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<DESCRIPTION>TEREX CORP - Q2 2005 EARNINGS CALL TRANSCRIPT
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TEREX CORPORATION AUGUST 4, 2005
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CONFERENCE CALL PREPARED STATEMENTS
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Ronald M. DeFeo: Good morning ladies and gentlemen and thanks for your interest
in Terex Corporation today.
On the call with me this morning is Phil Widman, our Senior Vice President and
Chief Financial Officer; Tom Gelston, Director of Investor Relations and
Corporate Communications; and available to answer your questions will be our
operating team consisting of Chris Ragot from Roadbuilding and Utilities; Bob
Wilkerson for Aerial Work Platforms; Rick Nichols for Materials Processing &
Mining; Colin Robertson from our Terex Construction product line; and Steve
Filipov for our Terex Cranes business.
As has been our tradition, I plan to make some opening overview comments, then
Phil will follow up and give you a specific summary of financial performance,
then I will return and provide comments on individual sector performances. We
will then open it up to your questions. I ask you to limit your questions to one
and then a follow-up in an effort to get to everyone. We will try to limit this
call to an hour or less if possible.
A replay will be available shortly after the conclusion of the call and can be
accessed until Thursday, August 11, 2005 at 5:00 p.m., Eastern Time. To access
the replay, please call (800) 642-1687 or international (706) 645-9291 and enter
conference id #8266315 or look at our website.
So let me begin.
Overall Terex had an outstanding second quarter. Excluding the impact of special
items, earnings per share were $1.58 and we achieved a net income level of $80.5
million in the quarter. This compares with the prior year of $52.3 million or
$1.03 per share excluding special items in the year ago period. We are pleased
with this operating performance and believe we continue to benefit from positive
end-markets and a maturing Terex Corporation reflecting a number of the
initiatives underway during and started over the past several years.
Net revenue for the quarter was $1,764 million or a 32% increase.
Reflecting on revenue for the first half of this year, Terex had revenue of $3.2
billion or, said differently, in the first six months of the year, we have
achieved a revenue level of about 83% of Terex's entire 2003 revenue level. As
many of you know, we established a goal 18 months ago to be "Six in `06" or $6
billion of revenue in 2006. It looks like we may achieve $6 billion of revenue
in 2005. This really reflects two things. First, the strength of our overall
end-markets which are more positive than I had expected when we set this goal
and secondly the continued development of the Terex franchise overall, which I
think is right on track.
Terex as a corporation has never been stronger. Our financial and marketplace
opportunities nevertheless still have a lot of runway to improve and with that I
will turn it over to Phil.
Philip C. Widman: Thanks Ron, and good morning.
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Before I begin, let me remind you that we will discuss expectations of future
events and performance of the company on today's call, and that such
expectations are subject to uncertainties related to macroeconomic factors,
interest rates, governmental actions, and other factors. A fuller description of
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the factors that affect future expectations is included in the press release and
our other public filings. I encourage you to read them.
We are nearing the completion of the restatement process, audit and assessment
of internal control over financial reporting. While no assurance can be made, it
is management's current expectation that the financial statements for the year
ended December 31, 2004 and prior periods will be filed on or before August 15,
2005. We expect the impact on our total stockholders equity at December 2003 to
not be material.
For the second quarter, we reported net income of $78.8 million or $1.54 per
share compared to net income of $59.1 million, or $1.17 per share in the second
quarter of 2004. Excluding the impact of special items, net income for the
second quarter of 2005 was $80.5 million, or $1.58 per share, on sales of $1,764
million, compared to $52.3 million, or $1.03 per share on sales of $1,336
million in 2004. The estimated tax rate for the current quarter was 33.8%
compared to 19.7% in the comparable 2004 period. The 2004 rate was lower due
mainly to the strong performance of the Terex Fermec business, where it was
determined that we would be able to realize the benefits of certain tax assets,
and therefore, the valuation allowance held for this business was released.
Net sales for the second quarter of 2005 increased 32% over 2004 due to
improving market conditions in most of our business segments. Foreign exchange
impact on revenue accounted for approximately 3% of the increase, while the
acquisition of Reedrill at the end of 2004 added roughly 2%.
Gross profit excluding special items increased to $285 million for the second
quarter of 2005 from $204.9 million for the second quarter of 2004, reflecting
the impact of increased volume and pricing actions, dampened by the impact of
material cost increases, mainly steel. You will recall that the increases in
steel costs were just starting to materialize in the second quarter of 2004, as
they accelerated through the latter part of the year. Gross margin increased
roughly 9/10ths of a percentage point, reflecting these impacts over the prior
year from 15.3% to 16.2%.
SG&A expenses excluding special items increased to $140.4 million from $117.6
million for the second quarter of 2004. The increase is split between sales
costs, which are a function of the volume increase, and administrative costs,
which have increased in support of Terex Business System efforts, as well as
external professional fees to assist in the restatement, Sarbanes Oxley and
audit processes. Overall this achieves a level of 8.0% of sales, 8/10ths of a
percentage point better than 2004, as we continue to focus on cost management.
Second quarter income from operations, a pre-tax measure, excluding special
items, increased by 66% to $144.6 million from $87.3 million in the comparable
period for 2004. Operating margin increased to 8.2% from 6.5% in 2004 and this
represents an incremental margin improvement of roughly 13% on the volume
change.
Our net debt decreased in the quarter by $139 million to $733 million, and for
the six months to date decreased by $47 million. This performance is ahead of
our previous expectations for this time of year, as we continue our focus on
working capital management in a growth environment. We ended the second quarter
with working capital as a percentage of second quarter annualized sales of 16.8%
compared to the second quarter of 2004 of 18%. We expect to end 2005 at the 18%
level.
Cash flow from operations is expected to be between $275 to $300 million for the
full year 2005. We will continue our debt reduction efforts this year, targeting
a $200 million reduction, plus positioning our balance sheet to retire high cost
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debt, mainly our 10 3/8% Notes that are callable in April 2006. You will recall
that this represents $300 million of our overall debt portfolio.
I commented earlier on the second quarter tax rate of 33.8%. We expect a full
year rate of 35% consistent with our prior guidance, where we indicated that our
rate would move closer to statutory rates, excluding the impact of discrete
items.
Our weighted average interest rate on total debt was 7.6% for the second quarter
up from 6.6% for the comparable 2004 period.
Ron back to you---
Ronald M. DeFeo: Thank you Phil.
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I'd now like to start with the discussion of Terex Construction. Our
Construction business had a strong second quarter. Revenues were $604.5 million
or up 27% versus the prior year period. The business was generally strong across
the board with the Heavy, Scrap Handling and Mobile Crushing and Screening
businesses the strongest. The Compact side of this business was a bit slower
compared to the other businesses, but still quite positive. The operating margin
for this business was 8.0% of revenue compared with 6.6% in the prior year
period. Backlog is also up versus the prior year at $232.3 million or up 7%. We
believe the positive impact of pricing actions earlier in the year helped us
mitigate cost pressures from components and raw materials such as steel, and we
expect this trend to continue as the new pricing levels flow through our
backlog. The programs initiated in 2004 and early 2005 continue to be working.
We are implementing lean manufacturing methods and we are at the early stages of
progress here. We are also benefiting from the Atlas restructuring that we
completed in 2004. We now have a number of active projects in China and expect
that, as we enter 2006, we will see some of the benefits of sourcing from these
initiatives.
The Terex Cranes business continued to make steady progress also. In the
quarter, revenue was up 23% compared to the prior year of $341.5 million at that
level. On a year-to-date basis, revenue is up 32%. Leading our revenue increases
were our Tower and European based businesses, mainly the business we export from
Europe to the rest of the world. The operating profit in the quarter achieved a
level of $15.7 million or 4.6% of revenue which is still meaningfully below our
goals. Contributing to this from a positive perspective was our Tower crane
business and on the negative side we had some European employee profit sharing
costs as well as some bad debt provisions that we needed to accrue in this
quarter. Furthermore, the North American business continues to struggle to meet
our profitability objectives. However, we have made a number of changes and we
think these will pay off in the near term. We are sourcing a number of
components and have proven this out at Terex's Acuna, Mexico facility which we
acquired in late 2004. These have significant cost reduction benefits on our
sourcing. Furthermore, we have increased our direct workforce at Waverly by over
40% and as of the 27th of June, 2005, we started production on a second shift.
These actions, we feel, will allow us to reduce the significant and now higher
priced backlog that we currently maintain and meet the demands of a recovering
marketplace while being more efficient overall. Starting next week, we also have
a new leader of our North American Crane business joining the Company and
reporting to Steve Filipov. We look forward to his leadership. We expect to
continue the lean initiatives underway in Terex Cranes both in Europe and in
North America. Opportunities for significant improvements in working capital
management as well as better customer practices are still in front of us in this
segment.
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The Terex Aerial Work Platforms group had a tremendous quarter. Revenue in the
quarter was up 46% and on a year-to-date basis up 52%. We are benefiting from a
strong market overall reflecting the significant changes that have taken place
in the Aerial Work Platforms market over the past 5 to 7 years. Our operating
margin came in at 13% of revenue, down slightly from the 13.4% of last year, and
on a year-to-date basis operating profit was 11.4% down versus the 12.7% in the
2004 period. We do believe, now, that our pricing has generally caught up with
our input cost, but we do expect additional cost increases and therefore are
planning significant price increases as we look out to 2006. For product ordered
now and shipped after January 1, 2006, we have begun to introduce a new greatly
simplified pricing structure which is designed to insure more consistent pricing
across our AWP product lines. In addition this new structure better reflects the
value that is in our products and makes it easier for our customers to do
business with Terex. Some of the learning that has taken place at our AWP
segment on pricing will also be applied to other Terex businesses, as we have
hired some consulting assistance to teach us improved practices in this
important area.
It is encouraging to note that our Telehandler business posted a 75% increase in
year over year business and we are taking advantage of cross-selling
opportunities with this product. Obviously a backlog of $420.5 million is
significant for this business and remains a positive statement for this
business' future. We continue to work on implementation of the Terex Business
System at our Aerial Work Platform business and to utilize some of the learning
historically from this sector to our other businesses.
Our Terex Materials Processing & Mining sector had a strong quarter overall.
Revenue was up 67% and, excluding the Reedrill acquisition, revenue increased
43% compared to the prior year period. Operating earnings from this sector were
$20.0 million or 9.0% of revenue. This is nearly 2 margin points ahead of the
prior year period. We continue to expect strong demand from this sector in the
second half and throughout 2006 and probably through 2007. The underlying
fundamentals here remain encouraging. Obviously what is driving this sector is a
combination of both high commodities pricing and a strong demand for Materials
Processing equipment.
The last sector, Terex Roadbuilding, Utility Products and Other, had an improved
performance. Nevertheless, the opportunities for improvement here remained
significant. In the quarter, revenue was $252.9 million, up approximately 18%
from the prior year period. Most of these gains came from our concrete mixing
truck business and Tatra. We are pleased with the operating profit improvement
at $10.7 million versus $2.7 million last year. Nevertheless this margin is
still low at 4.2%. The change year over year is a result of operational
improvements at our Roadbuilding business and solid performances in the other
areas, in particular the concrete truck and Tatra businesses. We still have a
lot of work to do in the Roadbuilding and Utilities businesses but progress is
clearly underway. We are improving our products, focusing on fewer products,
implementing lean manufacturing processes in the factories, and improving our
aftermarket products support. This is critical for our customer satisfaction
levels. We are obviously encouraged by the recent passage of the Federal Highway
Bill and think this will provide an overall positive environment for some of our
asphalt and concrete plant products which have lagged. Our asphalt paver
business on the other hand has had very strong performance.
Now let me turn our attention to the Overall Outlook for the Company. We remain
quite enthusiastic about the prospects for this year. We continue to see strong
order activity, evidenced by both current revenue and our backlog which is up
50% versus the backlog at this time last year. As you know, we have structured
our Company to reward our leadership on the basis of Return on Invested Capital
and we think this is the most appropriate measure for value creation. At the end
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of this past quarter, our trailing performance was 17% ROIC, demonstrating
continued improvement toward our goal of 20% for the full year. We are
optimistic that we will equal or beat this target.
I'd like to stress again that we have a number of product categories that are
just turning positive. This would be our Roadbuilding and Utilities businesses
and our Terex Cranes business in North America. So we are quite pleased at how
our revenue position is stacking up for both the balance of this year and into
2006. We are also pleased with the operating margin improvement in this quarter
to 8%, and remain pretty focused on our goal established back in 2004 of
achieving 10% operating margin. And lastly of course, the debt reduction that
has been achieved, and we expect to be achieved in the second half of this year,
is also a pretty important area to remember.
In the previous 2005 earnings per share outlook, we had increased the range to
$3.50 to $3.70 per share. However, based on the current trend, we expect
improved performance in 2005 with an EPS in the $3.90 to $4.10 range, excluding
special items, for the Company. So we are encouraged by that.
Thank you and now I'd like to open it up for questions. Thank you.
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