earlier around housing starts in North America, some areas where we haven't seen movement. And I can specifically see that flowing through in business tied to that.

I am reasonably confident that 2013 will be a year of meaningful progress in the construction segment. We know for a fact that our concrete mixer truck plant, which had been down and basically shut for three years, is now running, and we have got good solid view to our customers there. The fact that we took the Takeuchi Private Label arrangement which has a pretty substantive amount of business attached to it is an indicator. We have got some other European activity that I think is pretty positive. So net/net the market for at this moment in time is very nervous, and probably hasn't placed a lot of orders with us. But unlike Caterpillar, we don't have dealers with a lot of floor planned inventory where we have to adjust for. When the market does pick up, we will be responsive and begin to reflect that in our business.

Maybe just as my follow-up then on the new distribution agreement there, help me think about where this goes from here? Is this the first orders of a long term relationship, or is this going to be more of a lumpy relationship where we get some orders that show up kind of here and there? Can you help me think about how that moves the needle?

I think it begins to move the needle for our plant in Grand Rapids, Minnesota, pretty meaningfully. I think it could be the beginning of a very solid long-term relationship with Takeuchi. Clearly it is a multi-year agreement. Having said that, we also believe there are opportunities for us to build relationships with others as we have in the past. Tim Ford has a part of his business with another European player where he private labels products. This is a strategic opportunity for us, and we are going to continue to develop that. Terex has always been the kind of company that we will try different approaches that others may or may not do. This is just a reflection of that.

Alright. Thanks, guys.

Next question comes from the line of Rob McCarthy with Robert W. Baird.

Hello this is Mig Dobre sitting in for Rob McCarthy. Good morning guys. Maybe a little bit of color on your 2013 outlook first. Just trying to understand here. You are guiding or commenting a little bit on some revenue growth. Should we understand that you are also expecting operating income growth to be fairly significant in 2013?

Well, again as I said at the end of my comments, we haven't completed our budgeting process, so we are not really providing specific 2013 guidance. Having said that, I wouldn't want anybody to interpret that we would grow our business and our margins would go down. Our focus is clearly on margin improvement, cash generation, integration completion of MHPS and debt reduction, those four things. And in that environment, we still expect some moderate revenue increases mainly from AWP and cranes. And a little bit from material handling and port solutions.

Excellent. That is very helpful. Thank you. My follow-up is, it sounds to me like you are not planning any sort of production adjustments in either AWP or crane, in spite of the backlog in a quarter. I guess I am wondering when you are thinking about 2013, what sort of order levels in the fourth quarter would be consistent with unchanged production plans from how you were thinking about the year currently?

Well, I don't think we are planning any production declines. In fact, we are probably planning some production increases. Again I have to tell everybody the same story. Too much backlog is a problem, too little backlog is a problem. We do not have too little of a backlog in AWP and cranes. We have too little of a backlog in construction and materials processing. It is not my concern really, I mean three months from now things could change, but at this point in time that is our assessment.

Thank you for your comments.

Next question comes from Jerry Revich with Goldman Sachs.

Good morning, and Phil congratulations, and good luck in retirement.

Alright, thank you.

He has got a ways to go. (laughter)

I am wondering if we could bother Kevin one more time. If you don't mind Kevin, rank order for us, which regions do you expect to drive order growth over the next six to twelve months, or Ron however you want to frame it, top line growth, and also just touch on how much pricing contributed in the quarter, and an update on the pricing of the competitive landscape as you see it now would be great?

Okay. For us the strength remains with North America. We still see strength in Australia, the Middle East, and most of Latin America. Those seem to be the core drivers of our growth right now. Although I would say there are selected countries in Eastern Europe that we see really good demand and continue to see good demand out of. I would think going forward those will be the anchors in our play book for growth.

Now in terms of your pricing, we have worked hard to get the discipline we have, and we expect to continue it. In the third quarter, price probably accounted for 4%. Price was the majority of the impact in our margin increase on the third quarter. The other piece obviously we talked about comes from cost reduction. Roughly 2% from cost, 4% from price and mix, giving us the 6% improvement, or doubling our margins for the quarter on an annual basis.

Good. I would also like Steve Filipov to provide some commentary on his view of the regional strength. Because this really is crane related but also region related. Steve. Steve is in Moscow right now. So it may be a colder there than most places.

Yes, sure Ron. I mean our business in developing markets is very diverse. Most people think we have core businesses in Latin America and other places. But it is pretty diverse. If you look it quarter-over-quarter it is fairly flat. It is a little bit down versus second quarter, but it is really some of the markets that are shifting. Our total Latin America business was actually up although Brazil is slightly down. As Ron said, most of the other markets in Latin America are fairly good right now. Southeast Asia is pretty much flat.

Russia and Eastern Europe are flat for the Company, with most of the softness in Eastern Europe but Russia is up a bit. Our Middle East and Africa business, both of them are up substantially year-over-year. India is probably the biggest softness we have. But it is a fairly small business for us, it is down a bit. All of these numbers I reference are without MHPS. If you add in MH and PS, you add about another $0.5 billion to the developing markets revenue. It is diverse I would say it is flat overall for the Company. But there are some substantial markets that are up, and going forward we want to leverage the MH and PS infrastructure that we have in those developing markets. Because it is about 40% of their total revenue. I hope that gives you a picture.

Thanks Steve.

I appreciate the color. and Ron, I am wondering if you could just pull together what you are seeing in Europe across your businesses? It sounds like in a couple of industrial end markets things have deteriorated, at least from an investment confidence standpoint 3Q versus 2Q. I am wondering if you can just comment on what you are seeing across your product lines? Thanks.

Sure. We actually were surprised by the fact that on a year-to-date basis our European Union revenue was up about 6% as a Company. That excludes the DeMag Cranes AG acquisition or our material handling port solutions business. But without a doubt it is a mixed story in Europe. A story that causes us some concerns, and will be a focus of our reviews as we plan our 2013.

In general, I would say that the Spain, Portugal, Ireland, Italian and Greece businesses are pretty quiet, if not dormant. On the other hand the German businesses, although it is slower, are still reasonably positive, and the Scandinavia businesses are pretty positive, and some of the Eastern European businesses in particular markets like Turkey are actually quite good. United Kingdom, still hard to predict, generally pretty soft. The mixed bag we are getting from Europe, the mixed picture I think just reflects the general economic malaise that is ongoing in the Company. In overall terms, the third quarter we did 28% of our revenue in Western Europe. You say well you are bigger in North America.

Well historically Western Europe used to be larger than that. So this reflects the shifting mix of our business. But you can expect to see that change over time. I don't think 2013 will be a strong year in Europe for many of our businesses. But I do believe that given the fact that we are in businesses that have fleets of equipment that need replacement, that 2014 will be an excellent for aerial work platforms in Europe. At one time Europe represented one-third of our work platform business. It does not today. This is the waxing and the waning that happens in a capital goods business, and the importance of being diversified.

Thank you very much.

Next question comes from Seth Weber with RBC Capital Markets.

Hey good morning guys. First question on the crane business. It sounds like you are calling out Europe weakness in the crawlers and the AT business. Can you frame for us how much of those crawlers and all terrains is represented by Europe, and can you comment whether you are seeing strength in crawlers anywhere else?

We are definitely seeing strength in crawlers other places. Again, many of our European crane companies buy the cranes and move them to other places. One of the reasons we feel really good about our crane opportunities is not because the cranes we are selling are going to Spain or Portugal, but because the cranes we are selling are going to other parts of the world. I would not characterize our crane business as terrible in Europe. I would characterize our crane business as fairly flat in Europe with an opportunity to sell European customers who sell elsewhere. Kevin, did I get that wrong?

That is right. If you look back at the chart on page fourteen, you can see that we were roughly 42%, 43% of our market was in Europe historically. Now it is has stabilized at around 30%. As Ron points out, a lot of that 30% is actually for large fleet buyers that are doing global projects in developing markets. We actually feel very good right now about the forward-looking picture for crawlers. Some of you may know, we just three weeks ago launched a very significant product in the 600 to 700-ton class, which for us in the large crawler pace is the most meaningful product area, and we are getting a great reception for that particular product, the Super Lift 3800, which we think will create significant incremental revenues for us in 2013 and beyond.

That is helpful. Thank you. A follow-up question, your outlook for moderate growth for 2013. If we look at 4Q, your guidance for 2012 it implies fourth quarter down about 7% on the top line. How should we think about 2013, are you expecting it to be back end loaded?

No, not necessarily. I think what we have got going on in the fourth quarter is also a little bit of currency comparison year-over-year too. Because remember a piece of our business shifts with the currency. When we look forward to 2013 and compare that with 2012, what I say is 2012 was more first half strong, second half weak. I think 2013 will be a little bit more balanced across the year. I think we are likely to see the growth really happening in year-over-year in the second half of 2013, but still some growth in the first half as well.

That is very helpful. Thank you very much.

Next question comes from Rob Wertheimer with Vertical Research.

Hey good morning everybody. I had one question on cranes and one on aerials. Should I understand the crane orders as being you announced the price increase a little later, so you didn't get the pre-ordering ahead of the price increase? Is that what that meant? And just real quick on cranes also, the price discipline is obviously great in trying to force people to pay up and not string you along with deferrals. But was it really out of step you are trying to change industry practice, or is this just you taking a harder line and people shouldn't really be surprised by it?

Kevin, you want to handle the crane?

On the price piece it is exactly right. We have been lowering our variance on discounting, but also making sure that we have had a practice, at least within our crane business on the large side, where some customers will tend to buy up slots pretty far out and then maybe defer them. Instead of allowing people to defer orders, what we are doing is we are saying listen, if you want to defer an order, we are essentially canceling the order, so that we are not getting last year pricing next year. So that is a little more discipline that we are bringing to the market. It is self inflicted and it is having an impact.

It is not that they don't need the cranes, they were just trying to get pricing stretched as long as possible, which makes it difficult for us to put in new pricing in. We are just saying these are our rules, please follow the rules, and I think our customers understand this. I am sure that they would love to buy the equipment at last year's pricing if we would sell it to them. They need the equipment, so they will buy it at next year's pricing.

The other part of your question specific to North America, yes we did release 2013 pricing late in the quarter, only allowing, we go to market two ways in North America for the smaller cranes we go largely through distribution, for larger cranes it is direct. But for the smaller cranes we get fairly large orders for the following year, typically in Q3. More than half of that activity is pushed into Q4 because of the timing of when we release the pricing. But we feel very good. We are actively in negotiations with the all of the right players this quarter, and we expect that to fill in the next two months.

Great. If I can just switch to aerials and the commentary on the fleet mix has been really helpful and interesting. Are you assuming, and I guess the reason for my questions is that we have seen in dirt moving equipment and trucks, bigger fleets continue to buy, and smaller fleets just haven't been able to or haven't been willing to. I am just curious about the dynamic here. Are you assuming smaller fleets up and bigger fleets up in aerials next year? You have talked about the aging. Do you think bigger fleets have a couple more years to go before they are totally refleeted? Thanks.

I want to turn this over to Tim. But I do want to make a comment. Aerials is going to be a little bit different than dirt. A lot of the dirt equipment is going through a tier engine change. Many of the customers bought tier 3 engines in advance, because they didn't want to buy tier 4 engines. Last year, they pulled forward orders for the dirt equipment intentionally, whereas aerials isn't really in that situation. Tim, do you want to pick up from there?

Yes, Rob, I would just add a couple of comments to Ron's. We spent a lot of time, rightfully so, focused on the large national footprint buyers in North America. If you look across the AWP segment, the national footprint buyers represent a relatively small portion of the overall segment sales. So while they are important, and I don't want to dismiss them as unimportant because they really do help us drive some volume, we really think the market in general, whether you add Europe, Latin America, Australia, and Asia-Pacific to the mix is a pretty diversified market. To focus on the big guys, yes they have an influence on things, but the overall market is pretty broad and pretty diverse. Do I think the large guys are going to be buying an increase in fleets? We have heard some mixed signals. Some customers have said they are looking at replacement, others say they are going to be adding some fleet to their mix, but it is really going to be driven a lot by the diversified portfolio of customers we serve throughout the business.

Thanks.

Next question from Joel Tiss with BMO Capital Markets.

Hey guys. How is it going? I wonder if you could help us to try to aggregate or get us into the ballpark the combination of the carryover in pricing from 2012 into 2013 plus the new pricing actions? Can you get us to the ballpark what that means for overall pricing?

I don't think we can at this stage Joel. Pricing is just one piece of the margin mix. It would be kind of misrepresenting the overall picture of the Company just to talk about what we think is happening with pricing, until you have a sense of what is happening with costs. I just think from a balance commentary point of view, you have to have a view on both. And until we go through our budgeting process, we won't have a view on both. I mean the net/net we believe will be positive, but maybe not as positive as it was in 2012, the total amount.

Okay. And then on the debt side, can you give us a little insight into is there any plan around the $800 million of 8% debt? I know that becomes callable soon. You have got a pile of cash on the balance sheet and probably some more to generate as we go through 2013, can you just give us a little bit of a sketch of what you are thinking? How that plays out in the next year?

Joel, I don't know about a pile of cash. I am Mr. Liquidity, mountains of cash is more important. The debt markets are certainly very positive for high yield type instruments. 6.5% notes are trading at 5.7%. The call on the 8%s are open to us November 15th. So we are going to look at what we can do out there in terms of that item. I am not going to announce anything at this stage. I think as we look at our cash flow through our budgeting process, we will look at other opportunities next year to pay down debt. We will have a sufficient amount of term debt such that we can prepay at any point in time. So that creates some opportunity for us next year. But I think that is more appropriate to address as we get into the guidance for next year.

Alright. Thank you very much.

Our last question is from the line of Matt Vittorioso with Barclays.

Thank you for taking my question. On the back of that previous question, Ron or Phil, what do you think the right amount of debt is for this Company going forward? I think your credit investors have appreciated the focus on the balance sheet and on margins and cost reduction. But as you look forward and given the inherent cyclicality of the business, what do you think the appropriate amount of debt is as we move through 2013, and you look to reduce debt? What do you think the right amount of debt is over the long run?

Thanks for the question. The way we look at this is that given we do have cyclicality, we try to target around 2.5% net debt to EBITDA as a metric that we look at, net debt, so including the cash appetite. That will fluctuate mainly depending on the EBITDA performance that we have. But in flexibility such that if there is an attractive acquisition we have got the capacity to do that. But really we try to manage around that level over a business cycle.

The other thing I would add to this is one of the objectives in acquiring the DeMag Cranes, or now the material handling and port solutions, was to acquire a services business that we think we could build on, and find ways to grow and balance some of our other businesses that are cyclical. Now with the Demag Cranes AG acquisition we acquired a $450 million services business that operates at about am18% EBITDA margin. That over the past business cycle did not see major contractions in the EBITDA margin, and the Demag AG business remained profitable through the whole financial crisis, which is a very different profile than the Terex performance.

We compounded our problem with the sale of the mining business. But frankly speaking, that is why we wanted to exit that business, and get a business that we thought could deliver more reliable cash flow. We have added cost in a certain sense to the material handling port solutions business because we allocated to them some of our corporate cost a little bit ahead of the time when we are taking their corporate cost out. So this comment is relevant to the debt question, because what is the peak and trough of our EBITDA is an important part of answering that question.

And so this is where we are going to spend some time just making sure that future businesses we add to Terex enhance the predictability of our EBITDA, and any businesses that we don't have as part of Terex actually also feed toward making us a more predictable EBITDA player. So we won't completely change our cyclicality by any stretch of the imagination. But I think that we can mitigate some of the peaks and troughs at least. I hope that answered your question Matt.

Yes. That is very helpful. And just on the back of that as we look at 2013, you said that you would be looking to pay down additional debt. But Other cash uses acquisitions are always a possibility. Any thoughts on that? I guess you would looking for again businesses that have a milder peak to trough EBITDA, and if I can just dovetail the typical question around the construction business. If you make some acquisitions in 2013, hopefully they will be more stable businesses. At what point do you start to put some sort of deadlines on the construction business, to say we are either going to be in this or we are not? If the effort here is to make a less volatile peak to trough, might construction a divestiture of the construction business help that effort?

Well I think improved performance in the construction business will clearly help that effort, and we are pretty positive about our ability to achieve that, even though right this minute we are seeing some significant revenue softness. So I guess I don't really want to comment about anything beyond that. Both acquisitions and portfolio management are always some things that we will look at.

I think we did quite a bit of portfolio management so far. And for the most part I think we are in businesses that we can grow with the goals that we have set. The Takeuchi transaction should give you a sense of where we see opportunity, and there are other things that can be done on that kind of front. So we will leave it at that. I think obviously the comment on construction is something that we think about and appreciate, but I think we are making progress.

Thanks guys, I appreciate it.

Thank you very much. I think that ends our call, operator.

Thank you ladies and gentlemen, that does conclude the Terex Corporation third quarter 2012 financial release. You may now disconnect.