Terex Corporation (TEX) Q2 2011 Earnings Report, Transcript and Summary

Good morning, my name is Chastity, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Ronald DeFeo, Chairman and CEO. You may begin, sir.

Good morning, ladies and gentlemen, and thank you for your interest in Terex today. On the call with me this morning is Phil Widman, our Senior Vice President and Chief Financial Officer; Tom Gelston, Vice President of Investor Relations. And participating on the call and available for your questions will be the leadership of our business segments, Kevin Bradley for the Crane business; Tim Ford for Aerial Work Platforms; George Ellis for Construction; Kieran Hegarty from Terex Materials Processing; Steve Filipov for Developing Markets; and Ken Lousberg for our China operations. As usual, a replay of this call is archived on the Terex website, www.terex.com, under Audio Archives in the Investor Relations section. I'd like to begin with some overall commentary. Phil will follow up with a more detailed financial report. I will provide an outlook and summarize and open it up for questions, and as usual, during the Q&A period, please ask only one question and a follow-up. And the presentation we will be referring to is accessible on the company's website. Let me begin by referring to the forward-looking statement commentary on Page 2, which I encourage you to read and review, as well as our other disclosures available in our public documents. And now please turn to Page 3. In general, this is not the quarter I was hoping for in terms of bottom line performances. Nevertheless, the quarter reflects real progress, an adjusted net income of $0.10 per share, some tough restructuring choices that we've made and recognition of the challenges that we face and the issues that we believe we're fixing. Specifically in the quarter, net sales increased 38% compared with 2010, and 30% excluding the effect of currency. Incremental margins were not in line with our expectations, as input costs were higher than planned and manufacturing variances greater due to supply shortages and productivity deficiencies. A rapid ramp up of production, particularly at our Aerial Work Platform business, caused labor inefficiencies. And in construction, shortages caused us to miss net sales and be less efficient. We feel we are now in more balance, and that the efficiencies are improving meaningfully. We announced restructuring and aggressively reduced some costs in our Crane business. This is consistent with what we previously said we would do. We are going to optimize our facilities and reduce or eliminate loss-making operations. We are not going to discuss the specifics or particulars here, but the consolidated efforts result in annualized savings of over $70 million. Lastly, we used $142 million in cash from operating activities in Q2, mostly in working capital due to business growth and TFS financing. This is normal for this time of year. We are expecting significant working capital burn-off in the back half of the year; Phil will explain. The Demag Cranes AG purchase. That offer has met our expectations and was done within the parameters that we set for ourselves. We think this is going to be a great acquisition and meaningfully improve our company in ways we have yet to fully forecast. This is a business where we can have a market-leading position, make profits in good times and in bad and help diversify net sales and services. It has been difficult to get here, but I think the destination will be worth the journey. Now Phil is going to cover our specific performance.

Thanks, Ron. Good morning. Page 4 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 38% from the prior year quarter and 18% sequentially or 30% and 15%, excluding the effect of foreign currency translation, respectively. The increases over the prior year were most significant in AWP, Materials Processing and Construction, as we continue to experience positive signs of an industry recovery. This recovery is somewhat fragile, in particular, geographies and product areas, however, as demonstrated by the Cranes segment relatively flat year-over-year performance. Sales increased sequentially in all segments. However, production was somewhat hampered by supplier constraints, particularly in the Construction segment. We are working through these issues and expect this situation to improve in the second half. Net sales in the Cranes segment fell short of our expectation due to timing of orders and deliveries, most significantly in large crawlers, all-terrain and Chinese truck crane products. We had income from operations of $7 million in the second quarter compared to a loss of $10 million in the prior year quarter. Excluding the impact of restructuring and other items, the income from operations would be approximately $43 million in the current period versus approximately $8 million in the prior year quarter. The favorable effect of increased net sales volume was partially offset by higher input cost, cost and efficiencies from supplier shortages and the quick ramp-up in production. This was most evident in AWP where we did not attain our incremental margin objectives. SG&A expense increased primarily due to the restoration and accrual for certain performance-based compensation programs, increased engineering for new products and Tier 4 work, as well as certain insurance recoveries in the prior year period. Overall, working capital increased partly due to typical seasonal pattern of deliveries in the summer months, some delivery delays in the Cranes segments and in Construction due to supplier constraints. Working capital as a percentage of the trailing 3-month annualized sales was 33% in Q2. Overall, we expect our working capital sales ratio to improve in 2011 to below 30%, as we bring our production in line with demand and the step-up in Cranes second-half deliveries. We continue to take advantage of early payment discounts with our suppliers to improve our returns. And considering this action, we are basically flat with last year's working capital for sales performance. Net debt increased to $725 million from $693 million at the end of the first quarter due to the use of cash and operating activities, mainly on working capital and increased financing receivables, partially offset by proceeds from -- of $127 million from the sale of Bucyrus shares. Overall, liquidity remained strong at $1.2 billion, with cash balances of approximately $700 million and availability under the revolving facility of slightly under $500 million. Turning to Page 5, we've outlined the changes between last year's loss from operations for the second quarter of approximately $10 million to the income from operations of approximately $7 million, with segment detail displayed as well. The most significant changes are as expected in the largely favorable volume effect from the recovering segments, partially offset by Cranes, where reduced crawler, all-terrain and Chinese truck crane demand negatively affected year-over-year results. Manufacturing utilization provided a modest improvement except in AWP, where the accelerated production ramp-up in people caused inefficiencies relative to the prior year period. The SG&A increase of approximately $18 million is mainly due to the restoration and accrual of certain performance-based compensation programs, as I mentioned, increased Tier 4 in new product engineering and certain insurance recoveries in the prior year period. For purposes of comparison with last year, we have split out the effect of the allocation methodology change to the segments of management charges on a separate line for better clarity. Foreign exchange translation provided approximately $4 million in operating income benefit overall. Restructuring, impairments and related charges increased from the prior year by $18 million, mainly due to the charges for the cost reductions and facility optimizations undertaken in the Cranes segment. Improvement year-over-year in AWP and Construction segments reflect charges taken in the prior year quarter that did not recur. Page 6 displays other financial items for comparison purposes. I'll cover backlog in another slide. The net interest expense reduction for the prior year reflects the positive effect of the debt repayments made over the last 9 months of approximately $570 million. Other income in the period includes the gain on the sale of Bucyrus shares of approximately $40 million, partially offset by approximately $3 million for the cost associated with the Demag Cranes AG acquisition and $2 million for a prior acquisition arbitration settlement. The prior year quarter included $12 million benefit for marking to market certain derivatives associated with mitigating the Bucyrus International share risk. Tax expense for the period is at a higher-than-normal rate, mainly due to the increased level of losses not benefited, of which the restructuring charges account for approximately 60%. The weighted average share count is diluted this quarter, given the overall profitability, and includes 4.2 million shares for the effect of the convertible notes and 1.1 million shares for compensation programs. The earnings per share effect of the restructuring and other items for the quarter are explained on Page 7. This schedule bridges the as reported EPS of $0.01 to the as adjusted EPS of $0.10. The benefit of $0.22 per share for the after-tax gain on the sale of the Bucyrus shares offset by $0.29 per share for the cost associated with the Cranes restructuring and related cost, as well as $0.02 for charges related to our intended acquisition of Demag AG. You will note the lower-than-normal tax benefit on the Cranes charges due to the inability to recognize the tax benefit on the vast majority of those charges. On Page 8, our working capital statistics are outlined, and we expect most of our second-half improvement to come from inventory reductions in the Cranes segment as we have better clarity on deliveries, and in Construction where supplier constraints are expected to be largely resolved. The decrease in days payable outstanding compared to the prior year is mainly due to the early payment discount program. We expect working capital as a percentage of fourth quarter annualized sales to be less than 30% at the end of 2011. Improving working capital management, coupled with our earnings performance, should deliver between $350 million and $400 million of free cash flow for the second half of 2011. Referring to Page 9, we feel that there are several signs of recovery in the marketplace, but it is still fragile as evidenced in certain products and geographies. AWP first half demand came mainly from the large rental companies in replacement capital spending. Our pricing increases are taking effect for Q3 deliveries. And in Construction, the situation is product and geographic-specific, with continued solid demand from material handlers, backhoe loaders and off-highway trucks. Roadbuilding products, in particular in Brazil, were soft as government financing tightened. For Cranes, North America was a bright spot for rough terrain and truck cranes, while product demand for straddle carriers continues to improve. Our German Crane business continued to experience shifting delivery dates and cancellations in Q2, as we work to solidify our second-half deliveries. Materials Processing continues to experience strong demand for larger capacity machines worldwide, but we are entering a slower seasonal period. Page 10 shows the backlog trend for the company by segment. Overall, we are basically flat in the first quarter, but up 57% from the prior year quarter. As mentioned in our press release, we made adjustments to the Cranes backlog in Q2 of approximately $219 million to remove orders mainly related to a new product that is not ready for introduction, orders associated with the customer and bankruptcy proceedings and cancellations occurring in the period. Other segments continue to show solid levels of backlog as we enter the second half. I'll turn it back to Ron now.

Thank you, Phil. As you know, cyclical businesses are difficult to predict, and the dramatic changes we've gone through certainly presented us forecasting challenges. Nevertheless, we expect it to be meaningfully net income positive in the quarter, and I think we got there with $0.10 per share. More would have been better and was expected, but we think the bottom line in the second half will strengthen. There is a backdrop of economic uncertainty. And as we turn to the outlook on Page 11, we think -- we have to keep this in mind. But based upon the backlog and current customer inputs, we think we'll deliver between $2.7 billion to $2.9 billion of net sales in the second half and operating profit that ranges between $140 million and $170 million, resulting in an earnings per share of about $0.47 to $0.67 for the half or $0.40 to $0.60 for the full year considering our first half performance. This is lower than we expected but does not change our view relative to our future potential for 2013 and beyond. If anything, the company is going to be strengthened during this period as we force out inventory, cost and get manufacturing performance back to where it should be. Staying on Page 11, the outlook anticipates our Aerial Work Platform and Materials Processing organizations to deliver as expected in the second half, with AWP pricing actions and productivity being key to the performance increases in this business. In Cranes, we have people-related cost reductions helping, plus both our crawler and Port Equipment deliveries are expected to improve in the second half. Our Construction business, that demand is solid, and we think the supply risks are softening. And we will have full effects of pricing actions in this business in the back half of the year. The balance of the assumptions relative to our outlook is noted on Page 11. All figures exclude restructuring and any effects of the pending Demag AG Cranes acquisition. Turning to Page 12, relative to our Demag AG progress. As noted in the press release approximately 82% of Demag Cranes shares were tendered as of July 19, 2011, including our 1%. We've received early termination under the HSR Antitrust Act. The transaction has been filed with the European commission, and the initial review period expires on the 8th of August. As noted, we are nearing completion relative to the syndication of our new term debt facility. And pending EU approval, we expect to close this transaction in the third quarter. So finally on Page 13 and to summarize, we are making progress in every one of our businesses, but there is significant work in front of us. We expect that the supply disruptions experienced in the early part of this year are slowing or have been mitigated. And we expect improvements in productivity, utilization and pricing, and those are expected to more than offset whatever input cost issues remain in the second half of 2011. We plan to complete, continue and initiate new cost-reduction activities. We expect to generate substantial free cash flow, as Phil has mentioned, mainly from working capital improvements. And we remain focused on the profitable growth goals that have been previously established for 2013 and beyond. We expect each of our segments to positively contribute to profitability in the second half of 2011. We think this positions us nicely for a much improved 2012. We do believe customer replacement rates will continue to be positive, and that the actions initiated on and that are under our own control will ultimately determine our profitability and the improvements we expect to achieve. Now I'd like to open it up to your questions. Again, please ask a question and a follow-up. Chastity, please open up the lines for our participants, as well as opening up for questions.

[Operator Instructions] Our first question comes from the line of Ted Grace with Susquehanna Bank.

Ron, I appreciate kind of the commentary around the products. I was just wondering at a high level if you could kind of walk through the geographies and your macro observations. I mean, I think we all sense kind of the rising concerns in Europe and probably elsewhere. So I was wondering if you could just initially speak to, call it, Europe, the BRICs, North America, given the cancellations in Cranes. But I think most of that was concentrated in Europe. But should we think that there is risk at other elements of your business? So that was my first question.

Okay. Let me give you a sense. It's an interesting story because the Developing Markets remained positive, but the developed markets actually grew faster than the Developing Markets. And that somewhat is a product story and somewhat different by each of our product categories. For example, our North American business, that's a combination of United States and Canada because we actually include Mexico in our Latin American operations, on an annualized basis for the first half was up pretty dramatically, probably in the range of 45% to 50%. But that was mainly driven by our Aerial Work Platform businesses in North America that was up nearly 3x, whereas our Construction business only moderately was increased in North America. Crane business for us had a pretty substantial increase in North America. And Materials Processing was good, but Materials Processing is really doing well in markets like Australia and to a degree, North America. Europe, on the other hand, was also a mixed bag depending upon the product categories. In our Aerial Work Platform business, we showed a pretty nice increase, a surprisingly nice increase in our European business. But our Construction business also had a pretty nice increase in our European business. But our Crane business was meaningfully down, not dramatically, but meaningfully down, and that's where we had some of the cancellations. And our Materials Processing business was relatively flat in Europe. Overall, it continues -- I would say our Chinese business was slower than we wanted in part because our own Chinese crane -- truck crane venture is struggling a little bit at this point in time. So the characterization by geography I'd say is positive -- more positive in the smaller equipment for our business in Europe and in North America. The bigger Cranes, in particular in Europe, struggled. If you dissect Europe, the markets where there is more economic difficulty: Spain, Italy, Portugal, were pretty soft even in the smaller equipment area and in those markets that we normally would expect a more positive economic situation: Germany, France and to a degree, the United Kingdom, those markets were generally positive. Does that help?

Yes, that's helpful. And then the follow-up question I was hoping to ask is, is there any way you could just provide us, maybe Phil, a bridge of your first half performance to your second half performance to reconcile to the -- call it the implied $0.47 to $0.67 of earnings found in the back half. So walking through how we should think about revenue, the underlying profit, time of restructuring benefit, seasonality, et cetera.

Okay, Ted. I'll give you a kind of a high-level breakdown of that. But as we mentioned, order of magnitude is probably $120 million roughly and $140 million to $170 million identified here in the outlook that we have. Of that, I'd say about 30% to 40% is going to be related to price. We do have volume and mix benefit which is also a considerable amount and I'd say in a similar range, 25% to 30%, and that's mainly Cranes is picking up in the second half. We've got strong MP, but basically volume relatively flat, AWP pretty flat and Construction coming through. Cost reductions, including efficiencies in the facilities, is probably close to 40% to 50% of the improvement that we have first half to second half, and there's some headwinds on material cost that kind of make up the difference related to that. But that's kind of the split in terms of what we have, and I guess I’d characterize it as the positives would be maybe we can do some more volume than we expect or kind of balancing that with the working capital push in reduction, not to try to schedule production for optimistic order projections, but schedule production for reality to drive the cash flow generation. So I'd say if there's a little bit of a mix difference, maybe there could be a little bit more volume than what we've got in the outlook at this stage to help solidify the earnings power.

Okay. So the last element is so Cranes should do well in spite of the fact that you've had $220 million of, call it, cancellations or numbers removed from the backlog. You're still behind your great confidence that you can see an acceleration in top line there?

That's right. Yes, Cranes will get better, and also the Port Equipment we've talked before, they had very low first half versus second half. And the deliveries there, their profits improved quite a bit from first to second quarter, and we expect that they'll get the deliveries that we have out there which are profitable business.

Well, we've made some changes in how we are looking at the Port Equipment business, and those changes I think are coming through. Profitability -- the losses were cut in half in the second quarter. We have a profitable Würzburg facility that actually was net positive in the second quarter. We have taken a level of management out in that business. And frankly, we expect to be profitable by the end of this year, and that does not include any of the future benefits we expect to get by combining that business with the Demag Cranes Port Equipment operations.

Our next question comes from the line of Ann Duignan with JPMorgan. Ann Duignan - JP Morgan Chase & Co: Just a question on the AWPs, your price increases, pushing them through in the back half. You know that a lot of the orders in the front half of the year came from your large rental customers. Can you talk a little bit, Ron, about how sustainable that price increase will be as we go into 2012, when those large rental companies are back buying large volumes again?

Sure. Let me give you my sense, and then Tim has a closer picture of that. Not that we really can completely answer that question. The first half of the year, there was a pretty substantial mix of orders to the very large rental companies. Second half of the year, we implemented a price increase, and we anticipate the mix of the business in the second half of the year to reflect a good or meaningful piece of that price increase. Obviously, we are entering conversations with the large rental companies right now, some of them wanting to get into conversations about 2012. And there's going to be a push from our side to have those price increases stick and for that to be the pricing of the day for 2012. I think there's a requirement that replacement rates continue among the large rental companies, but there's also a reality that we have had substantial increases on components that we have to pass those price increases along. And I think there is the dilemma in the market. We think we'll get the pricing. Tim, you want to add to that?

The only thing I would add, Ron, is that nobody ever likes a price increase, but our customers understand the need for it. The conversations we've had with our customers has actually been positive. One of the most significant positive things that we can see in the marketplace is our customers getting price increase in the form of rental rates, and we're seeing that all over the place. Utilizations are strong. They're yielding better results. And as a result of that, there’s a, I guess an acceptance that price increases are inevitable. And while they don't necessarily like it and don't want them, I think we're pretty confident that we're going to be able to pass that through.

And, Ann, if I could just kind of wrap this up and put a bow on it, I would say the combination of pricing and a more consistent throughput from our operations will have a pretty meaningful increase on the incremental margins. Ann Duignan - JP Morgan Chase & Co: Yes, I'm just wondering what color bow that is, Ron, that you’re wrapping around this.

Well, you put whatever color you want on it, Ann. Ann Duignan - JP Morgan Chase & Co: Hopefully it's a nice bright color. My follow-up question then is more on the Construction side. You noted supply constraints. Ron, were those really component supplier constraints? And could you expand on that? Or were they Terex's inability to forecast and therefore just didn't order components in time? If you could just expand so we can get some read-through. What were the components? Is it an industry-wide problem? Or is it a Terex-specific problem? That would be great.

George?

Ann, relative to the question around the forecast, as we saw the demand begin to increase Q3 of last year into Q4, we reached out to all of our suppliers and basically gave them a rolling 12-month forecast. Some of which even asked for a 18- to 24-month forecast due to the long lead times they projected based on the total industry demand increase worldwide. Most of our suppliers have stepped up to the table, delivered on time and we've been able to put machines together and deliver. We have had a handful of significant component issues around engines early in Q2 which have now improved. We have pumps, drive motors, dozer blades, smaller components that are hit and miss, that we have been chasing every hour all around the world to try to get improvement out of. If I walk through the 3 months of Q2, it improved greatly by the end of June. And to the magnitude in the quarter, I would say that created about $40 million to $45 million of revenue miss in the quarter, which also could be reflected in our increased working capital within the quarter, which I anticipate that we’ll flow that out. The factories all around the world are learning very hard, very long days, very long weeks to try to get back to the forecast to improve our position in Q3. I do still see challenges as we move into Q3, particularly with a couple key suppliers that we're working at my level and at Ron's level even with support there. But I don't think that's unusual anywhere else in the industry, and that kind of gives you a flavor for what we're working through. Ann Duignan - JP Morgan Chase & Co: Okay. And just a point of clarification, your engine supplier will be Scandinavian or U.K. or German?

All of the above. Ann Duignan - JP Morgan Chase & Co: All of the above. Okay, that's helpful. I appreciate the color.

Your next question comes from Jamie Cook with Crédit Suisse. Jamie Cook - Crédit Suisse AG: Quick questions. One, just to follow up on Ann's question on the supply-chain issue. How big of an issue was Japan in the quarter so naturally we get some benefit in Q3 as that works its way out? And then, Ron, a follow-up question. You've been pretty vocal about some market share targets you had. I mean, at your Analyst Day, you spoke about the market share achievements you made in Cranes in North America, some double-digit increases. You're going after some pretty aggressive increases in the Aerial Work Platform business to you before. So just -- has that decided at all as your market share, where you want it to be on a relative basis? Or are you still going to be pretty aggressive in that sort of what's driving some of the underperformance for lower-than-expected profits that you guys had hoped?

In Japan, really not a huge for us, a small issue in general. So we can't really blame Japan, at least we don't have the visibility through our supply base to think that it was Japanese-related. We think most of our supply issues tended to be just the substantial ramp-up in demand. We're in very similar product categories that others are in. And everybody sees the same issue, and everybody ends up chasing the same demand and wants those components all at once. So there's got to be a balancing act. And as in any recovery, what happens is the supply base has a upper hand initially. That's where they get their price increases early. And so I think that is mitigating now as demand is a bit more stable. But more importantly to your other question, the market share, I think -- well, I guess I'd like to have Tim and maybe George address it, but what I would tell you is -- and Kevin. Our market share objectives, we've secured and we're improving. We're happy with the progress we're making there, but the issues we have are probably not market share-oriented. You might say a little bit pricing-related to get the market share, but I don't think that's the main issue. I think it's mostly operational. But Tim, how do you feel the market share is progressing in AWP? And then we'll go George and Kevin.

Yes, I think from where we were at the bottom of the cycle to where we are now at the beginning of a recovery, we feel pretty good about the improvements we see in market share. In most categories, not all, but most categories, in most markets around the world, I think we're pretty pleased with where we are. That has -- much of the market share that we have came at the inflection point last year when we had to make some decisions, and I think we feel pretty good about where we are.

Whatever we lost in the downturn I think we have recovered. Jamie Cook - Crédit Suisse AG: Okay. What about Cranes as well because that's another area you guys pointed out at the Analyst Day?

Kevin?

Yes, Jamie, we feel good about our market share progress. Ron called out North America. Just to give you a couple of examples, boom trucks, RTs, ACs, really the core of our product line, we’re up significantly on a year-over-year basis, anywhere from 60% to 100% increase in market share across those products. Again, I'd say, I'd repeat what Ron said which was although we'd like more, our real focus right now is getting yield out of the revenues that we do have. So we're focused highly on our cost structure and making some choices that we have to in that area.

Our next question comes from the line of Robert McCarthy with Robert Baird. Robert McCarthy - Robert W. Baird & Co. Incorporated: My first question has to do with Crane business. I wonder if you could help us with some kind of rough break on how much of the $219 million backlog adjustment related to new product, delay, cancellations, et cetera, versus the bankruptcy issue. And whether you could give us some visibility on whether the $36 million of restructuring expenses in the quarter is all we're going to see to generate the $70 million. Or is there some more to come as you announce specific facility actions?

Sure. Phil?

Okay. Robert, on the first question of the backlog, the $219 million, the new product introduction accounted for $73 million. The bankruptcy was about $31 million and the remainder related to cancellations. And this is all in backlog relative to within the 12-month delivery period, the way we define it. Now on the restructuring activities, the $36 million charge basically is related to the $70 million. In other words, if we do additional actions, there should be additional benefit associated with those. Robert McCarthy - Robert W. Baird & Co. Incorporated: The facility closures that were referenced that you're not prepared to identify yet, are they fully reflected in those numbers?

Yes.

Yes. Robert McCarthy - Robert W. Baird & Co. Incorporated: Yes. Okay, all right. And then I just wonder if you could speculate a little bit on order prospects in the AWP business. Your order book looked very strong in the quarter but, of course, in front of fairly significant price increases taking effect. Do I need to have some concern about having pulled some demand forward into the quarter? And are we going to see a -- I mean, does this translate into or should we be prepared for a pretty significant sequential decline in orders next quarter before we get the traditional seasonal rebound in the fourth?

Yes, I'm going to let Tim answer that question.

Yes, I would say the orders that we saw in the second quarter, Robert, were strong. I think there is -- you've got -- we're in that period now where customers are saying, "Do I want to place an order now for delivery in the fourth quarter? Or should I wait and place the order in the fourth quarter for delivery in the first quarter." And I think the third quarter profile is going to be pretty consistent with historical patterns if we look back over a normal seasonal pattern. I am hearing and talking to customers about some fairly significant future orders. So I'm not overly concerned that we're going to see a dramatic drop-off in third quarter orders. But I feel pretty good about where we are from a backlog standpoint, and I'm very confident that we're going to be able to show continued delivery against the orders we have. And as Ron has commented and Phil has commented, we'll see meaningful margin expansion as we go through the year. So I'm actually pretty bullish about where we are.

Our next question comes from the line of Andrew Obin with BoA Merrill Lynch.

Just a question and just a little bit more understanding. You highlighted a negative absorption capacity about a variance on AWP. Could you just give us more details on that on just how that's going to work out into the second half of the year? Sorry.

Yes, Andrew. The schedule that I showed on the absorption is a year-over-year comparison. So getting a little technical, they were fully absorbed this year. We just had over-absorption last year because we were producing with fewer people a similar lower revenue level or unit level. So the inefficiencies in adding cost, adding people, really, and the ramp-up timeframe in the second quarter with the significant increase in revenue, we should have over-absorbed, is a way I would think about it in the quarter based on the increased volume. We basically just fully absorbed our cost.

So basically that goes to Ron's comment on absorption capacity sort of incremental margin improving significantly in the second half of the year, right?

That's correct.

Because that number -- should we expect that number to turn positive?

In terms of the absolute as we go through this year, again, that slide that we looked at was a comparison to prior year. I don't remember exactly the third and fourth quarter. But yes, sequentially, absorption should improve pretty dramatically.

Think about it this way, Andrew. Our business pretty much doubled in some cases. And we -- in order to produce that level that fast, we hired a whole bunch of people and put those people to work. And productivity wasn't at the defined rate that it really should be. So as the demand now is not going to double anymore, although it would be a good problem to have if it doubled, but it would also not be an easy one to deal with, it's not going to double again. So what we're going to do is we're going to rebalance the people that we have, in a certain sense, drive efficiency and productivity. So it's about squeezing things out and putting the productivity metrics in place now that you've got a more stable future revenue outlook.

Got you. So when we get these numbers -- and I understand that we have year-over-year comparisons. When we get these numbers next quarter, is it fair to expect that absorption capacity variance for AWP will be a lot closer to 0?

It will be -- and again, think sequential, it will be improved sequentially. Looking back at third and fourth quarter, there's some effect of change of rates, but sequentially, it will improve.

Got you. And just one of the sort of machinery companies today reported weak numbers out of Brazil. What's happening there?

George, why don't you comment? It's mainly Roadbuilding-related, but...

Yes, specifically in Brazil, we're still seeing a lot of demand on our Compact Equipment, which is generally more privately funded. What really took us pretty hard in the quarter and basically for the last 5 months has been where our Roadbuilding Equipment is 90% funded by government-subsidized interest rates to the user. And early in the year, they began to tighten that subsidy to the point where they basically shut it off in Q2, which has created a chasm for me relative to the volume for that business. We have some glimmer of hope we've seen in July about releasing of some of that. I'm not predicting that it will be back to where it was December, January, but it really put a hurt on us significantly because of the subsidies that were provided for particularly on our Roadbuilding product.

They're going to have to release that money or more money at some point in time. It's just a matter of when, given all the work that has to be done in Brazil.

Our next question comes from the line of Seth Weber with RBC.

I guess just first a clarification, maybe Ron, is the adjustment to the EPS number for the year really just related to the second quarter coming up short of where you thought? Or is there some tempering to the second half as well?

I would say it's probably – and this is not a quantification answer but I would say it's more 75% related to what happened in the second quarter and 25% related to some slowing of our expectations on the Crane business. And I think the actions we're taking in Cranes are intentionally driven to try and get the working capital out of that business, okay? We know we've got to get the cost out of the business. Well, we've got that identified. But we want to make sure we don't just keep producing to hit a revenue number. We want to make sure we get the working capital out of that business. And most of that working capital is sitting in large products that are in our German operations. Just for perspective, Seth, one of our big cranes we expect to ship this quarter will be in the range of over $30 million, and it's been in our working capital now for probably a year. So we need to clear that out, and there's a couple more of those.

Okay, that's helpful. I guess switching over to the AWP business, maybe for Tim. As you kind of, as the cycle kind of migrates towards more of the second tier or mid-tier guys, I mean, can you talk about the ability for those customers to buy equipment these days? I mean, there's been some discussion about the financial health of once you get out of sort of the top-tier rental guys. Can you just shed some color on that?

Tim?

Sure, yes. The financing markets for the mid-tier guy is still a challenge. I would say those that were troubled going into the down cycle are still troubled. Those that were healthy and became troubled are recovering, and their ability to buy equipment is reasonably strong. We are -- we have had some challenges getting paper placed in this market, though as recently as the last couple of weeks, we're starting to see some of the financing companies step back into the market very typically, but step back into the market and begin to buy some of the paper for some of the healthier next-tier companies. So I think as the market continues to recover, we saw results yesterday from one of the large rental companies where their utilization was at an all-time high and their rental rates were increasing, as that kind of result affects or impacts the entire market, we'll see the financing companies step back in, and the ability for our customers to keep buying will grow.

That's a critical comment, Tim. Critical comment. The pace is being set by a couple of the big tier guys; that gives confidence to the financing market for the second tiers.

If I could just ask a follow-up on the Crane business. I just want to make sure I'm hearing this correctly. What’s -- maybe for Kevin, what's the message that we're supposed to be hearing on the Crawler business? It's good in North America, but slow in Europe. Is that what I'm hearing or...

I would say on the Crawler business, our strength has been actually with the Developing Markets, not Europe and not North America to date on Crawlers.

Okay. So Developing Markets strength, Europe is relatively weaker.

Right. And just maybe go back to the prior question if you don't mind, Seth. Just a little bit of clarification because the question earlier about the drop or the cancellation levels just -- we called out specifically an insolvency situation for the $31 million, but the reality is a reasonable chunk of the remainder of the cancellations were also credit-related, not insolvencies, but customers specifically in Europe and their inability to attract financing from the outside capital markets or from Terex.

Okay. I mean, so do you feel like that the cancellations have basically washed through at this point? I mean, have you kind of scrubbed the backlog?

We have -- we believe we have much higher predictability on backlog in that our expectations going forward are less reliant on the key areas where we've experienced the cancellations, i.e., Europe. And a higher percentage of it is in areas like Port Equipment where, although there are longer lead times, our translation from backlog to revenue has been much, much higher.

Our next question comes from the line of Henry Kirn with UBS.

Could you talk a little bit about how disciplined your competitors are in the global Crane markets if we're sort of in a plus period?

Okay. Why don't we -- Kevin, you want to talk a little bit about what you're seeing from the competition?

Sure, yes. We see fairly good strength in our competitors. We've got a lot of respect for them. And I would call out specifically progress that's been made by our Chinese competitors in several areas. And so again we keep a close eye...

He's talking about pricing.

In terms of pricing?

Yes, what do you see from -- is there a competitor that's out there that's just you see -- historically, Liebherr has been the most difficult to predict in terms of pricing in our Crane business. And I think the North American market has shown better pricing discipline than I've seen in some time, and I haven't seen a huge amount of pricing issues in Europe in general. Although in some Developing Markets, I'm sure we still see some aggressive pricing from the Chinese in particular. Obviously, the Chinese are waving the flag here in the United States and in Europe, but most of their action is in the Developing Markets.

I would agree. I think in general, I'd say there's a fair amount of price discipline from the larger competitors, with the exception of where our Chinese competitors are entering new markets trying to establish distribution and a footprint. That's where we're seeing more aggressive behavior on price.

That's really helpful. And your Construction backlog was up nicely. Could you talk about any successes in gaining penetration there in the U.S. rental companies or North America in general?

George?

Yes. We are seeing success particularly through the relationships with our AWP larger customers. We have multiple rental houses that are now, as we talked during the Analyst Day, that are buying our equipment and filling gaps within a lot of their product ranges. And also I'd like to point out our relationship, as I described in the Analyst Day also, with Compact Power in North America is really progressing well through the Home Depot stores through their rental, which is a totally different approach for our traditional dealer only on the Compact Equipment. So we see that gaining momentum, and I anticipate that to continue to grow.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

Ron, congratulations on the Demag shareholder approval. To the extent you're comfortable, can you talk about, from a high-level standpoint, the extent of distribution location overlap for the Fantuzzi business with the Demag sales organization and touch on the manufacturing facilities as well? And also I'm wondering if you can talk about what proportion of the restructuring charge this quarter was at for Cranes. I know you mentioned you wouldn't size specific facilities, but I'm wondering if you can give us that piece.

Okay. So relative to where the restructuring charge was in our Cranes business, I really don't want to comment on that because people's lives are affected here, and we want to make sure we do the right thing and handle it appropriately from that point of view. So I’d prefer not to get into that detail. On the other hand, the Demag Cranes AG is an exciting business. The fact that 82% of the shares have tendered is a good thing. We think we will be a world leader in a growing product category, which is always a great place to be. And the growing product category is Port Equipment, both Demag recognizes that, as well as Terex has recognized that. We will have the broadest, and we believe the best product line. Demag brings a very high level of market share in the Mobile Harbor Crane business and a very well-established installed base and service centers. The Fantuzzi business that we acquired and renamed Terex Port Equipment has been struggling with the cost burden of probably 15 different sales and service locations around the world required to be in the business, but insufficient volume really to justify those. So there will be an opportunity to really combine sales and service locations to improve customer service and drive profitability between both locations. We've got the #1 straddle carrier product line. We've got Ship to Shore product line. We've got Superstacker product line added to the #1 Mobile Harbor Crane product line. So all in all, it's going to be an exciting time to be in the Port Equipment business for Terex, and I think it will take us some time to harvest those synergies and efficiencies. But I think the teams are beginning to gear up for that as we speak. Relative to the rest of the Demag Cranes business, there's 222 service locations. And those service locations for the Industrial Crane business are producing an EBITDA of 19.5%, and the expectation -- our expectation is that we'll learn something from those service locations and be able to work with them to find new synergies to grow some of our other businesses and our other product categories. I can't forecast that at this moment in time, but we know there will be synergies there. Regarding manufacturing operations, as part of our business combination agreement, we knew that we would maintain the German manufacturing locations. That's pretty fundamental to the Demag Cranes business, both in terms of technology, productivity cost. They produce pretty solid components, but there are a number of regional manufacturing operations that we're going to look to synergize over a period of time. Right now, it's too early to say. Our focus in the next few months, once we get -- once we close on the business, will be to get alignment in the basics. They report on an IFRS basis. We'll need to report on a U.S. GAAP basis. There will be accounting analysis and adjustments that will have to take place. There'll be technical issues relative to the Supervisory Board and how we approach the capital structure and the governance of the business over the next several months. So there's a lot of work to do on a technical basis. But at the end of the day, it's going to be a terrific business addition for us. I think it is the kind of business I was looking for when I sold the Mining business. I didn't have the chance to be #1 in the Mining business, particularly with those guys that sell yellow iron from Peoria. But I've got the chance to be #1 in the Port Equipment business and probably will be, and it is a business that will grow because there will be more ports and there will be more movement of material to places in the world that are growing.

I appreciate the color and recognize it’s early in the process, so thanks for sharing that. Phil, I'm wondering if you can talk about the extent of cost inflation by business that you saw in the quarter and just step us through how the comps stack up over the balance of the year. I know pricing is picking up. Can you talk about where you're seeing cost inflation as well?

Well, as I mentioned in terms of first half, second half, we're going to get about 30% of our operating profit improvement over the first half, second half, from our pricing. The cost headwinds are probably in the 10% to 20% range relative to the first half. We saw, in general, cost increases, largely in the U.S. businesses and largely, AWP was the most significant. And that continues in the second half of the year in AWP and a little bit in the European operations. So we'll be ahead of price to cost relationship in the second half of the year, supplier side where we were behind the first half.

And again, some of the commodities, we talked a little bit about the shortages. Those also had some price pressure in hydraulics, but steel and the tires tended to be some of the other areas that we had some pressure on.

Our next question comes from the line of David Raso with ISI Group.

I'm trying to triangulate the cash flow working capital color with what you're implying about the fourth quarter revenues. You're looking for free cash flow of $350 million to $400 million in the back half. And if you're looking at the working capital now, a shade below $2 billion. I got to believe a large bulk of the $350 million to $400 million is lower working capital?

Yes, probably in the range, David, of $250 million to $280 million.

Okay. So with that in your comments, Phil, that fourth quarter working capital will be 30%?

Less than 30%.

Less than 30%. Okay. The business just seems to be implying the fourth quarter revenue at a level that is implying 5% revenue growth year-over-year in the fourth quarter. Is that -- I'm rough with the numbers there a little bit but...

Again, think of the fourth quarter AWP would typically be a lower fourth quarter on a traditional basis, and as Tim...

I'm talking year-over-year, though, on that 5%, though, Phil. You're basically implying roughly about $1.4-ish billion for the fourth quarter. And I'm just trying -- is the order book that...

We did about $1.3 billion in last year's fourth quarter. And what I indicated was, in terms of our guidance, the expectation on sales is one that we probably have the opportunity to exceed, but I'm trying to hold down the production levels to get the working capital down. So if there's some revenue extra in the fourth quarter, it's possible. But we're trying to control our production and make sure we're not just building inventory in the fourth quarter.

Okay. And secondarily, while I appreciate the sensitivity around it, the implied cost savings for the second half, you're talking roughly about $50 million, roughly 45% of the $116 million of sequential improvement in op income. And again, I know you can't detail it, but for a $36 million restructuring in Cranes to get $50 million that quickly, I'm just trying to get my arms around how believable -- and then I'd open up the second question, why didn't we do this earlier? If I can get $52 million in 6 months with one charge of $36 million and if anything, Cranes has been weak for so long, thankfully you're seeing actually orders get better. What's new about the business to take that kind of charge now? And can I really believe $50 million on a $36 million charge?

The $50 million, David, was total company, and that gives that some of the absorption/cost issues in AWP and the other businesses as well and part shortages. That's not just the Cranes number. Ron has indicated that of the $70 million, about half would be this year. That's not necessarily all in the second half of this year as we did experience some of those reductions in the first half of this year. That's a piece of it as well.

So it's a bit of an absorption type-related number in that cost saving number so to speak?

That's correct.

And the other thing I would say, David, is decisions to change factories and optimize locations, these are things that we have been looking at for some time, but I think under Kevin's leadership, which is new this year, and a good solid, strategic plan going forward for how we want to structure the business, we've made the right choices. And these are things that we needed to do.

Our next question comes from the line of Charlie Brady with BMO Capital Markets.

With regard to the construction business, and I apologize if you mentioned this, you talked last quarter about getting it to profitability this quarter. Obviously, you missed the mark there. Have you talked in your comments today about a time line as to when construction gets to profitability? And what is the bar, I guess, now on the -- I understand you had some under-absorption, you had some component stuff that's getting better, but there's still some of those issues kind of bleeding into Q3. So I guess what I'm really trying to wrap my mind around is to when construction kind of gets above that breakeven level. Does it happen this year or not? And kind of a rise [indiscernible] we’re seeing the pickup in the revenue side of the business.

Fair question, and I will tell you that I'm going to turn the question over to the man that was the most disappointed by not getting to profitability in the second quarter. George?

I'll kind of walk you through what happened a little bit in the second quarter. But to answer your question directly, we don't get to profitability in Q3 of this year. And what really held us back, if you will, around the material shortages as I mentioned earlier, that was about $40 million to $45 million top line revenue that did not flow through, which also challenged our absorption throughout the factories. But also, too, the issues that I mentioned in Latin America and also somewhat in North America on the Roadbuilding side equated to about $25 million of the top line miss. And through that and the businesses that were strong, we continue to leverage price. As we saw the commodity pricing going up, we were pushing that through. And we started early in Q1 to really forecast and then move through the pricing, which should be reflected in Q3. So it was a mixture of those 2 activities, along with a couple of million dollar hit to the P&L as we closed out an issue in Latin America with an acquisition from a long time ago. So it’s a lot of negative headwinds. Not all of that will go away in Q3, but as I mentioned in the beginning, we are going to get profitable in Q3.

Our next question comes from the line of David Wells with Thompson Research Group.

First off, looking at the orders that were removed for the AT that was a newly developed product, can you give us a sense of what the drivers were? It was that a technical issue with regards to the actual design of the product? Or was it a supplier availability of the components that go into that? Just trying to get a sense of if that's an internal issue or an external issue.

Sure. I'll be happy to comment on that. Bottom line, a very large AC Crane that's been in development. A very innovative design for a crane of this size with the boom on, really targeted to drive productivity for end users at the high-end. And the reality is the product is just not ready to deliver to the market. It's very specific quality and load specifications that we are committed to meeting, and we looked at where we were in terms of our delivery and made the decision that we need to make sure that it's met that criteria. And at this stage, it does not. There was substantial demand as noted in the backlogs that we decided to take out until we can comfortably say to our customers that it meets our high standards for quality and their high standards for quality. These kind of cranes, as you probably know, go into very specific high-profile lift situations, and it's not an area where we would ever compromise on the level of quality that we hold ourselves to.

That's helpful. I appreciate that color. And then a follow-up, if I look at the Construction business, the SG&A in the quarter was a bit higher than we were thinking about it. What's a reasonable run rate to think about for that business? And was there any kind of one-time things that are going on there other, I guess, than the closing of that one issue that was discussed earlier?

George?

Yes, specifically what you're seeing flow through there, the $2 million charge in the Roadbuilding in Latin America is what really ticked that up. We've really been working on the SG&A for quite a period of time. So I would see that coming down a couple of points as we go forward because we won't have the effect of that charge.

Our next question comes from the line of Matt Vittorioso with Barclays Capital.

For Phil, just a quick clarification around the cash flow. Have you guys paid the tax bill on the Mining asset sale yet? And is that -- if not, is there cash taxes associated with that in the back half of the year? And is that baked into your cash flow guidance?

Yes, the cash flow -- free cash flow that I defined there is EBITDA, plus change in working capital less CapEx. So it doesn't take into effect some of the other things that might be encashed from offsite taxes. So thanks for asking the clarification. The large payment regarding the gain on the Mining transaction related to last year goes out in the first quarter of 2012. In order of magnitude, it's about $160 million. We do -- $160 million. In the second half of this year, we do have to pay taxes regarding the sale of shares associated with Bucyrus that we will basically complete in the third quarter, but that's kind of factored into our overall U.S. tax return. And I'd say cash taxes for third and fourth quarter will approximate $30 million to $35 million each quarter, the rest of the world basically.

That's very helpful. And then on the investments, if you will, into the TFS business, would that be additional cash outflow in the second half of the year as well?

Yes, that would be. Given the -- obviously, the acquisition of Demag AG, we're trying to balance our needs there and look to partner more with our critical partners that we have and manage that a little tighter. We did add about $44 million in the quarter. However, we also probably sold more than we normally would looking at the balance there. And I think as we mentioned earlier in the call, we're starting to see more appetite for the Construction industry, particularly in the U.S., to take some of the credit. So we're going to monitor that very carefully. And I'd say the other piece that's in the estimate that I had, CapEx, probably going to be $70 million to $75 million for the year.

For the full year?

And that's in that free cash flow estimate that I mentioned.

Great. Very helpful. And then just a quick follow-up around the Aerial Work Platform business. You mentioned that the large rental companies replacing their fleets as they've gotten older, was driving the turnaround. I mean, how do you guys think about some of the macro numbers that we've seen more recently. The ABI I guess has now been under 50 for 3 months in a row. At some point, I guess the fleet age has come down, and we're going to be looking for Non-Res Construction to come back and drive Aerial Work Platform orders. How are you thinking about that as some of this weaker data starts to come in here over the past few months?

I think we have a ways to go, but Tim, do you want to comment on that?

Yes, I would say, Matt, this very clearly is a replacement market. There is no doubt that this is all about refleeting. North American customers are aggressively updating their aging fleet. Until we see more substantive and material improvement in the Construction markets, you really won't see fleet additions. But keep in mind that we are seeing increasing volume in other markets around the world like Brazil, like China, like the Middle East, where there is construction activity going on. Obviously, this is largely a U.S. and Western European market historically, but we are seeing some construction volume that's affecting our business in a positive basis. But there's no doubt this is a refleeting basis. I think you'll see this refleeting continue for the next couple of years. I've had, in the last 30 days, 2 very large North American rental companies tell me directly that they expect the CapEx-based spend in 2012 and in '13 to be up year-over-year. So yes, it's a refleeting market, but from our perspective, there’s a long way to go until they get their volumes where they need to. They didn't buy anything for 2 years.

Okay. Well, that's really helpful. So these refleeting cycles can take a few years, anyway. So we've got time...

Absolutely.

[Operator Instructions] Our next question comes from the line of Heiko Ihle with Gabelli & Company. Heiko Ihle - Gabelli & Company, Inc.: Most of my questions have been answered, but can you provide some color on your expected gross margin by segment for orders that came in during Q2 and your expectation for Q3? You mentioned rental companies fleeting up through relative larger orders. Does this depress margins in the future?

I don't think it depresses margin for the future, Heiko. I think what will drive our margins at this stage is, as we have articulated, the pricing and the story in the marketplace and the productivity that we can drive at our operations. Since we don't expect the dramatic shift in revenue change that we had in the first part of the year, the opportunity to improve efficiency I think is right in front of our nose. I don't want to get into a handicapping of gross margins or even gross profit by individual businesses beyond what is already out there. We tend not to look at gross margins in the backlog as consequential because it is on our pricing, okay? It is really the ability of the company to get the product out the door efficiently that drives the gross profit number once the pricing is set.

Our next question comes from the line of Brian Rayle with Northcoast Research.

Most of the questions have been answered. We discussed how Construction can move to profitability in the third quarter. I guess longer-term, as we think about this segment, certainly it's underperformed through the last cycle. What are the steps that are going to be necessary to move it towards, I guess, industry, even industry average profitability in terms of what you're thinking about in product or restructuring?

Sure. This is a business that is not a simple or single business. It's really a collection of 3 or 4 different businesses. And as you break it down into the 3 or 4 different businesses, the quality of its franchise somewhat varies across those 3 or 4 different businesses. Strategically, I think we've got a pretty strong position in a couple of really good niches: our material handling, our product line. We don't report these individually, so I know the market doesn't see this. The material handling part of our product line, very strong product, very high market share, very concentrated and sophisticated specific customer types that -- such as scrap handling, et cetera. So that's a particularly good franchise, and it's done particularly well over the past few quarters, reflecting the turnaround efforts that we placed on that. So it's a keeper, it's really strong and I think it's progressing. Our Truck business, which we think is also a good franchise for us, we are the #3 player probably in articulated and rigid-frame trucks up to 100 tons. That franchise has been a core part of Terex for generations. It has a strong franchise combination in China where we're the #1 player with our JV partner. So that business has struggled for profits over the past 12 to 24 months. It's now making money, and its ability to improve in profits is right in front of us. And I think that is a good strong business and will continue to be. The third piece is the Compact Equipment business. And that's a business we've decided that we can grow and make money in and improve and have a decent franchise. That has yet to be proven, but we think it's being proven, okay? That is a business which has value in cross-selling between our Aerial Work Platform business. We've introduced a new skid steer loader, and obviously when you introduce a new product in the skid steer loader, the first few months cover yourself from glory relative to profitability. So we're kind of investing in that business, and we're investing in its future. That coupled with the mini-excavator product line, coupled with the mini wheel loader product line that we are even private labeling for some very well known other global players gives us a chance we think to make money, but that business has somewhat underperformed our near-term profit expectations, but is certainly one that we think will be profitable going forward. But we've got to prove it. We've got to prove it and I think we'll do that. And lastly, you have the Roadbuilding business. And the Roadbuilding business for us is a collection of 2 or 3 different important pieces. One piece is the front-discharge mixer truck business, the cement market in the United States. That market has really dried up and is likely to be pretty bad for a little while. It will come back. We've got a 50% market share, and we've got a pretty high installed base. So giving up on that business makes no sense to us. The next piece is the Roadbuilding business down in Brazil in particular. It has been a highly profitable and highly successful business for us. It hit a revenue wall over the past few months in part because of the financing as George has mentioned. That was a bit of a surprise to us. But when that comes back, that will importantly contribute to the profit. Our North American Roadbuilding business is not at the level that we'd like it to be, but we think as a number 2 type player, particularly in asphalt plants and some in the papers, we've introduced a couple of really exciting new products. And those are getting some traction. So all in all, I think the question is valid. We don't -- we're not afraid of the question, but we think there are really better pieces in this business than meets the eye, which is why we think third and fourth quarter and longer-term expectations that we set for this business are still deliverable.

Not to drag the question out, but -- so you're comfortable with the portfolio that you have. Are we going to see restructuring charges over the next year or 2 as things get rationalized? Or are you also comfortable with your current production portfolio?

Yes, I think, in general, we are comfortable, but I will tell you that one of the things Terex is going through is we're maturing as an organization. And we continue to be changing the company from being a holding company to an operating company. And as we implement the TMS management system, which gives us visibility and information, and as we implement a complete analysis of our global manufacturing footprint, what we have to do is we've got to drive cost out of our developed market investments in order to afford the Developing Market investments that we’ve made and to afford and effect the TMS investment. So I would say, we don't have a list of restructuring things that we plan tomorrow, but this is going to be a constant evolution for us as we continue to move toward improving our operational capabilities. For example, at this moment in time, we distribute the company's parts through very, very different methodologies around the globe. Parts logistics can be consolidized -- consolidated and improved for Terex. It's a real improvement opportunity. So you will find that we continue to do these things, but please be assured that every restructuring charge we look at down the road, we expect them to have very short-term paybacks.

Our next question comes from the line of Andy Casey with Wells Fargo Securities.

Just some clarification in Cranes. Can you help us understand how to view the sustainability of the U.S. and Canadian boom truck and rough terrain strength? We continue to hear chatter in the channel about a potential tax pre-buy. Does the North American backlog for those product segments remain firm beyond the end of '11? Or is it -- is there a little bit of a drop-off in the beginning of '12?

Kevin, you want to comment on that?

Yes, I guess what I would say, our success in those 2 products in particular I think are – while I would say the market’s been improving, I'd say the majority of our success has been more in the area of taking share. And again there's -- I'm not saying there's an upward pressure on market share. But at the same time, we feel very good about the progress, and we don't have concerns in those 2 products going forward. We've also been innovating in terms of new product designs. We've delivered some new products as recently as March in CONEXPO in both of those categories that we feel very good about. We're getting some real excitement in the market, and I think as long as we continue to innovate and deliver, we’ll stay strong in both of those categories in North America.

What I would add to that, that you're not going to get continued significant increases in revenue unless Construction activity begins to come back in this country. Okay, I mean, let's just be realistic. The housing market is an important contributor to our business. Non-Residential Construction is an important contributor to our business. A lot of the strength in the Crane business is going to industrial petrochemical-related projects and those kinds of things. So we do need to get our economic house in order for this business to continue to progress.

And on that last point that you made, Ron, we kind of touched on it. And then AWP is a little bit earlier with the replacement demand. But bigger picture on North American and European end-market customers, have you seen any sentiment deterioration through the quarter as they look beyond 2011 at their prospects?

I don't see any sentiment. In fact, the deterioration effect I would echo what Tim said, having spent the time with some of the bigger customers and also having gotten direct feedback from some of the big European customers. They need to replace their fleet, and the difference between cranes and aerial work platforms is also pretty striking in that cranes tend to last a generation, whereas aerial work platforms tend to last much less time, okay? And so the replacement cycle comment is much more relevant I think to the Aerial Work Platform business than others. But in AWPs, we're not expecting a lot of growth capital over the next couple of years.

Our final question comes from the line of Steve Barger with KeyBanc Capital Markets.

Just one real quick one. I want to circle back on a comment from earlier in the call that the Chinese truck JV is struggling a bit. One of the Chinese TMI indices came in below 50 last night. So just to clarify, is that an operational issue? Or is there anything to update us on in terms of end market puts and takes in China?

Yes. Ken Lousberg from China, I would characterize as more of our own operational issue, but there is some slowdown that we seem to be hearing about in China. Ken, you want to comment on that?

Sure, Ron. To me, it is, definitely we've had operational issues with our Truck Crane business in particular in China. I would say the main factor, though, has really been tightening of the financial markets or lending markets in China, in particular the residential.

And for your guys on the ground there, is it their expectation that's going to be persistent? Or how long do you see this lasting? And I guess how much worse could it get?

Well, to be honest with you here, it is tough to tell how long it will last. Things change very fast. The slowdown was pretty quick, although not all that significant in the grand scheme of things. But certainly relative to our forecast, it was significant.

All right. Then I think that does it. We’re an hour and a half into this mission, and I appreciate everybody staying on the line that long with us. Thank you very much, and please follow up with any questions for any and all of us. Thank you.

Thank you for joining today's conference call. You may now disconnect. Presenters, please remain on the line.