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Executives

Ronald DeFeo - Chairman & Chief Executive Officer

Phil Widman - Senior Vice President & Chief Financial Officer

Tom Riordan - President & Chief Operating Officer

Rick Nichols - President, Terex Cranes

Tim Ford - President, Terex Aerial Work Platforms

Eric Nielsen - President, Terex Materials Processing & Mining

Tom Gelston - Vice President of Investor Relations

Analysts

Steve Volkmann - Jeffries & Company

Ann Duignan - J.P. Morgan

Robert Wertheimer - Morgan Stanley

Charlie Brady - BMO Capital Markets

Matt Vitorioso - Barclays Capital

Henry Kern - UBS

David Raso - ISI

Terry Darling - Goldman Sachs

Jamie Cook - Credit Suisse

Alex Blanton - Ingalls & Snyder

Meredith Taylor - Barclays Capital

Denver Roland [Ph] - AET&A

Peter Epstein - PWP

Chris Dionne - Shooters [Ph]

Dave Gerard - Trilogy

Terex Corp. (TEX) Q1 2009 Earnings Call April 22, 2009 8:30 AM ET

Operator

Good morning and welcome to the Terex Corporation 2009, first quarter earnings release 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)

I would now like to introduce Mr. Ronald DeFeo, Chairman and CEO. Please begin sir.

Ronald DeFeo

Thank you and good morning ladies and gentlemen, and thanks for your interest in Terex today. For your reference, on the call with me of course is Phil Widman, our Senior Vice President and Chief Financial Officer; Tom Riordan, the company’s President and Chief Operating Officer; and Tom Gelston, Vice President of Investor Relations.

Also participating on the phone is Rick Nichols; President of Our Cranes Segment; with me in the room is Tim Ford, President of Aerial Work Platforms and Eric Nielsen, President of Our Materials Processing and Mining businesses.

To accommodate our audiences in earlier time zones or anyone unable to listen, a replay is available shortly after this call and can be accessed until Wednesday, April 29. To access it, please dial 1-800-642-1687, conference code ID is 93775219 or simply go to our website and go to the Investor Relations section of the website at www.terex.com.

Importantly, we’ve also posted a presentation on our website as well and we will go through that presentation following my opening comments to provide a more in-depth summary of our 2009 first quarter performance.

I’d like to begin with some opening commentary and then of course Phil will follow me with a more detailed financial report and Tom will participate, discussing our operations by segment. Then of course we’ll open it up to your questions. Please try and have one question and a follow-up.

The industry we compete in, has always been somewhat unpredictable and certainly not for the fain of heart. What we’ve experienced and continue to manage through is remarkable, even for some industry veterans like myself.

The measure of success at this moment in time is not earnings per share nor returns on capital. Success is and will be measured by an organizations ability to flex cost with revenue and position itself to win when the market recovers as no one is able quite to predict the trajectory of the revenue at this point in time.

Part of winning is to assure survival and to harden capabilities in key areas of cash and cost management. We feel that Terex will survive and prosper as we navigate these unchartered waters and I think we will cover some of that in some depth over the course of this call.

Why do I call these waters unchartered? We think the Aerial Work Platform; end markets for example are down, over 75% as an industry worldwide on a year-to-date basis; the largest drop from peak to trough, in the shortest period of time in history. We know key product categories such as loaded backhoes and hydraulic excavators have seen revenue reductions for the industry of 50% to 80%, depending on the geographic market.

I could go on by product and by market, but I think you get the point and when markets go down like this amount, it doesn’t really separate good companies from bad, It causes entire industries to restructure and consolidate and certainly those are things that we will want to watch and pay attention to over the coming months and year. This basically causes us to see striking changes in just a 12 month period.

For example, in the year ago period; we received $3 billion of new orders in the first quarter, about $1 billion a month. These past three months or the January through March period the net number was about 10% of that total. It would be easy to see the world through the eyes of a dooms day scenario, but frankly I and all of the Terex team remain rather optimistic despite these challenges.

We’ve seen severity before, we’ve addressed it and we’ve accommodated those changes to our business and we’ll do the same today. I think you will learn on this call that we are banning together in dealing with reality. The tough times have resulted in tough choices and we are making them and controlling what we can control.

Yes, things may take a little longer in Europe and in our construction business, which was not positioned very well for this dramatic change, but we have acted and of course, when you estimate the level of revenue decline and you are wrong, it takes a little longer to get the inventory out than you might have thought, but you will get that inventory out and we are doing that.

Next, because of the work we’ve done on culture and building a common mission, we remain committed as a team that’s capable of changing quickly. This is a major capability. We have generally not overproduced and oversold into the channel; even with the severe economic downturn among our customers.

As we finish 2009 and enter 2010, we think we’ll have the ability to produce to the demand levels and regain earnings momentum. It’s important to understand that we have not been producing to demand, we’ve been actually trying to produce below demand in order to generate inventory reductions and we see that in our raw material reductions that Phil will mention a little bit later.

It’s too difficult to specifically call our second half performance right now, but after we dissect this past quarter for you, I think you’ll see we are much closer to breakeven, even with a 50% decline in revenue and we are pushing out costs about as fast as humanly and humanely possible.

We think we will be profitable in the second half of this year. We will end 2009 with our businesses positioned for growth and profits in 2010, at basically the current run rates of volume. This provides us real upside potential that we feel we will better understand later this year.

Now, Phil will walk you through a presentation on the first quarter. Phil.

Phil Widman

Thanks, Ron and good morning. Tom and I will be referring to the presentation on our website for our prepared comments. 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 the factors that affect future expectations is included in the presentation, our press release and our other public filings. I encourage you to read them.

The first quarter as Ron indicated, is impacted by significant declines in industry demand for the short cycle equipment in our product range. Although a relative level of stability still exists for our larger crane and mining products. Our backlog is down 33% sequentially and 59% from the first quarter of 2008. We are aggressively responding with cost reductions to size our organization appropriately.

From our peak, in the second quarter of 2008, we have reduced the quarterly run rate of spending on manufacturing and selling, general and administrative expenses by $208 million or 33%, while quarterly net sales have declined by 56%. We are targeting a $300 million quarterly run rate reduction by the end of 2009, based on current volume expectations.

Inventory continues to be a more stubborn obstacle, but we are just starting to see the effect of supplier rescheduling, reducing our net raw material levels in the quarter. With production schedule reductions and material input curtailment, inventory reductions should begin to accelerate through the year. We are in compliance with our financial covenants and have adequate liquidity to weather the storm and be in a stronger position when the recovery begins.

The key figures table on page four displays the quarterly year-over-year and sequential performance of the company. We will not dwell on this page, but rather focus on the segment details and the actions undertaken to address the current environment.

Page five outlines the net sales bridge from last years first quarter, where the most significant decline in volume has been felt in the AWP and Construction segments, down 66% and 48% respectively. In the Cranes segment, which declined 29% overall, the most significant decline has been in the power and rough terrain crane businesses, while all-terrain and crawler cranes are more stable, although not immune to the current environment.

In the Materials Processing & Mining group, which is down 34%, the Materials Processing businesses account for virtually the entire reduction year-over-year, as the Mining businesses continue to deliver solid performance.

Page six bridges the operating profit from the prior year’s quarter, to the operating loss for Q1 2009. The margin impact on the net sales decline for new equipment contributed $232 million of the $329 million deterioration in operating profit for the company, while parts, service and used equipment margin declined approximately $29 million from the prior year period.

Restructuring and other costs mainly associated with the reduction in production levels, and headcount contributed approximately $40 million. Although, we reduced manufacturing spending significantly over the prior year period, net manufacturing under absorption increased by $44 million, as we could not cut costs as quickly as the volume declined. Selling, general and administrative expenses and other cost of sales had a net positive effect given cost reductions and other items.

The segment breakdown of the year-over-year change is consistent with the volume changes mainly affecting AWP and construction; and the restructuring charges are mainly in construction as the costs are higher in our largely European manufacturing operations. Overall, foreign currency translation impact was insignificant in total, but had meaningful impact on the individual segments.

On page seven, we outline our cost reduction actions for the company. The chart in the upper left displays the trend in manufacturing spending, which is defined as manufacturing wages, salaries, fixed and variable overhead, as well as SG&A excluding restructuring cost, which together have been reduced by $208 million from the second quarter of 2008 peak levels. As I mentioned earlier, we expect to exceed $300 million in reductions in the quarterly run rate and the spending category by the end of 2009.

Numerous cost control actions have been implemented including headcount reductions, temporary plant shutdowns, shortened work weeks, a salary reduction of 10% for basically all managerial positions and 5% for all other team members globally, where we are legally able to do so. In addition, we are implementing certain benefit reductions on a broad scale, as well as curtailing non-essential spending, targeting our developing marketing efforts and process efficiency improvements.

I’ll turn it over to Tom to provide some segment details.

Tom Riordan

Thanks, Phil and good morning everyone. As Ron and Phil discussed, we’ve been living in very challenging markets. As a quick overview, I’m defining our key short cycle businesses, meaning shorter order lead times to include aerial work platforms, materials processing and our construction businesses. All three have been experiencing dramatic reduced order rates in the last six to nine months. That said, we have been flattish and generally stable order rates at these lower levels in recent months. These businesses have been the focus of the realignment actions described on page seven.

Beyond what Phil has described, virtually every plant in these businesses has been closed for weeks at a time and/or short work weeks. We have implemented global wage reductions as Phil mentioned, along with other benefit changes, spending restrictions and other changes called for in times like today.

Despite the challenging times as Ron mentioned, I’ve been very impressed with the continuing support and spirit from the Terex team members, who are joining together to help our company out of these economic times. We have all recognized that no Terex business is immune from this downturn and that all of our team members need to be part of the solution. In short, remembering we are building for a better tomorrow.

Moving on to page eight, our Aerial Work Platform business was hit first with the economy and has been hit the hardest. With revenue down 70% in the last nine months, very dramatic actions have taken place. With headcount reductions of over 40% and unfortunately more to come, the flexible business model of AWP has been certainly tested. We have reduced 47% of our manufacturing spend in the last nine months.

Despite all these reductions, the underlying performance of our business is actually reasonably good. We’ve remained focused on our customers in meeting their needs, making sure we take quick action to reduce capacity and not to add to the oversupply in the channel. Net inventory is down 40% since the downturn in this business started and we would expect to be back to running the plants on a regular basis within a few months.

Moving onto page nine, our Construction segment; we have made significant progress in the last quarter in restructuring. The new organizational structure has been announced and changes are accelerating. We have used the goal of an 8% SG&A cost structure, excluding corporate charges; along with current revenue and order levels to guide us in resizing this business.

While it appears that restructuring in this business has been slow, we are working effectively with our works councils in Germany. All but one site now has a social plan that is under way.

Please note that the manufacturing spend in this business is down 50% in the last nine months and we are moving forward with an additional $100 million in annualized reductions. Net inventory is down $149 million from the prior year and this downward trend will continue for at least the balance of this year.

I’ve been impressed with the openness and candor of the key people in this business as we deal with this significantly lower market reality. As you may know, I became the Interim President of this segment in February. I have no plans to relinquish this role any time soon, until this business is back to a stable footing and I’m personally committed to this happening.

We have relinquished the goal of being a global franchise and we are focused on improving our current underlying business model. Fixing this business provides the best long term value creation option for Terex.

Cranes, on page 10, is effectively two different situations. Our larger German crawler and all-terrain crane business continues to perform well with solid backlog and order rates. This now represents over 50% of the segment. Conversely, the tower crane business started to see shrinking order rates in Q4 last year and our rough terrain crane business has been struggling with order rates since December.

While the manufacturing spends and SG&A reductions from the prior quarter look modest, we have addressed the cost structures in both businesses aggressively and continue to manage for cash. Results of this will be showing in the next few quarters. Channel inventories are unreasonable shape and we expect significant working capital to come out of these businesses this year.

On the next page, our Material Processing & Mining segment is also a much different story between the two businesses. In general our Mining business continues to perform well, down single digits revenue from a year ago, but with much better profitability.

Our drill product line has a weak order rate which we are addressing, but the two much larger product lines, trucks and hydraulic shovels, have reduced backlogs. We see a stronger first half than second half and are positioning ourselves accordingly. That said we are seeing very robust quotation rates. In other words, we are planning for the downturn despite some optimistic signs.

Our material processing operations were down on revenue of over 65% from prior year and have been very aggressive in fundamentally restructuring our business. While there is more work to be done, they have made very good progress under the circumstances.

Order rates have been stable and channel inventories are in good shape. Working capital will continue to reduce and again, I would expect these plants to begin to operate on a more normal basis in the second half of the year.

On page 12, there’s some very real signs of life in our larger long cycle, long lead time products, which include large Mining trucks and hydraulic shovels, along with a large crawler and all-terrain Cranes. To be specific, although we expect and are planning for a gradual slowing in these markets, we do not expect a significant abrupt drop in demand.

Where we have had large crane order cancellations, generally we have had other customers interested in either stepping into those orders or accelerating future orders they have placed. Key Mining customers continue to have a generally cautious attitude, but with some optimism for a recent change in key commodities.

One last note I would make; it’s important to understand the restructuring actions have been taken with a purpose other than just cutting costs. We are redefining organizations, refocusing or eliminating work content and reducing complexity. We are working to build a faster, linear organization and cost structure for the next upturn.

At this point I’ll turn it back to Phil.

Phil Widman

Working capital improvement is key to our cash flow generation expectations. On page 13, the trend and velocity of the working capital components is displayed. We continue to manage accounts receivable well in a tough market. However, Day Sales Outstanding increased somewhat from the end of 2008, mainly due to reduced level of non-recourse receivable sales and overall quarterly net sales declines.

Inventory turns declined as volume levels dropped significantly; however, our efforts to shut down incoming material contributed to a reduction in raw material of greater than $90 million. Inventory reductions in excess of $500 million are expected by the end of 2009, with significant reductions expected from the Cranes and Mining businesses in the second quarter.

Those two segments account for approximately 62% of the total inventory of the company and as we mentioned, they are performing quite well. You’ll also notice a significant drop in accounts payable on the cash flow statement, reflective of the rescheduling of supplier deliveries, as our days payables outstanding has remained constant from the end of 2008.

In reviewing the debt profile on page 14, you’ll notice that $1.1 billion of our high yield notes with maturities no earlier than 2014. These notes are not subject to the same financial covenants as the term loan and revolver agreements. Total debt obligations under the term loan and bank revolver at the end of Q1, 2009 were $276 million, with an additional $64 million of letters of credit outstanding on the revolver.

Total company liquidity was $899 million at the end of the first quarter, including cash of $344 million and revolver availability of $555 million. Coupling this with our expected cash flow improvements from working capital, should put us in a solid liquidity position going through the rest of the year.

I’ll turn it back to Ron.

Ronald DeFeo

Thank you, Phil. So just let me summarize on the last page, page 15. The downturn in order activity has obviously been severe in our industry and in our company, though parts of our business continue to perform adequately. We are aggressively cutting cost to realign the business for this reduced demand and it’s important to note that the quarterly run rate of spending has been reduced by $208 million from the second quarter of ‘08 at peak, and we expect reductions to be approximately $300 million on a run rate basis by the end of 2009.

Managing our business for cash generation is obviously the most important thing we can do including working capital, capital expenditures and even possible portfolio changes. Most team members have been impacted by cost reductions, but remain supportive and committed to achieving our stated goals.

Frankly a 10% compensation reduction for the rest of this year for all the leadership of this company is a pretty remarkable and team oriented commitment, along with a 5% reduction for most everyone else. We are very pleased that we’ve been able to get that kind of support from our organizations.

We are continuing to build improved efficiency and production capability and administrative process improvement. Our lien initiatives continue to be a priority for us at Terex. The bottom line here is that, while today is a challenging time and reporting losses is certainly not something that we like, we believe we are doing the right things and positioning the company to be even stronger when the recovery begins.

So now I’d like to open it up to questions. Rachel, could you please open the line.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Volkmann with Jeffries & Company.

Steve Volkmann - Jeffries & Company

Good morning.

Ronald DeFeo

Good morning Steve.

Steve Volkmann - Jeffries & Company

I was hoping we might take a little bit closer look at the inventory maybe. So do you have the components of inventory in terms of finished product, work in process, etc.?

Phil Widman

Sure. On a consolidated basis, we have raw material of $657 million; work in process of $433 million; after market parts of $459 million; finished goods new of $622 million and finished goods used of $87 million and a small amount of miscellaneous inventory $5 million, and about $128 million of inventory reserves. The total is $2.152 billion and there’s some other capitalized variances that go into that.

Steve Volkmann - Jeffries & Company

Okay, great that’s helpful; and then just with respect to; I’m kind of struck by your language about trying to reduce your raw materials and supplies, which seems to be an achievement and yet it seems like that should be something you could very quickly and I guess there must be some minimum requirements that you’d take, minimum quantities or something. Can you just sort of get us around why that’s a challenge for you?

Tom Riordan

Yes Steve, this is Tom Riordan. I think there’s a couple of things going on here, that’s very important to understand. One is, there is a fundamental dynamic. We’ve got several businesses on the short cycle side that obviously have been down and continue to be down at the moment, recently stable order rates on AWP and construction, material processing. I think they have made very good progress on reducing inventory in general.

The challenge has been in some of our larger businesses, specifically mining and our large crane business, where those businesses are still performing well and frankly have been adding inventory based on what I call normal seasonal and/or customer demand profiles.

So you’ve really got kind of a tail of two cities here and on top of that we do have, as you can appreciate, just less than a year ago we had numerous commodities that had very extended lead times for specific order placement, as it relates to in some cases up to two years on bearings, extended lead times on gear boxes, on hydraulics, on engines and so on.

We’ve been working effectively with the supplier base and we’ve been taking some very, what I’d consider to be tough aggressive actions on drawing the line and canceling purchase orders, negotiating with the supply base in order to mitigate that. That being said, in total recognizing two of our bigger businesses are still performing well. We dropped over $90 million of raw material in the quarter.

Steve Volkmann - Jeffries & Company

Okay great, that’s helpful, and then maybe with respect to the $500 million reduction goal, would we expect that to be kind of evenly come out of the various types of inventory or would it be more one kind or another?

Phil Widman

Again Steve, I would expect that you’re going to see a drop between raw material and finished goods, as what runs through the factories tends to be fairly constant.

Ronald DeFeo

We would expect significant reductions in inventory in the near term in both mining and our cranes businesses.

Steve Volkmann - Jeffries & Company

And then the final sort of, how much of that do we give back I guess with respect to payables and we did see that come down this quarter and I’m wondering, are your suppliers kind of requiring a little bit faster pay, in order to play ball with you on this?

Ronald DeFeo

Not at all; we’re continuing to operate on normal commercial terms with our supply base.

Phil Widman

And you can see as evidenced by the days staying the same at 51, we’re continuing to do that.

Ronald DeFeo

We’re being very disciplined on paying for contractual terms and frankly our suppliers are keeping their end of the bargain as well.

Tom Riordan

I think we’ve paid that price already at this point in time and I think we paid a little price on the receivables at this point in time. So I think the focus has got to be on the inventory and the movement of the inventory through our system. With 62% of our inventory in our cranes and mining business, the next couple of quarters are crucial and they have the orders and the backlog and the planned shipments for us to see meaningful reductions.

Steve Volkmann - Jeffries & Company

Great. Thank you so much. I’ll let someone else go. Thanks.

Operator

Your next question comes from Ann Duignan with JP Morgan.

Ann Duignan - J.P. Morgan

I wanted to focus on your backlog versus how do you actually liquidate inventories with such low levels of end market demand. Could you just comment on the fact that your backlog in some of the short cycle business is less than your quarterly reported revenues?

Then you made a comment in the press release about doing some Terex Financial Services programs to help solidify the backlog in cranes. Could you just talk about how do you liquidate inventories and how much does it cost you to liquidate inventories when end market demand is weakening?

Tom Riordan

Ann, Tom Riordan again. The basic process we use whenever we’re in this kind of a situation, where order rates are under running at higher than expected inventory level is we shut the plants down. We’ve gone through significant, expensive shutdowns in numerous plants around the globe. Many plants have been shut for what I would describe as extended periods of time, well over a month in many cases and some cases much longer than that.

Most of our plants have cutback in terms of operating on one ship versus two ships and that will continue and which is obviously part of the cost structural issue here as we continue to right size the business, but when the inventory gets back to a more normalized level, which I alluded to with AWP and we think we’re reasonably close at materials processing as well; the plants will again begin to pickup and run on a regular basis, which will help the cost structure.

Ronald DeFeo

I’d like to make this point Ann, is that there’s actually a double cost in this kind of environment. If you were expecting revenues to be down 40%, and you plan production to be down 60%; and revenue is actually down 50%, you haven’t made as much progress on your inventory reduction as you have planned; but the double cost is, the fact that you are under absorbing your manufacturing and you are not running your factories at the current incoming order rate. Now that’s what we have done in businesses like AWP and in our construction business in the short run and that you pay the price.

Furthermore, we don’t have distribution that we floor plan inventory for, generally speaking, and I think that’s actually a good thing because we are not trying to make our revenue look a little bit better by pushing the inventory finance through a finance company or some third party so that we can make some short term revenue look a little bit better, but not fundamentally deal with the reality of a down market. This is important. Tim did you have a comment, a TFS comment.

Phil Widman

Ann, its Phil. On the Financial Services comment and Rick can add to this; he’s on the phone as well. We have gone through the cranes backlog and I’m looking at the financing related to orders that are in the backlog.

A lot of our customers would have had prearranged financing either of their companies or in some cases of their individual equipment orders, but we’re going through that with our Financial Services team in conjunction with the operating team, to try to solidify that and work through if there are difficulties currently being experienced by those customers in today’s credit markets.

Again, we’re talking retail sales, we’re not talking any type of floor planning as Ron mentioned. Rick, do you want to comment anymore on this?

Rich Nichols

I think you hit it right on the head. It’s really more from a crane perspective about helping our customers and facilitating new orders that are coming in and if they have principally an issue with financing that they had prearranged, we have Terex Financial Services right there with them to try to help facilitate the backlog.

Ronald DeFeo

The other comment Ann, I’ll reemphasize for everyone is, our Financial Services philosophy and model uses other peoples money. We’re not talking about adding to our balance sheet exposure or the requirement to finance that externally and when you’re talking about specific assets with value, that’s easier to finance, especially when we know the equipment and are willing to remarket the equipment with our supplier. So, that’s working quite well.

Ann Duignan - JP Morgan

Well, actually that’s a great point, because my follow-up question was on that very line of thought. I did visit with your teams at the rental equipment showdown in Atlanta, a month or so ago and one of the things that I noticed as I walked around, was that Terex was offering very aggressive financing; 0% for 48 months on some of the products.

I know that you have relationships with banks, but could you help us understand where that cost shows up? Does that show up in SG&A? At some point, somebody has to pay for that aggressive financing. Maybe you could help me understand how that’s going to end up flowing through your P&L?

Phil Widman

Yes, it would show up in gross profit and not in SG&A. So it’s part of the overall pricing, even as you look at it.

Tom Riordan

Ann, you’re referring to I assume the construction business down there, that we have been offering competitive market financing in order to pull it through the channel, because again, we do not have a robust dealer base that we’ve been loading up with inventory. So again, the financing’s been targeted for retail customers.

Ann Duignan - JP Morgan

Okay, I’ll get back in line. I’ve taken enough time.

Tom Riordan

Thank you, Ann.

Ann Duignan - JP Morgan

Thank you.

Operator

Your next question comes from Robert Wertheimer with Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Good morning everyone.

Tom Riordan

Good morning Robert.

Robert Wertheimer - Morgan Stanley

I wanted to ask two questions I guess. First just on the gross margin line, is that all sort of absorption cost or is there any significant discounting in there that lead to the sharp contraction in gross profit?

Phil Widman

Well, there’s a lot of things that go into overall gross profit Rob, including a lot of the restructuring costs are included there. Are you looking at the cause of all operating profit, specifically page six?

Ronald DeFeo

Page six, is instruct of a little bit on...

Phil Widman

The impact on operating profit that we show from the sales decline and new equipment does include some pricing added into that. I would say pricing is certainly not significant overall for the company in that line but it’s included there.

Robert Wertheimer - Morgan Stanley

Okay, fair enough. Then the second question would be how the quarter progressed. When you renegotiated your covenants a while back were you thinking that it would end up to be and I know it’s very transitional, right, this far down on the profit line and if not, I guess I’m wondering why you didn’t negotiate a bigger cushion on the covenant, which I assume you can do at some price. So did it surprise to use material as the downside and how come we weren’t able to see it when the quarter was going on if you weren’t?

Phil Widman

Let me comment and I think Ron will follow-up. Our covenants, I’ll just reiterate what they are, so you understand how they are calculated, but we have a net leverage covenant which is net debt, so it includes gross debt, less cash, divided by trailing 12 months EBITDA and it excludes unusual items basically; so restructuring costs are unusual things that have occurred are excluded from the EBITDA calculations including gains or losses.

The fixed charge ratio, which is EBITDA trailing 12 months, again excluding unusual items; over interest, capital expenses, cash taxes and share repurchases. In the modification we did on fixed charge a couple months ago, we excluded the share repurchases, because in the trailing calculation, they were pretty significant.

I would say we wanted to do a quick deal, surgical for a year period and we felt that was adequate, given we saw the significant impact of cash flow that we’re going to have from working capital as we expected.

So, working capital and cash generation provides a lot of flexibility on the net leverage test. You’re correct that the fixed charge test is probably more challenging, because that’s more dependent on the earnings side. We believe that we still can be in compliant with our covenants. We’re looking at a lot of options.

I think the emphasis I wanted to make on the liquidity and debt profile is the total value of our term debt and the revolver of $276 million I believe is the figure; in reality if I generated enough cash flow, I could take that off the table and pay it off and eliminate the covenant requirement, that’s one option potentially. So I think we’ve got enough flexibility Ron and we’ll continue to look at those and watch what we have.

Ronald DeFeo

A different point, but an answer somewhat to the same question; really is a reflection of how do you forecast. Historically, I’ve always said to be cautious about backlog. I’ve always said that when backlog is too high, that’s a problem; when backlog is too low, that’s a problem, but don’t judge a business by its backlog, because it can be substantially misleading for a whole host of reasons and that is proven to be an accurate statement.

Obviously, in some of our businesses, the backlogs are too low and you are essentially filling current demand with your ability to get orders. When industries and our businesses changes dramatically as we’ve seen them, it is very difficult to forward forecast.

I’ll just give you a sense on our industry; just pick the North American construction market on a unit basis, aggregated for all products, okay. The quarter-over-quarter data in 2008 versus 2007, the industry was down 10% in the first quarter, 15% in the second quarter, 26% in the third quarter, 31% in the fourth quarter and nearly 50% in the first two months where we have data of 2009, okay. So you are essentially seeing a trajectory, where revenue is precipitously dropping.

Now, I think what we’re seeing today is that that is kind of bottoming out and I suspect it will bottom out in the second and third quarter and then we’ll be adjusted to the new reality. Once you’re adjusted to the new reality, you can begin building back the components of profitability.

Phil Widman

One other comment Rob on the covenants; I’m sure it may come up otherwise, but the other option certainly of renegotiating on a new level of hurdles let’s say; potentially think of an impact of let’s say 400 basis points on that $300 million of borrowing or $12 million pre-tax or so a year. It’s not significant in terms of the EPS impact; it’s really more, I’ll call it the P&L issue than it is a liquidity issue in terms of the risk to the company, so I just wanted to reemphasize that again.

Robert Wertheimer - Morgan Stanley

Yes, that’s well. Thanks everyone.

Operator

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

Charlie Brady - BMO Capital Markets

Thanks. Good morning. With respect to the covenant on the net leverage, does that calculation, if you were to sell a business that had been losing money would that be excluded from the calculation following the sale of that business?

Tom Riordan

Yes, the way it works Charlie, is you exclude losses from the trailing period. If you sell a profitable business it has to be order of magnitude; 7.5% of the total net income to be excluded from the trailing.

Charlie Brady - BMO Capital Markets

Okay and as you’re going through and examining the portfolio and I think you’ve talked about this in the past, sort of where are you today in looking at that product portfolio, instead of looking at it and saying, these are businesses we think we want to keep long term and maybe these are some that we’re not going to keep longer term.

Ronald DeFeo

Charlie, there’s a couple of still relatively small businesses in our portfolio. We know we’re actively working to move to other people hands, but those are still relatively small. The broader portfolio of questions, we’re still open to fixing those businesses and/or selling those businesses either/or.

Our focus though, as Tom mentioned, is to fix the businesses, get them into a profitable position at a minimum of breakeven position and then we have much better options and obviously the business under the most challenges are construction business, but that’s where we’re taking the most aggressive action and we have made a decision that that business is going to be a regional business.

So I think we have set up a new leadership team. We’ve dramatically changed the way the organization has been put together under Tom’s leadership, stabilizing that business gives us lots of options down the road.

Charlie Brady - BMO Capital Markets

Thanks, I’ll get back in the queue.

Operator

Your next question comes from Matt Vitorioso with Barclays Capital.

Matt Vitorioso - Barclays Capital

Good morning. I was just curious; when the Fantuzzi deal closes, you’ll basically assume or issue, $232 million of new debt, is that accurate?

Ronald DeFeo

Why don’t you cover that Phil, because I think understanding Fantuzzi and the fact that we expect it to close in a couple of weeks, but understanding this is important because, we are essentially funding that by rearranging the debt structure that exist in Italy. We are not using any of Terex’s fresh capital.

Phil Widman

Yes, we are assuming debt and as well as cash that are in these businesses and a revolver agreement faced with a consortium of banks in Italy, which will have a level of capacity on it. So, we are looking at this acquisition to be self funding from internal and credit facilities that are provided; so that’s the situation.

Matt Vitorioso - Barclays Capital

Okay, but net-net; I guess to help us understand what the real impact is; I mean you’ll assume $230 million of debt. Is that net of the cash that you’re also acquiring or?

Phil Widman

Yes and the debt that we are assuming, we negotiated extended terms such that it’s multiple years out in terms of its maturity and the interest rates are at or below market rates, basically below.

Ronald DeFeo

Very attractive market rates and very good participation from the banks that were in the existing facilities at Fantuzzi; I mean fundamentally we’re going to aggressively restructure that business and deliver to the debt holders a much more capable and competent competitor in the next couple of years. They trust us, they look forward to partnering with us and we think it’s a good mutual investment. We still haven’t closed on the business. We still just have a non-binding term sheet at this stage, but we do expect to close on it in the next couple of weeks.

Phil Widman

Matt, we did assume the net debt position when we renegotiated our covenant relief a couple of months ago.

Matt Vitorioso - Barclays Capital

Okay and per those credit agreement calculations, does Fantuzzi add anything to the EBITDA calculation?

Phil Widman

We’re not going to get into the specific EBITDA related to that, but the covenant calculation, we pro forma the trailing 12 months EBITDA, including cost reductions that we plan to be implemented in that business and then as the actuals roll off, it’s one quarter replacing another. So, we don’t pickup their actual losses historically for example.

Matt Vitorioso - Barclays Capital

Sure. I mean for Q2 it sounds like you could possibly be operating at a loss again, which I’m having hard time figuring out whether or not you’re going to break your leverage covenant or not and you seem very confident that you won’t.

Could it be a difference of just calculating this EBITDA? Are there some big swings in either adding back unusual items or cost savings? Is there anyway you can give us some sort of guidance on what credit agreement EBITDA at the end of the quarter was versus sort of what you reported, so that we have an idea of what the swings are?

Ronald DeFeo

No. I’m not going to get into that level of detail. I think in the second quarter we still pickup, we lose the second quarter from last year, which was a very good quarter on our earnings standpoint; but the third quarter relatively speaking still was reasonably successful when you exclude different charges that we had. I think in the commentaries, we’ve talked about some of the unusual items in all the periods that we’ve gone through and against restructuring and any unusual charge, which typically I would talk about in our release.

The cash flow generation is pretty important in the second quarter and we see line of sight related to that from the mining and cranes business in particular, as we have reasonably high finished goods that’s going to be commissioned and paid for in the second quarter. So, we’re counting on a couple of hundred million dollars from those two businesses in the second quarter, as well as the earnings projections that I’ll call it reasonable and consistent.

Matt Vitorioso - Barclays Capital

Okay, so not to harp on it, but you’re comfortable that the leverage covenant that there is enough room here heading into Q2?

Ronald DeFeo

Our plans are that we are not going to break covenants.

Matt Vitorioso - Barclays Capital

Okay, thank you very much. I appreciate it.

Operator

Your next question comes from Henry Kern with UBS.

Henry Kern - UBS

Good morning guys.

Ronald DeFeo

Good morning Henry.

Henry Kern - UBS

Your allowance for doubtful accounts as a percentage of trade receivables spiked in the quarter; could you talk a little bit about how write-offs are trending and how you see them trending going forward and then maybe a little more generally, how you see the financial health of your customer base?

Phil Widman

Henry, I’ll give you a couple characterizations. We’re having weekly cash calls in all of our segments. We are over managing the attention on accounts receivable in particular and as you continue that pressure, you start to get at the hard ones to solve that I would say and we’re being realistic in terms of our exposures related to those and that’s part of the reason for some of the provision that’s occurring.

We are taking back equipment if necessary and we can get access to it to protect our exposure and we’ve taken provisions and again I’m not going to get into specifics by segment, but we’ve taken provisions where we expect to do that. So as you’re receivable dollar balance declines, that reserve position can tend to increase, but I would say that no abnormal losses; I’d call it normal for this type of situation.

Ronald DeFeo

No unusual specific customer exposure.

Henry Kern - UBS

Okay and then across your segments, could you talk a little bit about pricing and where the discounting may be most fierce as a result of competitors being less rational?

Tom Riordan

Henry this is Tom Riordan. Let me go through it real quick kind of by segment my assessment and then Tim, Eric or Rick feel free to jump in. In general as you’d expect in mining, large mining, large cranes, we think those are pretty stable pricing environments.

On the smaller products within mining and cranes, tougher environment, but we’re not seeing any fundamental unusual pricing activity that we consider out of the ordinary. Obviously, we’re moving, slow moving inventory at somewhat of a discount, but frankly on an overall basis my belief is it’s not material to the overall results. I think the AWP team has done a very nice job of being very disciplined with their customer base and frankly, not really seeing any pricing deterioration in that business.

In construction, we’re having a little tougher time. I think the market environment is tougher there as I would describe it from a pricing standpoint. I think the competition is being pretty aggressive in some specific markets and some specific product lines, and we’re trying to match that within reason. We don’t believe we are being the price leader for what’s going on; at the same time we’re also trying to be judicious on converting inventory into cash.

There have been several instances of us taking either used product or some very slow moving new product to auction, but again pretty immaterial portion of our total sales revenue at this point in time. So the short answer I think is construction market is seeing the most challenge in that regard. I think most of the rest of the businesses are behaving reasonably as I would describe it. Tim or Eric or Rick?

Tim Ford

Tom, this is Tim Ford. I would support that statement. There is a high degree of competitiveness for whatever little business there is in the aerial segment today, but manufacturers by and large are maintaining a degree of discipline. We’re not seeing tremendous price discounting to speak of; we’re not seeing or hearing of unusual terms and by and large I think that the industry is staying relatively disciplined.

One comment I would make however is, one of the differences I think today versus a year ago is there is essentially a shadow competitor out there and the shadow competitor is all of the depleting that the major rental companies are doing and so that’s creating a significant amount of newer used equipment; one, two, three year old equipment that’s being sold into the marketplace and clearly that is at a lower price than new would be. So, in essence your biggest competitor today is the used market.

Eric Nielsen

Yes, I would just add specifically from the materials processing side, that here in North America there has been an excessive amount of finished goods inventory in the competitor’s pipeline; that is working through. We are seeing some aggressive pricing on those, but we believe its short term in nature and that generally speaking all the major competitors are principled in their pricing and will be long term.

The other dimension though is the relative strength of the U.S. dollar versus the British pound and the Euro, which is the basis of some of our major competitors. They are clearly taking advantage of that relative strength of the dollar for a product that’s already in the U.S.; but again, we expect that to be more of a short term inventory clearance tool that they’re taking advantage of as opposed to a structural change in any pricing.

Mining continues to be solid. It’s a more competitive environment because of available manufacturing capacity, but overall we are seeing good mix in our products that are being sold and no more than I will say normal price negotiation tactics out there in pressures.

Rick Nichols

I would say from a cranes perspective, all competitors are out there competing very aggressively, but from a pricing standpoint there is a level of discipline between everyone I believe and we haven’t seen huge moves in pricing across the board. So certainly, the lower end crane product line would be a little more aggressive in pricing, the rough terrain, the tower crane, but the larger over 300 tons would be very, very stable.

Henry Kern - UBS

That’s helpful. Thanks a lot guys.

Operator

Your next question comes from David Raso with ISI.

David Raso - ISI

I just wanted to go through a quick clarification on a couple items. The $500 million inventory reduction; that is a cash reduction, right; that’s ex-currency; correct?

Ronald DeFeo

That’s right.

Phil Widman

That’s a cash increase.

David Raso - ISI

Yes, the option in the inventory, you get the cash?

Ronald DeFeo

That’s right.

David Raso - ISI

Regarding the inventory, you said 62% is cranes and mining, is that correct?

Tom Riordan

Yes.

David Raso - ISI

So and that’s just mining or the whole MPM?

Ronald DeFeo

It’s MPM David, sorry; the total segment.

David Raso - ISI

So, you’ve got about $1.3 billion of the inventory in those two divisions and you’re backlog in those two divisions, about $1.7 billion; and you mentioned the idea of a couple hundred million near term, hopefully in the door on those backlogs turning into sales, those are pretty sizeable numbers, so you think the inventory reduction could be greater?

Is there a mismatch issue with the $1.3 billion of inventory that doesn’t exactly match up well with what’s in the backlog? I’m just trying to think why isn’t the inventory reduction from those divisions a little greater?

Ronald DeFeo

The backlog doesn’t necessarily, all be deliverable in the next quarter David. That is scheduled out for the customer requirements; of the needs.

David Raso - ISI

Well, I’m thinking about the full year of the $500 million for the whole company full year. Do you think that those two divisions might give you $500 million alone, given those numbers?

Phil Widman

Well, if you look at where we have the inventory; in AWP we’ve only got 13% of our total inventory, it’s already down. They were on a lean process. There is nothing in raw material that’s going to improve there and it was more in finished goods.

Ronald DeFeo

David’s point is really why I wouldn’t want more inventory come out of those two businesses and I think what I’d like to say here is that maybe they will, but I’m hoping it won’t, because I’m hoping those businesses actually stay strong and we’ve got raw material and working process, etc. to build for a stronger 2010 period.

Phil Widman

That’s exactly the answer.

Eric Nielsen

I would just add David. This is Eric. That certainly from an MPM viewpoint, spare parts are a considerable portion of that inventory that are turning and that are out there to serve the customer. So it’s not like it’s all directly convertible to a finished goods sale.

David Raso - ISI

Okay and regarding the crane cancellations, by my calculation; you can adjust it for currency if you’d like, but still the net orders for cranes for the quarter were negative. So obviously, the cancellations seem to override the orders?

Ronald DeFeo

That’s correct.

David Raso - ISI

The cancellation profile, you made a couple of comments about the larger cranes still looking relatively solid, but when we think about converting that backlog to sales, inventory obviously then bringing in cash.

The cancellation profile, are we seeing a cancellation rate continue to accelerate? Where are we in that process? Because I don’t want to look at this inventory and realize that backlog is not there anymore, but this cancellation rates continue to accelerate and we lose the inventory reduction story there? I’m just curious of the cancellation profile, what have you seen in the first couple of weeks of April, just an update on that?

Ronald DeFeo

Yes, let me give you kind of an overview and then turn it over to Rick. I think this is a business as Tom said; it’s really a two businesses at this point in time. Dramatic change in lower revenue in North America, in particular the rough terrain cranes where we have seen pretty substantial cancellations, but we have also shutdown our production for somewhere close to four or five weeks and Rick can give you the specific amount there.

In shutting our production, we really adjusted to the reality of the current incoming order level. We think there was a little bit of excess inventory on our own books and at our customers, but we think a lot less than our competitors have.

So, I think the cancellations are a function of just adjusting for the reality of demand in North America and the tower crane business is down and staying down and we have seen some cancellations there and we’ve seen some cancellations in the smaller end of our European product lines, but Rick, can you comment on kind of the trajectory of cancellations?

David Raso - ISI

And Rick if you could and I know it’s competitors of yours on the phone and I think you mean what’s exactly on the backlog, but I mean is that backlog a lot of RTs and tower cranes that are more prone to cancellations or do we have some nice big lattice and the bigger truck cranes that should be less prone to cancellations?

Rick Nichols

I’ll give you rough numbers David. We would be north of two thirds of the backlog, more oriented towards the larger product portfolio and almost three quarters would be sitting in the larger German business of lattice booms and the large AC’s.

So I think we are fairly comfortable with our backlog position. We are very close to our customers. We are calling our customers weekly to verify and validate our backlog. Certainly we’ve seen cancellations across the Board, most significantly as Ron mentioned in the first quarter in our Waverly business.

Fully three quarters of the backlog disappeared very quickly, because of a very sharp downturn in the U.S. market, but overall I think we’re pretty comfortable with the $1.3 billion in backlog and we’re validating it weekly like I said, such that we have the opportunity to take the inventory out and generate cash for the company.

David Raso - ISI

Last quick one and I’ll hop-off. The AWP conversations you’ve had with the rental houses, were obviously through much of the big orders being put in for ‘09 and unfortunately the orders have not been that big, but where are we in the conversations; your view of the de-fleeting process obviously depends on and how the utilizations are the rest of the year, the way non-residential is turning down?

But how would you handicap at least the vibe from them ‘10 versus ‘09, their CapEx in aerials? Are we probably looking at the greatest year-over-year decline with this ‘09 period, but how would you handicap ‘10 versus what you’re seeing in their fleet?

Ronald DeFeo

Let me start and then turn it over to Tim. I see ‘09 as our toughest year. This is a year where somebody made a decision that they weren’t going to buy and they are going to stick to that decision of not buying, and they are going to buy to short term needs only as opportunities come up, and they are really going to squeeze things down and generate cash.

I do think we’re going to see activity improve in the later part of the year and while I’m not bullish on 2010, I think we’re going to see the beginnings of recovery in 2010, because fundamentally it’s going to be a couple of years and that just makes a lot more sense and our customers will improve in 2010. Tim.

Tim Ford

Yes, two points I’ll add here; one on the de-fleeting question, David. We have been surveying our customers both formally and informally to understand where they are. I think we are through the biggest portion of the de-fleeting and the biggest de-fleeting has happened in North America and selectively in Europe. So I think we’re through the biggest piece of that. I think they are by and large at or about where they want to be based on what I’m hearing and seeing.

With respect to 2010, I would support Ron’s comments. I think this is clearly going to be the toughest year for us, both volume wise and profit wise, because of all of the shut downs that Tom referenced from a profit standpoint and clearly the volume isn’t there. I like Ron, expect 2010 to be a rebound year, but it’s not going to be like we saw in ‘04, ‘05 and ‘06.

David Raso - ISI

Okay, thank you very much.

Operator

Your next question comes from Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs

Thanks Ron. I was wondering if we could use page six maybe and talk about building a bridge to this notion that the second half of ’09, you turned the company into a profitable position. I guess I can see with Aerial, the comps get a little easier, so the new equipment impact gets less negative. Same thing for construction hopefully, but I guess I can also see where the cranes business and the mining piece of MPM could get tougher. So I wonder if you could take us through that.

Ronald DeFeo

Okay. I think if you look at page six, what it reflects is the first quarter and if you just look at a couple of things; one, the restructuring activity is $40 million and the net manufacturing under absorption of $44 million. Those two combined simple math is $84 million.

Now, we won’t get our manufacturing under absorption all back to normal, but if we can just begin to produce the demand to real demand as opposed to try to produce under real demand, that number will be less than $44 million of the negative. The restructuring activity, those are onetime costs. That’s the simple explanation of it. The more complicated explanation is, we obviously have a forecasting process and we’ve gone through each one of our businesses, looked out forward and tried to handicap what those businesses are forecasting and have that as a conclusion.

Now, we believe that there will be weakness in our material processing and mining business and in our crane business. The degree of that weakness is an unknown, but the signs we see in our mining business are pretty good, robust, core activity and the order entry continues to be reasonably positive in our crane business, particularly for the bigger cranes produced from our European operations.

So, you balance all that out and with the cost reduction that we’re currently doing, coupled with basically looking at the company’s performance at a very low level from a revenue point of view, I think we can still make money in the second half of the year.

Phil Widman

A couple comments, Terry. We have implemented a lot of cost reduction activities. In construction, as those are largely European manufacturing operations, those are all in place yet, so they haven’t affected the P&L.

So you’ll start to see more of that impact as some in the second quarter, more in the third and basically all of it by the end of the third I would say in terms of the construction segment in particular. As well as the other actions that we’ve implemented, just recently and in the March timeframe and April timeframe that they’ll have some effect in terms of the rest of the year.

So, we’ll continue to keep the cost side down. If we have stability and production levels, I think you’ll see us adjusting the under absorption to the levels of production we have. So, that would start to have an effect as well.

Ronald DeFeo

One other factor, Terry that we haven’t talked about on this call yet is material pricing. We are at most of our businesses as you’d expect in this environment seeing favorable pricing. That being said, it has not flowed through the balance sheet and into the P&L based on inventories not turning, because the plants are not running.

So again, as the inventory works its way down, plants startup, material starts flowing through the system again, we’ll see as the year goes on favorable material pricing starting to show up on the P&L.

Phil Widman

The last point is more SG&A reductions and just the salary reduction alone is a meaningful contributor. So, I think we’re pulling on enough levers to give us, assuming the revenue stays at the low level that it is to have a good shot at making that second half comment.

Terry Darling - Goldman Sachs

On the restructuring, would we want to plan for or assume that restructuring increases in cranes and mining in the back half of the year as an offset to obviously all of those positives?

Phil Widman

How I would frame it is, some of it, particularly in the crane side of the business we’re already in the middle of as it relates to rough terrain and tower cranes. On the materials processing side of MPM segment, most of that is behind us at the moment; we’ve got a couple of other pieces that are hanging out there.

On the larger mining, larger crane business, kind of good news. Bad news is we see a gradual reduction here, but frankly not a lot of structural change that we’re likely to make to either of those two businesses. So, we’re not expecting what I would call big ticket plant closure or other major restructuring. There potentially would be some people restructuring costs, but we think at the current trajectory that that’s manageable.

Ronald DeFeo

I think in Germany, we have maybe 15% of our workforce that’s still temporary workers. What’s that level, Rick? Is it about 15%? Rick.

Tom Riordan

Maybe we lost Rick. Maybe we did, yes.

Terry Darling - Goldman Sachs

Ron also just shifting gears I wanted to come back to the reference in your opening remarks to consolidation and ask if you could elaborate on that. I guess I interpreted that as something beyond the standard boilerplate comment that in down markets consolidation makes sense and you look across the industry and there’s clearly a need for that. I’m just trying to calibrate a little more specifically there. Are you actually optimistic something will happen or are you just sort of noting that should happen, could happen, just flush that out for us?

Ronald DeFeo

I’m always optimistic that there is vision and leadership in the industry, but I’ve also been known to become realistic and that the probability of that happening sometimes is low.

I think this is an industry that does need to consolidate. I have said that historically. It’s been part of our investor pitch historically and I’m going to be consistent in saying that and either we will continue to consolidate others or we will be consolidated and frankly our job is to make the best possible company we can, to look for the best possible options in the industry for our shareholders that we can, and continue to move forward.

I’ve always been that open, I’m going to continue to be that open and because I believe that is my job, but I made that comment because I do think it’s important to emphasize that when industries go through 50%, 60%, 70% kind of volume changes in short periods of time, those that survive are the ones that focus on cash, focus on cost reduction and are open to value creating initiatives with others, and that’s Terex. The investor base needs to understand that about Terex. It can believe us or not believe us, but that has been our attitude and will continue to be our attitude.

Terry Darling - Goldman Sachs

Okay and then just one last clarification; the working capital number of $500 million, I was wondering if you could just remind us, did that change versus this prior expectation that you indicated and if it didn’t, given the lower revenue forecast, why wouldn’t that have moved up?

Phil Widman

I think Terry I indicated the last time around, it was a working capital percentage of annualized fourth quarter sales 23%. I’m talking specifically inventory, cash here, so as sales go down certainly receivables are going to go down and possibly generate some other offset. So I think we’re still as optimistic on the reductions as we have been in the past.

Terry Darling - Goldman Sachs

Okay, thanks very much.

Operator

Your next question comes from Jamie Cook with Credit Suisse.

Jamie Cook - Credit Suisse

Good morning. I just have one quick follow up question; most of mine have been answered. Tim, can you just talk about what you’re seeing, sort of the health of the rental customers as you’re seeing it both in the U.S. and Europe, because everyone sort always seems to think this time it’s different and people are going to be rational, but the channel check’s that are sort of gathering suggest that a lot of these guys are upside down, so you’re probably closer to it than me. So just if you could comment how you sort of see that playing out?

Tim Ford

Sure. I think by and large most of the rental companies in North America are finding ways to get equipment into service. Pricing from what I’m hearing from the customer side is very, very competitive. Some are using price as a means to increase utilization and I think frankly that’s challenging for many of our customers.

As Phil mentioned, as we look at our receivables balance, I’m not aware of any customers that are in distress. We feel like we’ve got a pretty good fruition and we’re looking at our receivables balances aggressively and consistently here in North America as well as in Europe. So I think by and large the financial health is okay, the industry health is questionable right now.

Jamie Cook - Credit Suisse

And how are DSOs trending in Europe, because that was also a big issue last cycle?

Tim Ford

For us, we are in a relatively good position versus where we’ve been historically. As Phil mentioned, we are managing receivables on a very, very close to the best basis. Every quarter is looked at with specificity and we have rolled in advance. We really don’t have any concentration of exposure as we did maybe in 2001.

Phil Widman

Well 2002 was a disaster. 2001, 2002 and most of those people are no longer with the company that made some of those decisions and frankly, it was too casual than the way receivables were managed in Europe. One of the reasons our SG&A is higher and AWP is because we’ve put a European organization together that we really didn’t have.

We have a Managing Director, whose paying attention; we have a financial organization that’s paying attention; we have a head of sales that’s paying attention; we got customer support people that are paying attention, and yes it’s costing us money, but the amount of money it cost the organization the last time, we didn’t own the business when the downturn hit. I’m sure this is smart money being spent right now for us.

Jamie Cook - Credit Suisse

Thanks, I’ll get back in queue.

Operator

Your next question comes from Alex Blanton with Ingalls & Snyder.

Alex Blanton - Ingalls & Snyder

Good morning.

Ronald DeFeo

Good morning.

Alex Blanton - Ingalls & Snyder

Well, you’re not alone. Dover Corp. reported this morning, probably the worst quarter since the company was founded in 1955 and it brings up a question that I wanted to ask you because it relates to the adoption of lean manufacturing practices over the past 10 to 20 years.

As companies have reduced the inventory buffers between points in the supply chain and developed much more flexible manufacturing systems that can react very quickly to changes in demand and I’m comparing today when you might be able to change a production rate in one or two days, whereas I remember Caterpillar in the early days when I started following it in the 70’s, it would take them six months to change a production schedule because they had that much material in their own pipeline in their manufacturing plants; today its a few days.

It means doesn’t it that the entire supply chain reacts very quickly to end demand and doesn’t that introduce much greater volatility in your operations on a short term basis if demand falls 20%, 25%, then your production can fall 25% practically overnight?

On the other hand if demand increases are reflected more quickly, also doesn’t it mean the reverse; that you can have a very big and sudden increase in production compared with the past? That’s a long question, but I’d like your thoughts on that because we’re seeing much greater volatility in all these companies in this cycle than in any that I can remember and I’ve been following the industry for 40 years.

Ronald DeFeo

Well Alex, you asked a long question, I can give you a short answer. Yes, in fairness I’ll add a little bit more dimension to it.

You have much better connectivity with supply chains and lean allows you to do that. You have for Terex a much better relationship with your customers and a commitment not to load your customers up and for us, our customers run again of rental companies and dealers and we don’t go through a single point or a single channel like a Caterpillar would, like a CNH would.

We sell across the range of different customer types. So when the downturn began, we made a commitment internally that we were not going to be driven by our own incentive compensation; we were not going to be driven by making a budget that we set at a point in time which is a snapshot; we were going to be driven by, how do you manage for cash and how do you get the company positioned to survive the downturn, because nobody knows how long it is and nobody knows how deep it is and how do you get to the other side, so that you’re stronger when you come out and that’s what we’re experiencing today.

That takes a lot of intestinal fortitude, because it means coming to the financial markets and saying, we don’t know what guidance to give you. You come to the financial markets and you say “Look, we’re going to have losses here and we’re going to chase the inventory, but at times we may get out of balance,” okay, but that is what we’re doing.

I think frankly, the rest of the industry understands the need to do it, but is struggling with this age old problem of putting inventory into the distribution, because you’re going to manage manufacturing operations in a more traditional way, but I think the rest of the industry is making progress at it. I think you hear Caterpillar talking about it and doing it. I think others are doing it. I think John Deere does it pretty well.

So I think the industry is becoming more disciplined and more capable and long term, our returns on capital will be better and frankly that’s good because that ought to require that we as an industry get a higher multiple, more along the lines of a diversified industrial than along the lines of a highly cyclical capital goods company that tries to do everything from pig iron on one end to financing on the other end. So now I gave you a long answer to your question.

Alex Blanton - Ingalls & Snyder

Thank you.

Operator

Your next question comes from Meredith Taylor with Barclays Capital.

Meredith Taylor - Barclays Capital

Hi, good morning. Tom my question is around the construction profitability, you said that you believe the construction can achieve breakeven in 2010 based on the actions that have already been taken. Can you just flush out your thoughts on how far the end market is from the bottom at this point in your view and what kind of volumes are required to support this breakeven in 2010 and perhaps when during the year you anticipate, the business could swing to profitability?

Tom Riordan

Meredith this is Tom Riordan. If I knew exactly where we were hitting bottom, I would be selling advice on the internet or something. I don’t want to be flip about it. We think we’re seeing reasonably stable order rates in construction. That being said, we’re a little bit concerned on how much of that is seasonality because obviously usually Q2 is the high point. So in some cases it’s really hard to tell exactly where we’re at.

Back to your fundamental question, we are structuring this business for the current low levels we are at of order rates and revenue at an 8% SG&A and we believe we’ve got a plan, such that at those reduced levels, with the reduced structure and cost that we’ll have with it and all of the restructuring behind us through the course of ‘09, by the time we move into ‘10 we’ll be in a position at these levels to be profit neutral and generating cash.

Meredith Taylor - Barclays Capital

Okay and just as a quick follow up; I mean have you kind of tried to overshoot at least a little bit in the event that you see further downside from here in that end market to still be able to achieve the profitability in ‘10?

Tom Riordan

We’re trying to be pragmatic, but also recognizing that again on an overall basis we’re 48% down. Some of our product lines are down even more than that, so it becomes very difficult to run a business, similar to the conversation we have with AWP. When you take 70% of the business away it’s very difficult and I think Tim Ford and his team have done a great job in fundamentally reducing the structure.

We’ve got a bigger challenge in order to accomplish that within construction fundamentally, because the number of plants, the breadth of the product lines, the breadth of distribution channels and that inherently majority of the business is in Europe which particularly in Germany tend to be less flexible in terms of being able to flex both up and down at cost structure and people content.

Meredith Taylor - Barclays Capital

Okay, thanks so much.

Operator

Your next question comes from Denver Roland [ph] with AET&A.

Denver Roland - AET&A

Thank you. I just had two follow up question. The working capital that you’re talking about for 2009, I know you are talking to $500 million inventory reduction. What does that mean for total working capital? I just want to clarify that. It sounds like you are not saying $500 million of total working capital as a source of cash.

Phil Widman

We have not updated specific guidance for anything; let alone working capital, but what I said in the year end call a couple of months ago, we are shooting for 23% of the fourth quarter revenue annualized. So whatever your expectations are for fourth quarter revenue, 23% of that is in working capital and you can back into it by cash flow change from working capital. That is higher than $500 million.

Denver Roland - AET&A

Okay, thank you, and the other question I just had is I know you had said that the calculation under the credit agreement is not as straightforward as we might think as far as looking at EBITDA. Can you guys just give me what the numbers were as far as the fixed charge coverage and the leverage at the end of the first quarter per the way you calculate it?

Ronald DeFeo

I’m not going to divulge at this stage, but we’re well in compliance. At the end of the year we were at less than one times net leverage for example. Those on the call, our credit agreements are probably public documents, so you can look at the covenant calculations in terms of the math to get that.

Denver Roland - AET&A

Yes, I was just looking for some more color because you had said part of it includes the restructuring charges and you were hesitant to give that out…?

Ronald DeFeo

Put it this way; we were very well in compliance, mainly because we had a very high second quarter profitability that in the first quarter is still in the calculation, second quarter of last year.

Denver Roland - AET&A

Okay, thanks very much.

Operator

Your next question comes from Peter Epstein with PWP.

Peter Epstein - PWP

Hi guys. Thanks for the detail call. Can you just talk a little more about your rental companies and what they are up to? Because it seems to me in the last downturn, in the early 2000’s, the rental companies were in trouble because of obligations to you guys, but are they able to now back out a lot easier of contractual obligations to buy equipment?

Ronald DeFeo

I don’t think rental companies have real contractual obligations with us to buy equipment. There is almost always an understanding of what we are planning, but never what I’ll call contractual obligations. I think the rental companies are managing their businesses as best as they can through a challenging end demand market.

As I look across the range of the rental companies, they run the gamut from financially stress a bit to in pretty good shape, but I don’t see anybody teetering in a major problem. I think they’re being prudent in how they run their business. If I was in their shoes, I’ll be doing exactly the same thing as they’re doing.

Peter Epstein - PWP

Even in the last downturn they weren’t tied up with obligations to buy equipment?

Ronald DeFeo

The last downturn was probably 2000 to 2002 and tied up is an odd word, because I wouldn’t say there was any contractual arrangement there. I think there might have been understandings, part of plans, but I wouldn’t say they were any contractual agreements.

Phil Widman

Attitude; potentially of that kind.

Ronald DeFeo

Yes, maybe a different attitude; yes, that’s probably a good point to make. Back in that downturn I think some of those rental companies were just in their early stages of being formed and they thought that a good way to improve profitability was to jam the equipment manufacture and buy the equipment for less and I think they quickly came to realize that that’s not a solution, because having an asset on your books that you paid less for, that’s still sitting there and not generating revenue, is not a particularly good business decision.

Peter Epstein - PWP

Okay, thanks very much guys.

Operator

Your next question comes from Chris Dionne with Shooters [ph].

Chris Dionne - Shooters

I guess you didn’t hear me. My questions have been answered. Thank you.

Ronald DeFeo

Thank you, Chris.

Operator

And your final question is from Dave Gerard with Trilogy.

Dave Gerard - Trilogy

Hey guys. When you say your goal is to be breakeven, you talked about net income line I suppose, 2010 for example?

Phil Widman

Net income, yes.

Dave Gerard - Trilogy

Yes okay. Can you help us understand in terms of CapEx, what is the maintenance CapEx on the company? I mean what kind of CapEx can you live with over the next couple of years?

Phil Widman

Given we are managing for cash; Tom and I are approving every single capital spending in the company regardless to evaluate that. So, we’ll find out what maintenance is, but typically we saw we’re at 1.25% to 1.50% of revenue and of that I would say probably half of point would be maintenance, order of magnetite, if that gives you enough to run at all.

Dave Gerard - Trilogy

And working capital; I mean that clearly in ’09 you guys are looking at it as a big source of cash. If demand stays at current levels, how might ’10 look like just directionally in any orders of magnitude if you might be able to spare that?

Ronald DeFeo

I think the opportunities are working capital in a stable environment, really get at the lean implementations and the operations. Increasing the velocity from the supply chain is still an untapped area that we could still do a lot more on and the velocity through the shops would tend to be about the same.

So I think that’s the opportunity in a stable environment that we still got upside. I set a target back, about 2004, to get the 15% of working capital for revenue, which is not world class, but I think it’s an achievable objective over the medium term horizon. We got as low as 17.5% within the last two years.

Dave Gerard - Trilogy

Got it. Thank you.

Ronald DeFeo

Alright thank you.

Operator

Thank you. I’d now like to turn the call back over to Mr. DeFeo.

Ronald DeFeo

Well, I know this has been a long call and we’ve had a lot of people on for a while. I appreciate everybody’s interest. Please contact Tom Gelston or our team for follow-up and thank you for your interest in Terex today.

Operator

Thank you ladies and gentlemen. This does conclude today’s Terex Corporation 2009 first quarter earnings release conference call. You may now disconnect.

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Source: Terex Corporation Q1 2009 Earnings Call Transcript
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