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Executives

George Ellis - President of Terex Construction

Ronald DeFeo - Executive Chairman of the Board and Chief Executive Officer

Timothy Ford - President of Terex Aerial Work Platforms

Philip Widman - Chief Financial Officer and Senior Vice President

Stoyan Filipov - President of Developing Markets & Strategic Accounts

Kevin Bradley -

Analysts

David Wells - Thompson Research Group, LLC.

Ann Duignan - JP Morgan Chase & Co

Matthew Vittorioso - Barclays Capital

Seth Weber - RBC Capital Markets, LLC

Henry Kirn - UBS Investment Bank

Alexander Blanton - Clear Harbor Asset Management

Andrew Casey - Wells Fargo Securities, LLC

Robert Wertheimer - Morgan Stanley

Charles Brady - BMO Capital Markets U.S.

Ted Grace - Susquehanna Financial Group, LLLP

Robert McCarthy - Robert W. Baird & Co. Incorporated

Andrew Obin - BofA Merrill Lynch

Jamie Cook - Crédit Suisse AG

Terex (TEX) Q1 2011 Earnings Call April 21, 2011 8:30 AM ET

Operator

Good morning, my name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation First Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Ron DeFeo, Chairman and CEO. Thank you. Mr. DeFeo, you may begin your conference.

Ronald DeFeo

Thank you Brooke. Good morning, ladies and gentlemen, and thank you 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; and Noah Weiss, Senior Manager of Investor Relations. Tom Gelston has been ill the past few days, and we wish him a speedy recovery, although I do think he's on the call as well. Also participating and available for your questions are Kevin Bradley, for the Cranes segment; Tim Ford for our Aerial Work Platform business; George Ellis for the Construction; Kieran Hegarty for Materials Processing; and Steve Filipov for Developing Markets; as well as Ken Lousberg for our China operations. A replay of the call was archived and will be archived under Audio Archives in the Investor Relations section.

I'd like to begin with some overall commentary on the business, followed by Mr. Widman who will provide a more detailed financial report. I will return and summarize and open it for your questions. During the Q&A period, it would be appreciated if you ask only 1 question and a follow-up.

The presentation we will be referring to is accessible on the company's website. Let me begin by referring to the forward-looking statements and the commentary on Page 2, which I encourage you to read and review, as well as our other disclosures that are available in our public documents.

And now let me turn to Page 3, which is marked as Overview. As anticipated -- frankly, as anticipated, the recovery is underway and continuing at Terex. Net sales increased 34% in the first quarter of 2011, and 3 of our 4 segments increased compared to the prior year. Order activity continues to accelerate, with a strengthening backlog in all of our segments.

This has led to increased production levels, which, of course, helped improve our year-over-year absorption of our manufacturing operations, which are returning to a more typical pace following the ramp down in 2009 and the ramp-up in 2010. This has resulted in both pricing and cost challenges at the moment. Key components such as steel, hydraulics and tires have had significant price increases, and we have put pressure -- and this has put pressure on our margins and, in some cases, caused short-term delivery issues.

Consequently, we have implemented price increases in virtually all of our product categories. But, as normal, these increases take effect over a future period of time. Of particular note are the Cranes' port equipment lines of businesses, which experienced a larger-than-expected loss, and we will discuss this in a little more detail later.

There's a lot more work to do to cut costs, although we do see increasing order rates in some of these product lines as being helpful for later this year and early next year. The last point on Page 3 is that we have executed a partial sale of our Bucyrus holdings to help balance our geographic cash position between North America and Europe.

Turning to Page 4. We are certainly seeing a more positive environment, market environment in most, if not all, of our products -- product lines and markets around the world.

Let me comment by product category. First, our Aerial Work Platform business. The backlog increased 123% with last year and 45% compared with the prior quarter, or about the same level of backlog that we had in June of 2007. This increased backlog has caused us to adjust our production levels, which we thought we were going to get ahead of. But at this point, we are just keeping pace with the higher demand. We also implemented at least a 4.5% price increase on most of our models during the quarter. This will have little effect in the second quarter and more in the third and fourth quarters. The market recovery has tended to be broadly based geographically.

In Construction products, we see solid demand for our compact equipment, material handlers and our off-highway trucks. We received solid orders for the recently introduced new products, and the lead times have been lengthening somewhat as our backlog increased. The operating losses from this business have now narrowed, and we expect Q2 profitability. There remains a lot of work to do to continue to improve this franchise, but we feel we're on the right path. We're achieving our longer term goals.

The Cranes market has experienced a notable recovery in North America with rough-terrain boom trucks, all-terrain and even some tower crane products showing improvements. Crawler cranes have yet to bottom in the EU with a soft market being experienced in particular for wind power. Additional cost reductions are required in our European Train operations, and these are underway. But in general, we've been surprised by a stronger backlog in our Crane operations than we had initially expected.

Turning to Material Processing. Dealer inventories continue to be low due to end user financing programs that created a good environment for new equipment to be sold into the marketplace. The Materials Processing group has a good track record of continually upgrading their equipment, and the marketplace generally responds to improved productivity and the advancements led by our team in this category.

So to summarize, the operating environment is clearly better today than we've seen in quite sometime. It's a little better in some areas than we expected, but we remain a bit cautious with a number of challenges that are being addressed.

Let me turn it over to Phil who will review the numbers for our continuing operations. Phil?

Philip Widman

Thanks, Ron, and good morning. Page 5 displays the quarterly year-over-year and sequential results for the continuing operations of the company. I'll cover some points here and cover more detail in the bridge later.

Net sales increased 34% from the prior year quarter but declined 5% sequentially. The increases over the prior year were significant in most segments: from 75% in AWP, 68% in Construction and 41% in Materials Processing, while Cranes declined 4%. Sequentially, the increases were more modest than the recovery in segments and were more than offset by the impact of the timing of cranes orders and deliveries where net sales declined 28% most significantly in large crawlers, all-terrain and port equipment products.

We had loss from operations of $9 million in the first quarter compared to a loss of $67 million in the prior year quarter. The favorable effect of increased net sales volume, improved manufacturing utilization, reduced restructuring and related charges were partially offset by increased SG&A and inventory charges. SG&A expense increased primarily due to the reinstatement and accrual for certain performance-based compensation programs and the cost of CONEXPO in March of 2011. Sequentially, the significant net sales decline in Cranes mentioned above was the primary reason for the increased loss from operations.

Overall, working capital increased to the typical seasonal pattern and due to delivery delays in the Cranes segment both year-over-year and sequentially. Working capital as a percent of the trailing 3-month annualized sales increased to 37%. We expect to reduce working capital in our Cranes segment as production and demand are more effectively matched.

Overall, we expect our working capital-to-sales ratio to improve in 2011 as the other 3 segments increase their volume. We continue to take advantage of early payment discounts with our suppliers to improve our returns, and this has had a 1% to 2% negative impact on the working capital-to-sales ratio when compared to the prior year quarter.

Net debt decreased to $693 million from $792 million at the end of 2010 mainly due to proceeds of $166 million from the sale of shares held in Bucyrus, partially offset by the use of cash in operating activities. Overall liquidity remained strong at $1.2 billion, with cash balances of $700 million and availability under our revolving facility of slightly under $500 million. During January, we redeemed the 7 3/8% senior subordinated notes of approximately $298 million principal value.

Page 6 displays other financial items for comparison purposes. And I will discuss backlog shortly.

The net interest expense reduction for the prior year reflects the positive effect of the debt repayments made over the last 6 months of approximately $570 million. Other income in the period includes the gain on the sale of Bucyrus shares of approximately $52 million, partially offset by approximately $6 million for costs associated with the redemption of the 7 3/8% senior subordinated notes.

The weighted average share count is diluted this quarter given the overall profitability and includes 5.7 million shares for the effect of the convertible notes and 1.7 million shares for compensation programs. The earnings per share effect of the unusual items for the quarter includes the benefit of $0.28 per share for the after-tax gain on the sale of Bucyrus shares, partially offset by $0.04 per share for the costs associated with the redemption of the 7 3/8% senior subordinated notes. And there was $0.03 per share for charges related to restructuring and a customer insolvency.

Turning to Page 7. We have outlined the bridge between last year's loss from operations for the first quarter of approximately $67 million to the loss from operations of approximately $9 million with segment details displayed as well. The most significant changes, as are expected, is a largely favorable volume affect from the recovering segments, partially offset by Cranes where reduced crawler crane demand and port equipment delivery delays negatively affected the results.

The $20 million positive effect on manufacturing absorption continues to provide an uplift in all segments compared to the prior year quarter. The SG&A increase of approximately $16 million is mainly due to the restoration and accrual for certain performance-based compensation programs and the cost of CONEXPO that I mentioned earlier. We have split out the effects of the change in management allocation compared to last year to the segments on a separate line so you can see with better clarity our methodology change from prior periods.

Let me refer to Page 8 for our working capital trends where overall Net Cash Days increased to 144. This is partly due to seasonally stronger second quarter demand, the mix of business and the significant March level of net sales. The decrease in DPO compared to the prior year is mainly due to the early payment discount program. We still expect to achieve a working capital-to-fourth quarter annualized sales of approximately 28% at the end of 2011. Let me turn it back to Ron.

Ronald DeFeo

Thank you, Phil. Turning to Page 9. The backlog performance of Terex is actually quite positive. At nearly $1.8 billion of backlog that is deliverable in 12 months, this is the highest level we've had since December of 2008. In total, our backlog grew 38% compared to the fourth quarter and 46% compared to year ago. Approximately 5% of the year-over-year increase is FX related.

It seems that customer confidence really did start to build in the mid to latter part of the first quarter, with March being one of the most positive months we've seen in a long time. Compared to many first quarters, shipping performance was fairly poor in January and February but significantly changed in the month of March. I believe this is a reflection of the seasonality built into our business, but also the care our customers took in planning when they wanted to receive their products.

Turning to Page 10. I'd like to provide some insight on each one of our businesses by segment. While the numbers are there and presented clearly, some commentary about what's going on in each segment may be helpful.

First, with regard to our AWP business. We continue to see our customers getting healthier. This is fundamental toward longer term improvement through this product category. The net sales increase of about 75% compared with year ago is the beginning of a very solid recovery.

Particularly encouraging were the strength -- was the strength of our business in Western Europe. There are still Eastern European markets and parts of Europe that are still very slow, and we expect these markets to remain slow for most of the rest of the year. Nevertheless, replacement capital is currently driving our improved demand. Said simply, fleets are old and our customers are buying.

From an operational perspective, we've hired approximately 649 additional manufacturing workers compared with September 30, 2010, and this 22% increase was required in order to get production levels back to meet demand. These ramp-ups, of course, are always less efficient than ongoing production levels, and we expect to see improved productivity for our operations in the coming months.

Last month, Tim Ford and I opened our new facility in China. This facility is entirely focused on shipbuilding boom manufacturing, and will eventually support a number of our other products, some regional and some global.

We're excited about our new utility -- Utilities hybrid trucks that recently received a new U.S. patent. And lastly, we are now realizing some of our investments in the parts and service support area as we are at excellent levels of performance in this category and building the Genie heritage of being the most customer responsive company in this product category.

Turning to our Construction business. During the first quarter, we introduced a rubber-tired skid steer loader and a new loader backhoe product line. Both of these products have received excellent customer response, and net sales expectations are higher than initially planned. From a geographic perspective, this business has benefited nicely from sizable orders in North America, Russia, and developing markets in general.

Our Material Handler product line for the Terex Fuchs product had an outstanding quarter, and it's the best performer of the business within this segment. We believe we are turning the corner in profitability from our German Compact Construction operations, reflecting the restructuring and consolidation that took place there last year. Our Latin America operations are performing well, and a new factory is in the process of being started as permits have finally been secured in Brazil.

Turning to our Cranes business. As expected, this product category had a difficult first quarter. It was actually a bit more difficult than we anticipated with a higher-than-expected loss of approximately $6 million from the Port Equipment products, which affected our Cranes segment in total.

The losses are reflected from a twofold issue. First, net sales in the quarter were about half of what they were in the prior year in the prior quarter. There were also -- these were as a result of some customer delivery pushouts due to, frankly, the monthly nature of this business. Furthermore, our cost structure in the Port Equipment product lines remains too high as well. This is being addressed as initial expectations for a turnaround in Italy in particular had lagged our expectations.

All is not bad news, however, as the backlog continues to grow. We expect to begin benefiting from this increased backlog later this year and early 2012.

For Cranes overall, we did expect North America to begin improving, but we have actually seen the backlog go up beyond just North America. We had a great CONEXPO. While our entire backlog presented here is for delivery in the next 12 months, I want to be clear that we still have cost reduction work to be done within our Crane operations, in particular within our German crane manufacturing location. We have not flexed this business efficiently. Getting costs further down as sales increase will be the formula for returning this business to solid profitability in the future.

Last year -- lastly, rather, the Materials Processing business had a solid quarter and is the leader of the pack in terms of performance from my point of view. Net sales were up 41% compared to the prior year. Profitability was at an 8% operating margin, still below the level this team is used to operating at, and the backlog is at a solid level. So as I look across our four segments, I expect substantial operating profit improvements from our Aerial Work Platform business in the second quarter, as well as a continued improvement in Construction. Materials Processing should also deliver a solid quarter, and the losses at Cranes will be reduced or turned to modest profitability.

So turning to Page 11 and summarizing. Results for the company are basically in line with our expectations, and we're continuing to grow our business fairly broadly. But developing markets are remaining a source of strength, representing 28% of the company's net sales in the quarter.

The backlog is growing in all segments, as indicated previously, with the Crane backlog, frankly better than expected. Further cost reductions, especially within our Crane businesses, are being worked on. And the overall outlook for 2011 is slightly better from a revenue point of view at $5.2 billion to $5.5 billion, and we are maintaining the EPS guidance at the $0.60 to $0.75 per share for the full year, excluding restructuring and unusual items, of course, like the sale of the Bucyrus shares.

We continue targeting the longer term goals we set for the company in 2013 of an $8 billion net sales company with approximately a 12% operating margin. This, of course, is not guidance but rather what we feel is the operating potential we are working diligently to capture.

We look forward to updating everyone more completely at the May 16 Analyst Day at the Marriott East Side in New York. Please reserve your space by contacting Investor Relations via the contact information on the IR section of our website if you have not already RSVP-ed.

Now I'd like to open it up for your questions. Again, I would like to ask that you limit yourself to one question and a follow-up. Thank you very much. Brooke, could you open that up?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jamie Cook with Credit Suisse.

Jamie Cook - Crédit Suisse AG

Just a couple of questions. One, Ron, I mean, you said results were general -- I mean, the outlook should be generally in line. You reiterated this $0.60 to $0.75. Last quarter, you gave a little more granularity on how we should think about the sales and operating profits by division. I'm just wondering if there's any material -- if there's any changes within the different segments even though the total, that you're saying the total is the same. And then my second question. Just are you going to give any range? It sounds like the second quarter will be profitable. Or are you comfortable enough to give a range of how you think you'll -- of how profitable, I guess, you think you'll be in the second quarter?

Ronald DeFeo

Jamie, I don't want to comment specifically on our net income expectations for the second quarter. Obviously it's an important quarter for us, and we clearly expect to be net income. I just indicated basically, I expect significant improvements in AWP, meaningful improvements in Construction. Construction will be profitable in the second quarter is our expectation. Materials Processing continues to be solid, and the Cranes is a little bit of a wildcard from the standpoint of just how good they can be. Now I think the increased backlog will allow us to capture additional revenue but maybe more toward that latter part of the year than in the second quarter. That's just not clear to us 100% at this stage. If I were to characterize how I see the year-over-year performance by segment compared with where we were when we reported the last quarter, I'd say pretty similar in terms of quarter-by-quarter guidance that we provided. Although generally, I'd say the AWP would tend to be a little bit more positive, Construction on track, maybe pretty much same. Cranes, we gave a pretty broad bandwidth of Cranes outlook the last time, and I see them coming in still within that bandwidth. Materials Processing may be a little bit on the higher end. And I think there's a pretty substantial push for cost reduction around the company and in Cranes in particular, and the Cranes' performance is somewhat dependent upon back-ended cost reduction efforts that are underway right now.

Jamie Cook - Crédit Suisse AG

All right, thanks. I'll get back in queue.

Operator

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

Charles Brady - BMO Capital Markets U.S.

Ron, in respect to the price increases that you've put through that are going to hit, kind of, I guess, in the back half of this year, across the segments, do you expect those price increases will fully cover the cost increases you're seeing today?

Ronald DeFeo

That is our expectation, Charlie, yes. I think there's always a bit of an attempt to figure out where the puck is going to be. And we are taking cost increases -- I'm sorry, price increases in anticipation of current material cost levels and maybe a little bit higher levels. I would say if we overshoot it a little bit, it'll be fine. In any recovery, what happens is that suppliers tend to increase price first. So our component suppliers give us increased prices. They see the demand coming. We are unable to get pricing at our customers initially. But then we begin to get pricing at our customers, and we simultaneously begin to push back on our supply base. And I think we'll be in that period in the latter part of this year. And that may be where we are next year. And so we plan to cover our material cost increases generally across the board. Steel is a bit of a wild card for us because steel spikes. And then if you ask five people what the steel forecast is, then you might get five different responses. So it's a bit of a wild card for us. So generally speaking, I think I answered your question, Charlie.

Charles Brady - BMO Capital Markets U.S.

Thanks. And as a follow-up, can we just talk about the Crane business for a second? How much of the backlog in Cranes, that's a little over $1 billion, is in fact just North America?

Ronald DeFeo

Yes. Well, about 50% of the increase from the fourth quarter came from North America.

Charles Brady - BMO Capital Markets U.S.

Okay. Great. I'll hop back in the queue. Thank you.

Ronald DeFeo

Okay.

Operator

Your next question comes from Ann Duignan with JPMorgan.

Ann Duignan - JP Morgan Chase & Co

I just wanted to ask the backlog question in Cranes in a different way. If you were to strip out the delayed shipments at the customers' request, what would the backlog have been? And I'm trying to get a sense of what really where new orders versus delayed shipments.

Ronald DeFeo

Well, most of the delayed shipments took place in the Port Equipment business. And the effect of the Port Equipment business was that our business was about $40 million off of where it has been. And we don't have an exact number of that. We saw a reduction in cancellations in our basic Crane business. Historically, each quarter, we have seen some cancellations, and I think that is substantially reduced. But I'll probably use the number of about $40 million, would you, Phil?

Philip Widman

For the Port Equipment piece, we had some at our other German facility, but I don't have an exact quantification of that, Ann.

Ann Duignan - JP Morgan Chase & Co

Okay. So it's $1 billion was -- whether we call it backlog or call it orders, it's not that much different?

Ronald DeFeo

What do you mean?

Ann Duignan - JP Morgan Chase & Co

I'm going -- I'm just trying to get a sense, again, of absolute new orders.

Ronald DeFeo

Yes. The absolute new order intake was pretty good, yes.

Philip Widman

So that's what I'm saying. It'd be just by $40 million. It's not a -- for the other businesses, it's not much higher than that number.

Ann Duignan - JP Morgan Chase & Co

Okay, okay. And then my follow-up question is, then can you talk, well, a little bit by business how much of the products being sold today have Tier 4 engines? And how should we think about that progression as we go through the next couple of years?

Ronald DeFeo

Okay, this is a complicated question that I'm going to try and give you a simple answer to. Okay? We are in the early stages of the Tier 4 conversion. Typically speaking, most of our bigger equipment is moving into Tier 4 interim shipments today. So the bigger the equipment, the more we're in the Tier 4 interim products. That would include product lines like Materials Processing, our articulated trucks, the bigger, rigid trucks that we sell. We are also in a period where we're using some credits, as everyone is. We expect the mid-sized products to go full bore into the Tier 4 in 2012. So it's a process that will go through our product line. 2011, biggest equipment; 2012 mid-sized equipment. And then we get through that by probably '13 and '14. I hope I've answered your question. It's a complicated one.

Ann Duignan - JP Morgan Chase & Co

Yes, and I totally appreciate that. So if I were to take a step back and just assign kind of timing by segment, I think you alluded to kind of Material Processing, Construction, maybe even some of the Cranes impacted this year or Aerial Work Platforms maybe...

Ronald DeFeo

Next year.

Ann Duignan - JP Morgan Chase & Co

Next year in '13 and '14?

Philip Widman

Right.

Ann Duignan - JP Morgan Chase & Co

Okay. Okay, that's all.

Philip Widman

Okay. And just to follow up on your first question, it looks like $40 million out of Port Equipment and probably $30 million of delays in our other businesses. So that backlog question you had.

Ann Duignan - JP Morgan Chase & Co

Okay.

Philip Widman

So that's $70 million roughly in total.

Ann Duignan - JP Morgan Chase & Co

Thank you, and I'll get back in line. Appreciate it.

Operator

Your next question comes from Andy Casey with Wells Fargo Securities.

Andrew Casey - Wells Fargo Securities, LLC

I apologize if you touched on this already, but I kind of have a detailed question. You commented about the need to reduce the Crane cost structure with specific reference to the port cranes area. Could we drill into the comment about competitive pricing environment that you're seeing currently? Are you seeing a more competitive environment than typical with some of the nontraditional companies trying to gain traction in the aftermarkets, specifically in what seems to be a smaller segment for you in crawler cranes?

Ronald DeFeo

Okay. Yes, I'll comment, and if Kevin Bradley, who's on the line from our Cranes business wants to add anything, feel free, Kevin, when I'm finished.

I think in general the Crawler Crane business is still not -- it's gone through a slower period pretty much as expected given its exposure to nonresidential construction. I think the only place in the world where crawler cranes are not slowing down at all is China. And, of course, the Chinese manufacturers pretty much control that market, although we have a couple of ventures started there. But nothing material enough to really comment on it at this stage.

I believe the crawler crane product line is a lot less price sensitive but not insensitive than many other parts of our product line because the bigger the crawler gets, the more technical the requirements are and the more purpose built as well as confidence required in the residual value of the asset. Of course, when you buy bigger cranes, you are buying an asset and you are buying the confidence of the manufacturer and the manufacturer's history. So I don't think the issue is price competition in the crawler crane product category. I think it is simply a moderate slowdown in particular in the EU. And we really haven't seen a large presence in most of our high-developed markets of foreign players really driving that price down. Kevin or Ken Lousberg, do you guys want to comment, particularly Kevin?

Kevin Bradley

Yes, I'll be happy too. I think that's right. I think the areas in the world where we're traditionally strong on the crawlers, we're seeing a slowdown, and that's what's affecting us directly. But I don't -- I think it's less about price and more about the macro demand that we're seeing right now.

Ronald DeFeo

Okay.

Andrew Casey - Wells Fargo Securities, LLC

Okay. Then as a follow-up, and thank you for the clarity, could you point out where you're seeing the pricing competition within Cranes?

Ronald DeFeo

Yes. I think what we feel is the biggest issue for us is the pricing we're getting from our supply base, okay, and the need to take prices up. And we are actually taking prices up in North America, and we will take them up from our European operations 3% to 6%. There is talk in the marketplace, and I use that word "talk" importantly from Chinese crane manufacturers coming into the United States in the Rough Terrain Train Product segment offering very attractive and low prices. There was that CONEXPO merchandising that some large customers have bought some of those products that we found out subsequently many of those orders were canceled. So there is a sensitivity to the pricing discussion at this stage, but we're not seeing huge or aggressive pricing actions taking place that's hurting our business. In the Port Equipment business, it is a bid business. And because it is a bid business and you go through a recovery process, many of the bids that were one, six, nine months ago won by ourselves, for example, were price oriented and price bids against some aggressive players. Particularly some of the European players are pretty aggressive. And in a couple of product categories, DPMC [ph] from China is very aggressive as well. But as that business recovers, pricing will also recover.

Andrew Casey - Wells Fargo Securities, LLC

Thank you very much.

Operator

Your next question comes from Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC

Just flipping over to the Aerial business. You mentioned customer concerns about availability. Can you just give us any kind of idea where lead times currently stand in that category?

Ronald DeFeo

Tim, why don't you address that?

Timothy Ford

Sure. Our lead times are -- it really depends product line-by-product line. But we are anywhere from four weeks on certain products in certain regions because we have inventory to as far as 15 to 20 weeks on other products in other regions. Our best inventory position today is in Western Europe where we have a pretty strong inventory position based on our ramp in the fourth quarter and the first quarter. North America is probably second. And then our Australian, Brazil and China operations, for the products we're not making in China, are probably the furthest out at this stage. But generally speaking, we're anywhere from four weeks on some products out to 15 to 20 on others.

Seth Weber - RBC Capital Markets, LLC

Thanks. Thanks for that. And so do you plan on adding capacity, adding shifts? Or are you comfortable running the business at these type of levels?

Timothy Ford

No, we -- well we have, in fact, been adding capacity and adding shifts. As Ron mentioned in his comments, I think kind of 22% since third quarter. We've been ramping quite aggressively to try and get in front of the demand. Our belief right now is that the demand rates and the production rates are in a position where we should be able to get in front of this a little bit to pull some of those lead times in. The biggest wild card at this point, however, is material availability. We've not had major effects of material shortages, but we have had what I'd call some wildcat or brushfire-type activity where we're scrambling to produce products that's in the plan. And so the biggest issue right now is less our ability to hire people and more the ability to get materials to support the demand.

Seth Weber - RBC Capital Markets, LLC

Okay. And

When you talk about bookings accelerating, I think Ron made that comment, I mean, does that hold for April? So far, months to April versus March? Is that a fair characterization for the Aerial business?

Timothy Ford

I think we feel like the trend that we've been on is one that we'll continue to see. I don't think the numbers that you saw in the first quarter should be the kind of growth rates we should expect going forward. But the trend is pretty positive.

Seth Weber - RBC Capital Markets, LLC

Okay. And then just lastly, were there any strategic sales? Or in past quarters, you've had some big sales to Brazil, for example, that depressed margins a little bit. Was there anything like that in the quarter?

Timothy Ford

The only thing that I would say is that we had a significant portion of our revenue in the first quarter that went to some of the large North American customers that tend to have somewhat better pricing than maybe the mid-sized and smaller players. So I think when you look at the margin position in the business, in the first quarter, we had a lot of revenue that went to those larger customers. As we go into the second, third and fourth quarter, we expect more normal distribution between the large customers and some of the mid and smaller customers.

Seth Weber - RBC Capital Markets, LLC

Okay. So as all this kind of rolls together, is there some kind of incremental or pull-through margin that we should think about for 2012 for this business?

Ronald DeFeo

Yes, I don't think you can use a standard pull-through margin analysis so readily here. I think what I would encourage you to do is to look at the history of how the margins progress in this business. Again, what happens is those that order early, get the best pricing. We've now announced at least a 4.5% price increase, which is going to impact our business latter part of this year. It will have a pretty meaningful impact on our margins in 2012. And then we will push back on our supply base and try to get cost reductions there. So I think that's how you drive the margin up on this business.

Seth Weber - RBC Capital Markets, LLC

Okay, thanks very much, guys.

Operator

Your next question comes from Alex Blanton with Clear Harbor Asset Management.

Alexander Blanton - Clear Harbor Asset Management

I've got some questions on AWPs as well. On that price increase, that'll have the impact next year, you're indicating that by saying that, that it's more than offsetting to the materials cost increases or the combination of materials cost increases and the productivity gains. Is that correct for next year?

Ronald DeFeo

Yes. Well, let's just stick with this year, and then we'll get to next year. What we've said is that we took at least the 4.5% price increase. It means that it's probably more than that. And that it will impact our business more in the latter part of this year than in the first part of this year. As Tim just explained, a good portion of our shipments in the first quarter went to the bigger customers, which had better price. So we think that the pricing actions we've taken this year will offset our cost increases this year. And as far as a flowthrough to the P&L in 2012, of course, we'll have 12 months of that new pricing compared to, I don't know, an average of 6 months, pick a number, I'm not really forecasting that, in 2011. So net year-over-year, it'll be a meaningful increase on pricing. We'll also evaluate our cost, of course, going into 2012 and take additional pricing action if the cost increases are justified. I hope, Alex, I've answered your question. But I'll throw it back to Tim to see if I missed anything.

Timothy Ford

No, Ron. The only clarification I might make is that we have, in the first quarter, begun to take some material cost increases. So we're probably about a quarter offset from the material cost increases to the implementation of the price increase. So there may not be exactly a 1 for 1 in 2011. There's probably a about a quarter to a quarter and a half lag between the material cost increase that we've started to receive and the market influence of the price increase.

Alexander Blanton - Clear Harbor Asset Management

Okay, so if I understand it correctly, the price increase will offset your cost increase for the entire year, even though it's only in place for 1/2 year, therefore it's going to have a bigger impact next year. Is that basically what you're saying?

Timothy Ford

You want me to take that, Ron?

Ronald DeFeo

Yes, go ahead.

Timothy Ford

I think what we ought to clarify here is that the price increase on a 12-month basis should more than offset the cost increases that we're seeing on a 12-month basis. As I just tried to explain, maybe not clearly, but what I tried to explain is that we're about a quarter to a quarter and a half behind on the price increase versus where we are on the cost increase.

Ronald DeFeo

Alex, I would like to add to that, one thing. Pricing is market-dependent, okay? So we're assuming that our competition follows us.

Alexander Blanton - Clear Harbor Asset Management

Yes, okay. It probably will. On the geographic breakdown of sales, I don't think I heard that. Where's the strongest sales increases? Break it down by Europe, North America, emerging nations, China, whatever.

Ronald DeFeo

Tim, why don't you do that? Phil's got some backup, if you don't have the information in front of you, Tim.

Timothy Ford

North America was, by far, our strongest market as we would expect, given where we are in a cycle and some of the orders that we've received from some of the large North American customers. Europe actually was surprisingly positive, orders doubled in the first quarter versus fourth quarter of 2010. Brazil remains a very good market for us. It was strong in the first quarter versus the fourth quarter from an orders intake standpoint. And Latin America -- or excuse me, Asia-Pacific was a pretty healthy business, though we didn't see significant order intake difference from fourth quarter, largely because we had the floods in Australia and the Chinese flood [ph] and so forth. Our Utilities business had a good quarter, though compared to fourth quarter, you have to remove the effect of the rental sales in the fourth quarter to kind of get a comparative. So on balance, pretty much as we would've thought with a little bit of positive surprise from Europe.

Alexander Blanton - Clear Harbor Asset Management

Yes. The Asian part is the weakest in terms of percentage change?

Ronald DeFeo

Asia is just not that big to drive anything, okay?

Alexander Blanton - Clear Harbor Asset Management

Okay, thank you.

Operator

Your next question comes from Andrew Obin with BoA Merrill Lynch.

Andrew Obin - BofA Merrill Lynch

And I apologize if you've answered this question. Could you comment, in terms of your inventory, how much of it is finished goods? And within that, if you could give us a big breakdown by big categories? I guess, what I'm getting to, as Cranes improve, how much working capital can we free up just on finished product from Cranes over the next couple of quarters?

Ronald DeFeo

It's an opportunity. Phil, why don't you...

Philip Widman

Yes. Total finished goods, new is about $430 million. We've got about $40 million of used. And when they put the...

Ronald DeFeo

Cranes is about 40% or 45% of that.

Philip Widman

Yes. Cranes is about $115 million, new, $24 million, used.

Andrew Obin - BofA Merrill Lynch

So how much of it do you think we can get rid of in the next couple of quarters?

Philip Widman

Well, I would hope that we could cut that in half.

Andrew Obin - BofA Merrill Lynch

Okay. Just total new equipment inventory?

Philip Widman

Part of our issue, though, Andrew, is not just finished goods. We have with the jockeying around of orders, period-to-period, our work in process, the raw material gets out of balanced as well. So the schedule changes are also affecting that. And that's probably a more significant opportunity in the Cranes area. So again, between raw and work in process, total Cranes inventory is about $600 million to give you an idea. So that's a better number to think about than just the finished goods.

Andrew Obin - BofA Merrill Lynch

And can we say that 50% reduction is a goal for that number as well for the year?

Philip Widman

Not quite. I'd say it's probably about $200 million to maybe a little more than that.

Ronald DeFeo

And one of the wildcards in there is that we've got some new products and new prototypes that are being developed on fairly expensive materials that we're carrying for a little while. So as we address that, we've got a couple of technical issues on some of that new product. And as we address those issues, we'll have a little more clarity on when we can get that working capital investment down.

Andrew Obin - BofA Merrill Lynch

And just a follow-up question on AWP, given your hirings in the sector, I mean, what are your expectations for recovery in 2012, 2013? For how far below normalized level do you think we will be at the end of 2011 even as things recover?

Ronald DeFeo

Yes. Well, this is the peak, the trough question questions really, Andrew. And I think what we have said, and I'm going from memory, but I'm sure we'll cover it a bit more at our analyst meeting, is that we think this business peaked out at about $2.6 billion at the last peak. And that we have said, we're not sure we'll get quite back to that level, I think maybe in the $2.2 billion range. And so if you take a look at where we are right now, we did $376 million in the first quarter, let's see what we do this quarter. I think it's a business that's operating in the $1.5 billion range at this stage. You've got $1.5 billion to $2.2 billion level, $2.2 billion, $2.3 billion level that we can expect.

Andrew Obin - BofA Merrill Lynch

Okay, thank you very much.

Operator

Your next question comes from Henry Kirn with UBS.

Henry Kirn - UBS Investment Bank

I'm wondering if you could chat a little bit about where your seeing the risk across the supply chain and maybe dovetailing with that the impact of the events in Japan?

Ronald DeFeo

Before I do that, Phil, you want to...

Philip Widman

Yes, Andrew, on your question, I was looking at one wrong column in my master spreadsheet here on the Cranes inventory. For the period that we have today, the inventory for Cranes is about $750 million in total in that inventory. And of that, finished goods was about $190 million.

Ronald DeFeo

Yes, that was a number I was remembering was $100 million, and that's why I said it was about 40%.

Philip Widman

Kind of $600 million maybe or better to get to.

Ronald DeFeo

Okay, so we corrected that for Andrew. But Henry, I'm sorry, your question was about material and supply chain issues and potentially, the effects of Japan, if I recall.

Henry Kirn - UBS Investment Bank

That's right.

Ronald DeFeo

Japan is a bit uncertain to all of us. I think we're not, in the front line, apparently affected. But it's what a second- or a third-tier supplier to our suppliers that are of a concern. So there's a couple of suppliers that we're trying to get clarity on, Mitsubishi engines being one of them, for our Compact Construction business. But George, maybe you want to comment on that and see if there's any supply-related comments. And then since our supply chain team works for Tim Ford, I'll ask Tim to follow up. So George first.

George Ellis

As Ron commented on the engine supply, we do have clarity through the second quarter. We are into the second tier supplier with the Mitsubishi engine that goes into our Compact Equipment and working recovery plans to get there. We do have second tier supplier component issues with some other products within our families that we're addressing. So short-term then, I don't see a massive problem. But the longer-term, there is some concern, but our teams are working each and every day to mitigate them.

Ronald DeFeo

Okay, George. Tim?

Timothy Ford

Yes. The only additional comment I would make is we have very little direct supply. We do have a few pieces as you're talking about or a few components that we're talking about that we're concerned about. I think probably the most significant concern is going to be a supplier that we buy a controller from, who buys a chip from a supplier that's made in Japan, that we just have no visibility to. And that's the unknown that we just can't forecast at this point.

Henry Kirn - UBS Investment Bank

Thanks, that's helpful. And when the backlog increases, was any of that in anticipation of your price increases? Or should we just view it as the natural rebound of the market?

Ronald DeFeo

It's hard to say. I don't believe much of the Q1 backlog increase was in anticipation of price increases. As we go through Q2, there maybe some of that, that takes place. But in general, it's hard to handicap. So I don't think there's much price increase related in Q1, but maybe a little bit in Q2.

Henry Kirn - UBS Investment Bank

Thank you very much.

Operator

Your next question comes from Robert Wertheimer with Morgan Stanley.

Robert Wertheimer - Morgan Stanley

I'll just be brief. You had two quarters of a very solid Crane orders. And I wanted to ask you sort of how it feels behind the scenes, whether it feels like a genuine bottom and turn or whether it's still lumpy enough and scattered enough that it still feels uncertain, Ron. Part of the reason of the question is that I think you mentioned 2Q is still a wildcard for Cranes revenue. I wasn't sure why that would be, given how things have been turning.

Ronald DeFeo

Yes, okay. Clearly, in North America, it does feel like the customer confidence is there and that we've secured orders. And frankly, we think we're probably building a little bit of market share in North America, recapturing some lost market share. Just getting closer to our customers. So the North American piece feels a little bit more predictable to me. The European business is where my uncertainty sits. We have had customers come in, push out orders, not cancel orders, some order cancellations, historically, but recently, not cancel orders but just push one out. And so our ability to actually see those things through to the end of this quarter makes me a little bit nervous. The Port Equipment side of our business, if I took a minute, I just explained that we bought that business about 18 months or so ago. And when we bought the business, there was a pent-up demand, a backlog that hasn't been able to realized. We sold off that backlog, and there was a period of time where it took us a while to rebuild the backlog. And right now, we are actually experiencing a sales decline and a backlog increase. And so we're kind of at an odds trend. We think that turns around and in the latter part of this year, backlog will drive our revenue increases and the kinds of customers we deal with are very large customers. And we do have some visibility into that future. So if you combine the European comment with the Port Equipment product line comment, that is where my uncertainty rests. And then if you add to that the fact that I think we didn't get at our cost structure as aggressively as we needed to in a few places and we are doing that now, it really is the right mix to get the profitability and the revenue going for later this year and next year. I hope I answered your question, Robert. I think I give you a flavor, if not quantitatively.

Robert Wertheimer - Morgan Stanley

That was helpful. Thanks, Ron.

Operator

Your next question comes from Robert McCarthy with Robert W. Baird.

Robert McCarthy - Robert W. Baird & Co. Incorporated

In the Aerials business, I don't have to tell you that the traditional seasonal pattern is, I would say, that you saw the peak in order activity in the first quarter. But as you know, sometimes as cycles are turning, customers order and take delivery of product closer to when they actually need it. And that can distort seasonal quarter patterns right at the turn. So that's the set up to the question of whether AWP order activity on an absolute basis could be consistent with first quarter levels in second quarter. Or should we expect to see some seasonal moderation in order activity?

Ronald DeFeo

And I'll answer this because I've had a little bit more experience than even Tim at this. But Tim has got certainly more day-to-day or current experience as to what he's seeing. So I'll start and maybe Tim could follow up. My expectation is that we'll probably see a more typical seasonal pattern for this business this year, meaning a little bit as you articulated that the Q2 orders will moderate and be high, but the growth, quarter-over-quarter, won't be anywhere near what we have recently experienced. But there'll be really solid orders as demand is driven by replacements of old equipment. We don't really see a very large pickup in what I'd call growth capital at this stage. And I don't expect to see much in the way of growth capital in this year. I expect to see a little next year and quite a bit more in 2013. The fact on the AWP business are that the end market growth isn't really happening that much. It's just that fleets are darn old and they need to be replaced. And so when we get the U.S. growth happening and, to a lesser extent, the European growth happening, coupled with the age of the fleet, we will see a pretty substantial increases still in this business. Tim, did I get that close? Or what is it that you've seen?

Timothy Ford

I see exactly what you said. I think that's the pretty good characterization of what we think.

Robert McCarthy - Robert W. Baird & Co. Incorporated

So it's something like what I described is going to happen. It's still ahead of us, it's not this year.

Ronald DeFeo

Right.

Ronald DeFeo

Right, okay. That's all I had. Thank you very much.

Operator

Your next question comes from Ted Grace with Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP

First question is coming back to orders. And I think people have come at this a couple of different ways. But could you just speak to what your perception is of real and market demand improvement for your products versus dealer restocking, particularly on the Cranes and the Construction equipment side. I feel like some of the comments I've interpreted inconsistently to some degree. And particularly, Ken talked about -- if I heard him correctly, some macro concerns were weighing on crawlers, yet in the press release, you highlight energy and commercial construction in the Americas is strong. I'm just hoping to better understand exactly what the message is.

Ronald DeFeo

Okay, sure, Ted. First of all, just to get grounded, unlike many of our other bigger players in the industry, a lot of Terex's business goes direct to the first line of consumption. Virtually all of our AWP business goes into rental, virtually all of our Crane business goes into rental, virtually probably 1/2 of our Construction product line go into application use, our material handler, our Articulated Trucks, although some of them also get rented. Materials Processing goes into distribution, so there is a dealer network between us and the end customer. So we see a lot of impact from actual end demand and end-demand fluctuations. In North America, the Crane business has responded to the energy sector, and we think that some large construction activity, even though the basic construction activity in North America remains somewhat depressed, it's depressed but it's bottom. I think we've seen for the first time, a little movement in housing. And I think nonresidential in the Architectural Buildings Index is beginning to turn, so I think those are encouraging signs for us from the North American business. But I don't think we internally are handicapping much in the way of end market substantive growth, at least not this year. And I think the same comment would be true in Europe. So a lot of our demand increases are simply a reflection of the fact that we've been through, in some cases, 5 years of pretty negative performance. The housing market that affects the small Compact Construction product started to decline in 2006. So after you've gone through as an industry, 5 years of virtually no growth, any growth seems like it's big and important, and some of that is what we're experiencing now. So I guess, my basic message is, the business is turning. We're seeing some positive signs, particularly as we ship into customers that need to change their fleets out, but it's not because we're seeing a spike in end-user demand.

Ted Grace - Susquehanna Financial Group, LLLP

Sure, that's helpful. But if we bring that to Cranes, if I got my mind kind of calibrated, I usually think about North America being about of 10% of your Crane revenue. So even as that's improving, it's a pretty small part of the pie, correct?

Ronald DeFeo

Well, North America, and on a trailing 12-month basis last year, 2010 versus 2010, it was only about 10%, 9% of our total business. On the other hand, at its peak, it was 25% to 30% of our total Crane business. So I think it is not unreasonable to think that we're going to get a disproportionate part of our short-term growth from the North American business as I indicated, half of our backlog increase, compared to the prior quarter, took place from North America. That's a pretty substantial amount of backlog increase.

Ted Grace - Susquehanna Financial Group, LLLP

Yes, that was impressive. Europe is, I think, usually about 40% of sales, so that uncertainty there, I guess, gives us some sense of that market. The other 50%, you didn't really touch on. Can we just get a sense for how you're think about that?

Ronald DeFeo

Well, a large portion of that is coming from developing markets. And that's split everywhere. It's split to Russia, to India, to China, to Latin America, the Middle East, it really goes everywhere. And I think, generally speaking, that portion of our business is remaining fairly strong. Steve Filipov is on the call. Steve, do you want to comment on that?

Stoyan Filipov

Yes, maybe just take a couple of areas. Latin America, I think, Ted, what you also have to consider is we put a brand-new team in place about six months ago. So we didn't have a team there before, we're starting to get some traction from that team in Latin America. I think the other pieces in Russia, we signed up a new dealer there, and they're starting to get traction there in Russia. And then you have the Middle East, which is kind of a mixed bag at this point, but it is a big part of the business. So maybe that's just a couple areas that we're investing in and changing our distribution model.

Ted Grace - Susquehanna Financial Group, LLLP

Okay, that's helpful. And just the second question, could you just touch on kind of what happened to Terex Financial Services, the capital extended this quarter, where it was focused by segments or whether it was AWP or Construction equipment? And just kind of give us a sense for how 1Q progressed there?

Philip Widman

We had about $10 million of expansion on the balance sheet in the first quarter. So not a very large quarter change there, and it's pretty well across the segments. In the U.S., Cranes and Construction, I would say, are the predominant ones right now. But again, it was fairly small in the quarter on the balance sheet.

Ted Grace - Susquehanna Financial Group, LLLP

And would we expect that to ratchet up in the second quarter? Or do you think it's going to be...

Philip Widman

Yes, it was indicated overall for the full year was we'd probably grow about $150 million. But some of that is Europe and China, so the U.S. probably for the year, up to about $100 million growth.

Ted Grace - Susquehanna Financial Group, LLLP

Okay. But should we look at that to hit in the back half, most of the $150 million?

Philip Widman

I'm not going to spread it exactly, it's going to climb as we're adding additional capabilities on the flow business and some other things that'll Construction mainly. And then the timing of the Cranes orders are the things that will be the other big impact. But generally, yes, it'll climb.

Ted Grace - Susquehanna Financial Group, LLLP

Great, super. Thanks, guys.

Operator

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

Charles Brady - BMO Capital Markets U.S.

I just want to make sure I understand kind of the business model looking out in this recovery. Because right now, you've got the large rental companies are the predominant buyers of the equipment to replace the old equipment that they've got sitting in their lots. And we don't have any underlying, really strong end market demand driving those sales. And I guess, my question is, is there a concern that once we fill out the old equipment from the large rental companies, that there's perhaps a lag between when the underlying market demand comes in, as well as replacement demand for the smaller and mid-tier operators who really probably are not in back in the market at any meaningful way right now?

Ronald DeFeo

Charlie, what I would say is given the age of the fleets of most of our customers, we think that there's plenty of room for opportunity just in the replacement of the fleets. They let them age too long, and now they're going to have to replace them. But Tim, you probably have a more current handle on this than me.

Timothy Ford

Yes. What I would say is you have effectively a 2-year hole in the fleet age that's in the field. And that was true in North America and Western Europe, where we've historically had the bulk of our sales. So you've got at least a 2-year process of replacing what has aged before you get to growth capital. I think the view of this next cycle is going to be somewhat different, maybe a couple of years out. But I think the growth pattern is going to change where you're going to start to see an acceleration of some of the developing markets like Brazil, like China, like Middle East and so forth, at a rate that's going to maybe compensate for what might be a little bit more slow recovery in North America. So I think when you look at the gap in fleet buying over the past couple of years plus the opportunity in some of the developing markets, I'm pretty optimistic about where this is headed.

Charles Brady - BMO Capital Markets U.S.

Thanks. That's very helpful.

Operator

Your next question comes from David Wells with Thompson Research.

David Wells - Thompson Research Group, LLC.

Just continuing on the kind of the AWP line of things, I guess, I'm trying to get a sense of, of the backlog that you have right now, how much of that is effectively price-fixed? And if we're not seeing growth CapEx return in a meaningful way, what are the abilities -- I mean, to put that forward, at least 4.5% price increase, what's the ability to actually realize that if right now is pretty much the larger folks who arguably have greater purchasing power?

Ronald DeFeo

Well, I think, I'll let Tim comment on the price-fixed and what is and what isn't, with just kind of a general comment there. But I think we have the ability to take pricing up because our costs are going up. And I think our customers are not insensitive to the fact that their costs are going up. So the fact that rental rates have stabilized, if not begun to increase, is what's going to allow that change. But Tim, do you want to comment on that?

Timothy Ford

Yes. If I look at the order book that we have, the pricing on the go-forward is pretty well set in the backlog. So whatever's in the backlog is that. The way we instituted the price increase was orders received by April 15 or delivered by June 15 will get the old pricing. Orders we're taking now are coming in at the new price. I would say on balance, we've been pretty good at making the pricing stick. We've had a couple of cases where we have customers that wants to be delayed in the fact of the price increases due to previously negotiated agreements. But for the most part, we're making this, the price stick in the marketplace because the market needs the equipment. As I talked before, lead times are extending out. We're starting to run into some material shortages charges that are causing some availability concerns. So we're able to work this through and customers need the equipment. As we look into the second quarter, I expect we'll start to see many of these mid-sized and smaller rental companies start to increase their orders. They tend to be a quarter or two behind the larger guys, and that will help us as we go forward. So again, I'm pretty optimistic about where we are. I think we should start to see some positive effect of the price increase as we go through the second quarter or get through the second quarter and into the third and fourth quarter.

Ronald DeFeo

And David, what I would add to that is any of our material shortages are typically our competitors' material shortages also.

David Wells - Thompson Research Group, LLC.

And then a follow-up, if we look back about a year ago, I think the kind of common element to a lot of these calls was discussing the cost-saving measures that you were taking and the permanency of a lot of these cost cuts. And just using the kind of AWP business as a microcosm, demand seems to have come back fairly robustly, almost V-shaped like. Does that make you reassess your previous estimates of the permanency of those cost cuts? And my concern is that if the market comes back stronger, we may not see the margin benefit from the hard work that you've done over the last 18 to 24 months on the cost side.

Ronald DeFeo

Yes. This is akin to figuring out how to sail appropriately with shifting winds. And I think that your question is a legitimate one. I think we have clearly taken some very hard cost reductions. And it's up to us now to make sure we don't add back cost just in anticipation of a great future market. I think we did maintain some costs because we didn't want to cut it to have to add it back again. So that's somewhat affected our trough-negative margins. But it's going to require the discipline and productivity management on the part of Tim and his team to see that through. Tim, I'm kind of speaking for you. I guess, that's the privilege I get. But if you see it differently, please comment.

Timothy Ford

The only thing that I would add is that as we globalize the business and add manufacturing in different parts of the world, there is a certain amount of overhead that comes with putting a factory up in China versus distributing products from the United States to China. And other places around the world that we're looking at manufacturing more aggressively. So the only difference would be, we took a lot of cost out in North America. We might put some of it back, though hopefully not at the rates that we took it out in other parts of the world. But that should also give us a market advantage or a market opportunity to be more competitive, where customers want product more quickly in those local markets.

David Wells - Thompson Research Group, LLC.

Thanks very much.

Operator

Our last question comes from Matt Vittorioso with Barclays Capital.

Matthew Vittorioso - Barclays Capital

Phil, I guess, if you could just touch upon from a sort of high-level standpoint how you see your cash balance developing over the rest of the year. I know you talked already about the investment in Terex Financial Services. I think you expect to pay some cash taxes on the asset sale over the balance of the year. And ultimately, just trying to get a feeling for what the business is generating or burning cash over the rest of the year. I think you said there were some opportunity on the working capital side.

Philip Widman

The key parts of your model, if you want to think about it that way, I would still hold to the 28% of fourth quarter annualized sales to be our ending working capital position from 37% today. So the mix of businesses which will be largely more related to AWP construction and material processing have a less intensity of working capital, and Cranes, the ones that we talked about before, probably the most opportunity to get dollars out. I did mention in our guidance, about $100 million of cash taxes, some of that related to the sale of shares of Bucyrus, which will happen more the third quarter in the U.S., fourth quarter time frame. And then we've got the European gain on sale from the Mining business that we had last year, the timing of that cash payment actually is towards the end of this year, beginning of 2012. TFS, and I mentioned $150 million net of adds to the balance sheet. So those are kind of the key variables. With the accelerated sales as we kind of go quarter-to-quarter, first to second, receivables will go up so the inventory shifting, from inventories to receivables, the second quarter tends to be a usage of cash. From the patterns that we have, I would expect that's still the case, in general, picking out these other factors. And the cash generation will start to occur in the third and fourth quarter.

Matthew Vittorioso - Barclays Capital

Okay, great. And just as a follow-up, Ron, and sorry if I missed it, could you just comment on what you're seeing in the M&A market? I know I ask this every quarter, but if you could give us an update there. I think last quarter, you had said that the second half acquisition was certainly a possibility. What are your thoughts at this point?

Ronald DeFeo

Well, I think we continue to look at the opportunities. They are difficult to come by, but there are opportunities out there. It's impossible to handicap. I think we're going to try and be fairly diligent. And our kind of expectation is that we have debt that costs us 6%, 7%. And if we can gain confidence that a transaction could deliver in the range of 2x of that. On a return on capital point of views, those are the kinds of things that would be value-creating. We're looking at those, and can't really handicap that anymore at this point in time.

Matthew Vittorioso - Barclays Capital

And is there any kind of update on what sort of businesses you're looking at? I know in the beginning, when you talked about M&A, after the Mining effort [ph] sale, there was some talk of trying to diversify into other industrial products businesses. Are you still looking at sort of away from the heavy equipment business? Or have you brought that back into businesses that you're currently in?

Ronald DeFeo

I have not been able to find businesses away from the kind of businesses that we're in that I thought made economic sense for us at this stage. And so while we'll look at things, I would say the probability of anything out of our core is highly unlikely at this stage.

Matthew Vittorioso - Barclays Capital

Great. Thanks very much.

Operator

Gentlemen, are there any closing remarks?

Ronald DeFeo

I'd just thank everybody for their interest in Terex. And please follow-up with Noah or Phil or myself or some of our team. We wish Tom a speedy recovery, and thank you for your interest.

Operator

Thank you. This concludes the conference. You may now disconnect.

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