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Terex Corporation (NYSE:TEX)

Citi North American Credit Conference Call

November 15, 2011 8.30 am ET

Executives

Thomas Gelston – Vice President, Investor Relations

Thomas Gelston

I have probably just about six resources live. I think the intention is to do majority question and answer both driven by questions that each may have, but also would love to open it up for questions that are on your mind.

The obligatory slide that mentions that I’m about to talk about some non-GAAP measures, but also make some forward-looking statements so, all the risks associated with that legally are listed here. I encourage you to read them.

We’ll start off nice and easy with some pictures while the caffeine from the coffee kicks in. Just as in the – a representation of some of the products which we make and how we report them by product segment, you’ll see that we have today five segments that we reported. The most recent was posted on August 16. It’s contained in the Material Handling & Port Solution business. I’m sure we’ll talk a little bit about that.

In terms of taking each one of these you’ll see Aerial Work Platforms business, its probably the business that right now, that’s going through its best growth pattern and has the best visibility of a customer order recovery driven by the rental company. Right now, it’s mostly in the United States about two-thirds of their business. So if you think of the United rentals of the world or the RSPs of the world, that would be a very typical customer. It is a replacement cycle dynamic that’s taking place. It is not being driven by growth capital, but the reality is they age their fleet out over the past couple of years to a point where they are no longer able to age the equipment.

And utilization, which are actually quite healthy, driven by non-construction type applications as well as some of the base level constructions. So if you think entertainment, I was watching the Monday night football game last night, saw quite a few of our products around the stadium, for example. If you think about bridge inspection, energy, agriculture, all of them are new uses of the equipment on top of the traditional industrial base.

So the right was a machine I saw a lot of couple of weeks ago, when the big snowstorm came through here in the North-East, so the utility sub products, repairs, livewires, it’s used both in the telecom, but principally in the electric transmission industry. That business dimensionally is about $250 million, it’s being consistently about that, but that is consolidated in the AWP segment.

Construction, you’ll see our products on this page are reporting four subcategories. About 40% to 50% will be in the compact construction arena with cranes in Central Europe. Germany would be probably our best market, Northern Europe would also be very good, as well as North America.

Off-highway trucks is a global product. It’s used in site development and roadbuilding activities. It’s also used in terms of the rigid truck in very small mine. So we, for example, sold from the beginning of the year to a gold mine in Mexico.

Material handlers, the blue machine on there is used in the steel scrap industry. That is the best product within the Construction Equipment segment today in terms of both their trajectory of their sales and their operating profit, which today sits over already 10%. And then the Roadbuilding business, which is about 80% in North America and it’s been as struggling business for some time. Over the last month or so, we actually mocked all for a lack of a better term. Two facilities here in the North American market to adjust production down to base levels and reengineer the product while there exists very little demand here.

And Brazil would be principally the other 20%. It’s traditionally or historically have been a very good business though government funding of projects took a brief pause this year for various reasons one of which we hear is corruption, but for the most part, we’re getting a sense of that in mostly over and the money is beginning to flow again. So we’re encouraged by that.

Cranes is our largest segment where we sit today, about 40% of our sales. You’ll see we report in various categories here it makes up; the majority of the equipment that makes it up is a construction oriented crane so you’ll see all terrain and rough terrain cranes. Large crawlers that go into the largest of infrastructure projects around the world, you think of the power plants that China keeps building or India. Stadiums being built in Brazil, their large crawlers would be the products that answer that.

And towers, is a business that was good for us four or so years ago. It’s actually really quite right now, not surprisingly it goes into high rise residential or commercial application or large site development. It’s still roughly of 80%, 85% from its peak levels it’s about four years ago.

Also contained in this segment is a Port Equipment business, it’s our legacy acquisition of the Fantuzzi product line we did in 2009. You’ll see a couple of examples of the pieces of equipment here. The straddle carrier that you see is made in Germany. It’s a strong market position that probably be number one in its market space and then the ship-to-shore cranes.

Those are businesses that have been struggling not those products specifically, but another one that we made within the Fantuzzi products category that business was effectively broken when we acquired it in 2009, but we’ve done a lot of restructuring, we closed Monfalcone, Italy plant in the third quarter and we also restructured the (inaudible) facility in Italy as well removing over $20 million worth of cost and our expectation is this business will be break-even in the fourth quarter and looking towards profitability next year. So a lot of the hard work has been done and the order backlog has built quite extensively.

Materials processing makes large rocks into small rocks, in the most simplest form. Our expertise tends to be in the mobile equipment, four of the five pieces of equipment shown here are mobile, so the user has the flexibility to move machines around from site-to-site, application-to-application, and the capabilities of this machines continue to evolve. So, if we were sitting here 10 years ago, I’d tell you, our largest mobile crusher can do 350 tons an hour and materials processing. Today, our largest crusher can do a 1000 tons an hour that has opened up a mining application, about 30% of our sales today goes into our mining application most notably in Australia and South East Asia, about 50% goes into quarrying aggregate, and the remaining goes into a quickly emerging field of recycling, a lot of it oriented around construction and demolition waste, which is a requirement in Europe, but it also is growing in green waste applications.

And our last segment on here is, Material Handing & Port Solutions. It’s the Demag Cranes AG business that we acquired 82% of in August of this year. It makes industrial cranes, overhead cranes that you think of in the factories, very sophisticated products, it’s not a simple crane. There is a lot of scaling capabilities, lot of anti-sway capabilities that go in, it (inaudible) some of the most high-tech manufacturing facilities around. We just installed a number of these cranes in the Airbus A380 assembly line, for example. And the other half of the business from a renewal equipment perspective is automated and very large cranes for the port industry as well. So it’s highly complimentary to the business we bought in 2009 in Italy. You’ll see example of a couple of products here, the mobile harbor crane was the one product overlap and the Fantuzzi product line has exited that business, but again, automation tends to be a big aspect of their product.

One thing that’s not highlighted here is this business also came with about a third of their sales from parts and service. So when we looked at acquisitions that we wanted to make that was a key criteria. Find something that helps offset some of the cycles that construction products bring to us and begin to leverage their expertise and how to satisfy the customers’ parts and service demand. It is a very healthy margin business that third of their business makes roughly 20% EBITDA margin.

From a geographic look, you’ll see that we’re pretty balanced in terms of the three major geographies with North America, Western Europe and the rest of the world. The other category is growing pretty rapidly. I mentioned the Australian mining exposure, for example so that would be something that’s growing in there. Russia has actually come on reasonably strong. We look back at the cranes portfolios [we’re referring] crane. So oil and gas exploration, the Middle East would also be benefiting from the oil and gas exploration. So I’d say the quickest growing part would be the other.

North America is rebounding this year, both in terms of cranes and increased sales in AWP. Western Europe is still trying to find its sea legs about them, but we have seen some increased sales in some of our product categories for example, construction. And you’ll see the breakdown again by segment on here. AWP is growing probably the quickest in terms of product category on the strength of the US rental channel.

75% of our sales are made in markets where Terex is a market leader. But one category where we really are challenged from a market presence perspective is construction and not surprisingly that’s the one where our margins are challenged, but all the other ones, we would have a leadership position globally, which is something that I don’t think is fully appreciated.

In terms of third quarter, I think you’ll see results that all the segments had increased net sales and operating profit. The only business report in operating loss was construction. If you remove some of the charges out, there were effectively break-even and we see some growth there. We are taking pricing actions across the board. You’ll see couple of bullets points down, 4.5% price increases has been announced for AWP starting January 1 that’s on top of the 4.5% increase that we put through in June of this year. So, pricing is going to be the driver next year.

You’ll see improved production throughput in restructuring. I mentioned that two facilities within the Port Equipment business there is roughly $36 million of restructuring charges we took in the second quarter of this year to reduce the work force to bring it inline with demand partly from market drivers, partly from the fact that we’re implementing lean manufacturing and the facilities are operating much more low oriented than they have historically. Those should generate roughly $70 million of savings, which about half has been realized this year; half are to be realized next year.

We have, as I mentioned, the Material Handling & Port Solutions is a new add this past quarter. The end market recovery is evident, but it’s not consistent across our businesses. It’s a bit choppy. We’ve mentioned for example, here and in our press release that the off-highway trucks in the mobile crushing equipment has seen a temporary pause, those tend to be more expensive machines. I think there is a hesitancy for example, on the mobile crushing side to finance some of those machines, so we’re watching the credit markets pretty closely. Those machines have probably the shortest life span in our portfolio, so relative to lenders who like residual value would probably be the one that would have the most challenge.

Cranes we still see good flow. The credit institutions are still lending nicely against products like AWP and cranes.

Supply shortages are decreasing. Construction is probably the one area where we still see that coming in. It tends to be a couple of products emanating from Japan, so engines and hydraulics, hydraulics across the board tends to be tight, but not necessarily to the problem that we talked about in the first half of the year.

And free cash flow is positive in the third quarter and expected to be significantly more positive in the fourth quarter. We generated $106 million in the third quarter. We expected to generate $200 million to $250 million in the fourth quarter. The tone on the call was very much one, that we were emphasizing the desire to grow profit and cash flow much more significantly than focusing on sales, which is a bit of a total shift, we’re always been a global oriented company but we are very much focused and candidly compensated on free cash flow and operating margin.

So just a quick little highlight on the Demag AG, 82% ownership as of today. That was about $1.1 billion of consideration paid, so that we bought another $200 million that would be owed if we get access to the 18% that remains outstanding. We’ve started a process called the domination and profit and loss transfer agreement. It’s a legal process in Germany that would require us to make a petition, have a shareholder vote, put exposed in front of the judge, and the judge will effectively establish a put price, that the 18% of shareholders can put their shares to us.

There is one large shareholder out there, so it’s difficult to predict the actual timing of when it comes down, but our hope is that we’ll see our way to a 100% of the ownership. It’s not a necessity, if we get the profit domination agreement approved, we get full control of the cash, we get control of the management, and we can implement our integration plan that we would like to see. So, that’s one of the important process, so hopefully we’re done sometime in the spring of next year.

We have a team from both companies, Demag AG and ourselves, working on integration plans. There is four main categories, which we’re focused on, so when the time comes, when we can implement those, it should be done reasonably quickly with a lot of forethoughts.

Backlog is probably the only forward indicator that we talk about in our business in terms of numbers. And you will see here that backlog has been stable from Q2 to Q3, that’s a very unusual trend. Typically you see Q3 contracts. We had a large number of shipments of cranes in the third quarter, but even despite that, you’ll see that the overall backlog of the historic business be reasonably flat and the addition of $448 million along the Demag AG product line gives you the total of 21.50 or so.

The biggest growth is in AWP, where we see our customers placing orders earlier and earlier than they’ve traditionally have. That’s again providing support for our comment that we see next year, a solid growth year and one where we would have pricing power which we intend to take advantage off.

In terms of the liquidity and debt profile, we have no near-term maturities. The two largest trances of debt is $800 million of 8% note and $750 million of a term note that was split in August to fund the Demag AG acquisition. The term loan comes with some statistics, some leverage statistics. We established those in August with the reality of what we see today and are pretty comfortable with our ability to meet or exceed those obligations and don’t see any risk there. The 10.78 are senior notes issued in May of 2009, so they are senior to anything else on this page other than the term loan. But today, where we are, we have strong liquidity $1.2 billion. You can see it’s almost $700 million in cash and $500 million under undrawn revolver and our net debt is $1.6 billion of which like I have mentioned, $750 million is the senior.

We have these goals out there. We’ve been talking about 2013 for some time. In May of this year, we talked about 2015, that’s really what our strategic plan internally is that we have what the board is oriented around. You’ll see very strong growth in each one of these categories, some look a bit like a reach relative to past peak. For example, you’ll see cranes on here peaked at $2.9 billion, we’re saying, we’re going to back to $3 billion in 2013. While about $500 million of that would the Port Equipment business which we didn’t own in the prior peak, so we’re not expecting that necessarily the construction crane to get back to peak then.

A similar story would be that the legacy business of AWP with $2.7 billion achieved was principally through North America and Europe only. In 2013, we’d expect roughly $400 million or so to come from non-traditional markets like Brazil to have grown quite extensively in their use of the product. So again, there is lot of commentary we put on the market relative to our views on these. Our highest level of confidence will be in AWP and materials processing, probably construction is the furthest away were we sit as we are still losing money a little bit. So the emphasis there is on right sizing the cost structure and we have a goal to get SG&A down under 10% for next year. On the first nine months it’s probably around 12% to 13% overall.

So in summary, I think this lists pretty much everything we just talked about. The free cash flow for the fourth quarter is something we’d like to emphasis again $250 million, so further de-risking the business. We do have some uses of cash early in 2012. I mentioned the potential of the 18% shares that (inaudible) out there for Demag AG, there is also a tax payment of Germany, which is the tail of the divestiture of we had of our remaining business to be [cirrus] of about $160 million in Germany, but after that focus will be on generating liquidity and debt pay down opportunities. And you’ll see that Material Handling & Port Solutions will be accretive as an EPS comment. Increasing amounts there is a bit of step up to amortization, but from a cash flow perspective it’s a very healthy business, and there you’ll see some of the guide post that we have in terms of our financial performance for 2011.

So, I think that was a little longer than the 7 minutes I had talked about, I has a tendency to do but I’ll open it up for question at this point.

Question-and-Answer Session

Unidentified Analyst

So, Tom, why don’t I just kick it off?

Thomas Gelston

Sure.

Unidentified Analyst

You where in Europe last week, obviously Europe is very topical, just can you kind of give us your perspectives on what’s going on the ground, what kind of demand are you seeing? Obviously you have a pretty big crane business in Europe and then, just a quick update on Demag operational front?

Thomas Gelston

Sure. Sure. In terms of, we’ll take it in three steps. One will be sort of a rough fundamental business. Europe is actually reasonably good for us, and our crane business will be one that has probably the highest European exposure. In the beginning, I’d say in the end of 2010 and the first part of 2011, we had adjustments to backlog. There were a quite a number of order cancellations or even deferrals in the backlog for pushing up delivery. In the third quarter, that number dropped to $3 million. We actually view Europe as stabilizing and that, generally the lenders are very comfortable lending against the asset, because the asset base has stabilized in a value and actually has increased.

The orders tend to be concentrated towards the companies that are larger than the smaller ones. We do have a number of customers that are still struggling financially on the smaller crane side, but if you think of big companies like (inaudible) that we sell to in Europe, the report as European sales that they use their cranes around the world. So I’d say they remain the most healthy.

But Europe is reasonably stable with markets like Germany and to the North really being where the growth is coming from. Interestingly, we had a fairly strong order quarter from the UK and AWPs, its one data point, so it’s hard to call it a trend at this point. But the statistics would support that they should enter into replacement cycle. So as [well] in the U.S. what we’re seeing for the better part of this year. So, I’d say we’re optimistic, we watch really closely the credit market. Cranes is probably the most dependent on credit, just as everyone of those assets was financed so, if we do see that take a turn down that would be concerning to it, but where sit today, it’s reasonably okay.

I’d say the investor confidence over there is shaky. They’re looking to put access to work, they were interested in our story specifically I believe. But they are – like everyone they’re hanging on the words of Merkel and Sarkozy, they are a little more pessimistic than I would say, we generally are here in terms of growth outlook, but that’s to be expected, they are dealing with the frontlines. The only ones who I would deal with is one as negative, where the Swedish who are very happy, they did not join the Europe, by the way. So again, it was a very interesting week.

In terms of Demag AG, I think we are extremely happy of what we’ve seen. I have visited three of their factories, two of the industrial cranes, and one of the port. Very busy factories, it’s coming off of a very good quarter for them, where they have their highest level of parts and service business they have. So into the fourth quarter, traditionally the slowest quarter, but what I saw wasn’t necessarily slow. It’s hard for me to have a historical perspective on that. But the port equipment business, they are very enthusiastic about.

The industrial cranes business tends to be the one that’s a little bit more volatile, depending on the seasonality of the business, but relative to their external commentary and they do have a public slope, so I have to be careful, well, they haven’t reported their full-year numbers, for example.

They are looking for a continued growth and it is roughly 10% top line and I think they’re having a lot of that translate to bottom line performance. So very happy in early stages of integration, but most of the operational integration has been a half a way to us, so we have the domination agreement in place.

The things that we can do tend to be customer facing. So if you think about where we manufacture the superstructures of the overhead cranes or the selling activity or the parts support, but it involves generally a lawyer having a management agreement to ensure that profit is allocated appropriately and we are not disadvantaging the 18% owners that are not part of the terms of operation. So this level of complexity interjected, until we have the domination agreement in place. In terms of the corporate synergies, most of those will be post against the domination agreement. So...

Unidentified Analyst

And I guess as you were speaking with your keen investors, what was their take of the US economy, and then obviously Germany being such a huge export economy, what was their take on China?

Thomas Gelston

Yeah, as mentioned, the more conversation relative to concern was China and what they’re seeing in the over abundance of either capacity for manufacturing or pieces of equipment that would be potentially coming on to other markets.

We had mentioned specifically relative thoughts, what we sell in China tends to be not available by Chinese manufacturers. So we import into China the largest of the product they use, we have roughly $300 plus million of sales that tends to be the biggest of the cranes that we sell, we do have a JV in China that makes a product, there are a couple of other competitors forth.

That is one that’s struggling, I think part of it is self induced with our partner and part of it is market driven. So there is slow down and I think there is concern on the Europeans minds that that slow down has a ripple effect be it with the commodity markets or affecting Australia or even more directly creating an outward push of equipment from China into markets like Brazil or South Africa or the Middle East et cetera. We haven’t really seen that much today, but it is probably pretty prevalent on their minds. In terms of their focus on the US, I’d say they understand the replacement cycle.

There is just very difficult to see any growth capital at this point in time and candidly, I’d probably agree with that and that’s all we’re generally talking about here is the fact that major customers who has already haven’t bought since 2008 in construction equipment hasn’t bought since 2006 materially.

So we’re calling four replacement cap for the better part of the next year and half or so, they probably be a little bit more negative than that in terms of, is there really going to be any recovery until you have some sort of significant housing push up, but replacement demand is, they are okay with.

Unidentified Analyst

Now in the US, we have a pretty good sense of what the rental companies are doing. What about the European rental companies, what are they doing? Are they investing? Are they replacing fleet? You know, what does the outlook look like for your business pertaining to those customers?

Thomas Gelston

Yeah, the sense that we have is that they're probably best described, and I don’t mean it in the negative way. As US offset by nine or 12 months, so a lot of the dynamics that look place would be one where we see the replacement cycle setting up that we’ve seen them aids their fleet belt, and the residual value support is there against for them to start doing trading and refreshing their fleet, because the fleets have been downsized, they are now reasonably utilized from a time perspective.

It’s difficult to see the consolidated versus what you can see here in the US. But the commentary I made about the UK market and seeing decent orders coming from them, which stem from the back that we heard some of that the fleet dynamics. And so, we are hopeful it’s going to be a trend, but again it would be just happening right around now.

Northern Europe, so if you think of Benelux or Scandinavia, probably is the best rental market today. Cramo for example is a big customer up in Sweden that I saw a lot of equipment to use and they would be one that would be buying the shares well.

Unidentified Analyst

Pertaining to the AWP price increases in the US that we talked about earlier, you announced 4.5% increase in June, another 4.5% in January, can you go back to June, I mean what percentage increase that you see of that 4.5%. And then, you know realistically, I mean what are we looking at? Are you going to get the full quarter and half percent in ’12 or is it going to be more of a blended outcome?

Thomas Gelston

I guess, the customer are listening, yes, we are. We are going to get the full compounded 9%. The 4.5% that we did in June was made in effect for those customers that would be impacted by that. Now, we do have called seven large companies that traditionally would negotiate annual supply agreement, they’d give us an indicated level of volume, and for that we’d give them a discount structure and pricing arranged around that volume relationship.

We were probably dealing with two-thirds of our business in the first half of the year falling in that category. So they would have been unaffected by the price increase in June. In fact, one of the different points that I think we had in the third quarter was the price realization overall. We had talked about at the end of the second quarter, getting $22 million of increased pricing benefit in the back half of the year. We’re probably a little bit shy of that at this point. So the secondary buyers that were affected by the price increase have begun to show up a little bit more meaningfully the last month or so.

So I’d say, the good news is, the two-thirds that weren’t impacted by that and third will be impacted by that plus the additional price increase we’re going more for next year. Now that’s the big starting point for the negotiation, there’s no doubt that they have leverage as well. But we’ve seen rationale behavior from our main competitor Oshkosh, they’ve done when we’ve done our pricing announcements, they’ve followed or announced similar times, similar price increases.

What we’ve talked about is, we need to recapture the pressure we’ve seen from our input costs. We’ve talked a lot about hydraulics relative to that, everyone can follow this fuel charge, but that might be somewhat of abating right now. Engines are getting more expensive. So there’s a number of things that are going on that we need to recapture and we think the 9% sets us up on the blend of customers that we have to actually cover that cost increase as well as the anticipated moves in 2012 that we see for some of our underlying costs. So it’s recapturing the margin, we’ve been not able to have this year where we would normally have had it.

Unidentified Analyst

You bought with Oshkosh, I think you’ve talked about 5% increase and you talked about 4.5%. So is that 5%, 4.5% and your 4.5% is 4.5%?

Thomas Gelston

No. When we announced 4.5% in June, actually we announced in April at ConExpo effective middle of June. They announced the 3.5% at that time. So we’ve done, they went a little less than we did at that time. They went a little bit more that we did this time. I think our push from this (inaudible) effectively with similar increases in terms of the customer impact.

Unidentified Analyst

Now, when you talk about pricing, I guess you know what we as investors, as analysts, and I'm sure, or against you want to see price increases beyond the commodity impact beyond this technological implementation impact. Are you seeing those trends shakeout, that is it really just kind of catching up the commodity pricing and…

Thomas Gelston

It’s probably best described as catching up the commodities right now. I'd say, the way the industrial cycle evolve is not atypical, you'd see in beginning of an economic recovery supply, if you use the hydraulics as an example, who they are supplying to multiple different channels of agriculture, which was strong in another aspect. It takes half pricing power, and you'd see us wanting to fill our factories as early as we can, and sometimes that involves bidding on transactions that don't have the historic margin you like to see. So it is a bit of a squeeze in beginning.

We are able to begin to negotiate and supply though it tends to be more on payment terms than it is on absolute pricing today, but we are also seeing ability to get some level pricing to recover that. So we are in that transitional period right now where things are balancing out. As you get deeper and traditionally it’s tight, if you see expanding capital and supply gets tighter and there is more of a struggle to get the production side people want. This way, you will get the pricing power in excess of your cost pressure. So we’re at that transition point right now, which is not a bad spot to be. Again, if we are able to get the pricing that we think we can get, AWP should be nicely up here in terms of revenue and in excess 10% of operating profit, which is a good start.

Unidentified Analyst

I will ask one more before we open it up. On China, I guess and one of the big debate in the market is the emerging Chinese competition, I think you can touch on that and how that’s incorporated in your 2013, 2015 goal?

Thomas Gelston

Sure. There is no doubt, and is most prevalent in the cranes business that they have done, but there is three big companies that have done a ton of research and development trying to increase the capacity of the machines, the size of the machines that they sell, the three that they’ve talked most are Sany, Zoomlion, and XCMG. Two of the three, Zoomlion and XCMG have stayed in ownership in their equity, so they tend to be more of a manufacturer in China export strategy driving the employment of the local individual.

Sany has been the most entrepreneurial, they are setting up factories in locations around the world inclusive of Georgia here. They have been struggling to find, I should say they find talent; it’s been struggling to keep talent within their organizations. But there is no doubt that they are all working hard to try to get their presence.

Our view in the way its incorporated into our slides and in the guidance here would be that we would see increasing competition from them in the two to three year time frame, but mostly in the developing markets of the world the equipment that we sell especially to developed markets has a high level of reliability and product liability, obviously is a big factor in those that has a very good part service and support, they’re under different emissions restrictions, so their equipment would need to be made compliant. So you’re beginning to talk about a Chinese competitor base that we need to ship their cost structure to be more in line with what we would traditionally manufacture. The largest commercially available crane I’d say accepted by the customer base would be in the 1,250 ton range on the Kuala crane, for example our largest would be 3,200 tons.

So, there in lies the difference and that’s why we’re selling those products from Germany into their markets that work in power plants, nuclear power would be the one that we just sold $30 million crane in the third quarter. So, I’d say they’re going to try hard, they’re going to try hard mostly in the markets like Brazil and Africa in the Middle East. We expect them to gain capability over time, but they in terms of being a China out strategy cost a lot of ship generally we see for Germany to there is 10% to 15% of the cost of the crane, the RMB is strengthening, so it’s difficult to say that that level of wage support is going to be there, so that they can just have a pricing strategy, but the unpredictable side is their willingness to lose money for an extended period of time especially to US government support, who is the principal mission at least from the government interest is the employment of the Chinese people. So we watch it carefully but as of now it’s not too much more market concern for us.

Unidentified Analyst

So why don’t we open it up, see if anyone has questions.

Unidentified Analyst

Just go back to the slide where you talked about the goals for 2013, 2015 et cetera is there primary drivers that is just growth in emerging markets, is it taking market share, how do you see getting to those goals?

Thomas Gelston

Yes, that’s a fair question. The AWP I’ll take it by segment here to each of them has its own new ones. AWP is pretty much getting to about 2 to 2.1 from existing customer base, so just the replacement cycle taking in the United Rentals of the world buying again to replenish their fleet. Above 400 would be from markets that would be non-traditional buyers that equivalent number today would be about 250.

So we’d be talking about another $150 million of growth. When you think about AWP, it goes into markets because it’s entering either a safety concern or productivity concern. So in markets like Brazil in the past – the high legislation that mimic their model that of the European standard, we’ve seen a rapid adaptation of the product.

When you go to China, they don’t they use capital in often times huge capital as their solution. So it’s not as much baked into that, it’s probably more of a Middle East, Russia, Russia is quickly coming on in terms of buyers and Brazil in terms of the non-traditional market growth.

In terms of cranes, the three billion now focus on the 2013 that is along we tend to have most commentary in the public domain, three billion about 600 million would be either port equipment business. Today that business is probably around 350. So decent level of growth, however, it’s also one that we’ve seen backlog increased year-over-year about 68%. So it’s one that we have very quick backlog and a pretty good line of sight on projects that are out there for bid.

So of the $2.4 billion that would not be in that port equipment business and you’ll see relative to the $1.8 billion. This year we’ll probably close to $1.92 billion. So you’ll get a sense that we’re talking about $400 million or 20% growth in two years. That would be driven some of our market share.

This year is a good example in North America, rough terrain crane product. We won a good number of deals that we wouldn’t traditionally have competed for. We hired a Head of Sales for North America named Frank Bardonaro who work for customer of ours, rental fleet manager was his primary role and he had a number of industry contacts and has been very successful for us.

He is actually heading up our mobile cranes business globally now. And it’s headquartered in Switzerland. So that would be part of the story as well. We would also expect markets – the US market this year, the crane business was bumping along at bottom and all sudden we saw the used inventory get depleted and the availability got pretty tight, it was actually best noticed in Ritchie Bros auction in January in Orlando where we saw used prices come in 10%, 15% higher than they were.

On the heels of that, we saw new equipment demand rebound pretty sharply in North America almost instantly. Our expectation would have been in the back half of this year to see the same phenomena in Europe. They’re still dealing with some struggling fleet managers over there and there is still some used crane inventory coming on to the market.

So until we see a way through that, it’s going to be difficult to predict growth, but our view is we’ll probably be in that now at this point sometime next year. So that would be probably the risk factor to that number in cranes, is the European demand driven by a replacement cycle. But the used equipment has to deal first. In construction, it’s likely what we may actually miss the top line on this 1.6. Our focus on this one especially is on hitting the 8% bottom line of operating profit. So I’d say, we are going to shrink from being an everything to every one sort of focus, not trying to have our products we represented around the world, but rather focus on products and geographies where we have a history of making money. So, you’re going to see this concentrate on Central Europe, in the UK, we may actually shrink the business a little bit in Northern America, it’s been pretty challenging for us here from a market presence. We would be pretty small relative to some of the major players. If we go to Europe, we would actually have a reasonably good market share. So, again, I’d probably guide you to saying that 1.6, which is not too far off where we are today, is likely to actually come down a little bit, but the margins being focused there.

And then materials processing, there is about 30% of that is mining. We would be pretty optimistic relative to that mining performance staying around 30%, so you’ll see that growth being inline there. The aggregates industry is really the driver of the most volatile swing factor in the materials processing side, so we would need a level of build cycle that come back not necessarily an extraordinary one, but you’re going to need to have the equipment that’s out there used up and just not reinvest because it’s being utilized at a low rate, now its just being reinvested in parts and service.

So we would expect in this time frame the large aggregate producers both in materials, to be buyers a little bit of our machine, but a lot of our equipment is actually rented from the dealers or done a rental purchase options or contractors. So you’re going to need a help in sort of smaller projects around. Construction and demolition in Europe is a good thing, but it’s mostly aggregate production, so you’re going to need (inaudible).

Now in India, for example they do have a national highway project, and the orientation of equipment they’ve done around is the mobile equipment, so that’s been a very good growth market where these machines move along with the project creating the base done right along side the highway. So that’s been a good growth market that would also, we would expect to continue to grow, you see a broadening expansion. We have a small JV in China and introduced a mobile concept. So that will be another example, I don’t know if that gave you some color commentary that helps.

Unidentified Analyst

Yeah. Very helpful, thank you. Just one more if I could. As we go through your sort of life cycle of your products, I assume as you’re investing in R&D, quality of that product gets better overtime. Do you see the replacement cycle lengthening as a result, either has it already or do you see it more in the future?

Thomas Gelston

Good question. Most of our focus in R&D tends to be on accessibility and maintainability of the equipment. So a lot of it is just making it easier for the repair person to get access to it. I don’t think there’s been a real fundamental difference in terms of a rare profile in fact, anything that’s ground engaged and pretty much starts destroying itself from the day it gets puts in to work and actually you’re going to start investing in very high stream metals which people probably aren’t willing to pay for it at this point in time.

I don’t see that shortening or excuse me, lengthening the time of this piece of equipment on the field. There was some sort of changes that focused in the background for example, AWP during that period of time where they’re under investing.

They were willing to remanufacture and pay a percentage of the cost of new to get another two, three, four years out of pieces of equipment. That may continue to grow, but that’s really more of a desperate measure from cash management than it is, than a sort of fundamental trend in the background.

Unidentified Analyst

I think, that’s all the time we have unfortunately. Tom, is going to be (inaudible) no one is going to be here Bob. So you can ask your questions.

Unidentified Analyst

Great, thank you.

Unidentified Analyst

Thanks, Tom.

Thomas Gelston

Thank you.

Unidentified Analyst

Thank you.

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