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Fourth
Quarter and Year End 2009 Earnings Release Conference Call
February
18, 2010
Ron DeFeo - Terex Corporation - Chairman and Chief Executive
Officer
Good
morning Ladies and Gentlemen and thank you for your interest in Terex
Corporation today.
On the
call with me this morning is Phil Widman, our Senior Vice President and Chief
Financial Officer, Tom Riordan, the Company’s President and Chief Operating
Officer and Tom Gelston, Vice President of Investor Relations. Also
participating on the call and available for your questions are Rick Nichols for
the Cranes segment, Tim Ford for the Aerial Work Platforms segment, George Ellis
for the Construction segment, Steve Filipov, President of Developing Markets and
Strategic Accounts and Eric Nielsen for the Materials Processing
segment.
A replay
of this call will be archived on the Company’s website, www.terex.com under
“Audio Archives” in the “Investor Relations” section of the
website.
I would
like to begin with some opening commentary, followed by Phil Widman who will
provide a more detailed financial report. Tom Riordan will discuss operations by
segment. Then we will open up the call for questions. During the Q
& A portion please ask only one question and one follow-up.
The
presentation we will be referring to is accessible on the Company’s
website. Let me begin by referring to the forward looking statement
on page 2. I will remind you that we will discuss expectations of
future events and performance of the Company on today’s call and that such
expectations are subject to uncertainties related to macroeconomic factors,
interest rates, governmental actions and other factors. A fuller
description of the factors that affect future expectations is included in the
presentation, our press release and other public filings. I encourage
you to read them.
Turning
to page 3 of the presentation, let me offer some overview thoughts on the
recently completed quarter and year, as well as our current 2010 view. Virtually
all of our comments today will be for continuing operations and, as you might
expect, there are a lot of moving pieces when you pull out the Mining
business. Firstly, continuing operations produced a net sales level
of about $4 Billion in 2009. This is more than a 50% reduction and
reflects the massive industry contraction that has taken place within our
product lines. We think revenue has now stabilized.
Manufacturing
costs for Terex have been dramatically reduced, and we believe this confirms the
strength of our business model, which historically has been focused on
manufacturing and outsourcing. Our exposure is almost entirely to
construction-related markets with not many offsets to other industrial
applications at this point in time. Nor do we have a finance company
that generates income as a primary mission.
We have
weathered the storm with excellent liquidity and, with the Mining sale due to
close shortly for $1.3 billion of value, we are in an excellent place to further
develop the Company over the next year. We are excited about the
potential. However, we recognize that our success is dependent upon
bringing our remaining businesses back to profitability and believe we will be
breakeven at the operating level for the full year 2010, and we are driving to
end the year with EPS profitability in the final quarter of the year. This is a
challenging goal.
We are
reluctant to speculate over acquisitions. These are hard to predict, and we
remain steadfast in our view that we have a variety of choices for using the
capital. We will evaluate all options throughout the year.
I know
this report is somewhat difficult to understand with the variety of changes;
however, I hope you will find the presentation useful as we explain the
performance. Now I will turn it over to Phil.
Phil
Widman - Terex
Corporation - Senior Vice President and Chief Financial Officer
Thank you
Ron and good morning.
The key
figures table on page 4 of the presentation displays the quarterly
year-over-year and sequential performance of the Company. Given
the pending sale of our Mining business and the sale of our Load King trailer
business we are reporting their results as discontinued
operations. All figures in this presentation are for continuing
operations of the Company unless specified to the contrary. Net sales
were down 36% from the prior year quarter, or 41% when adjusting for the
translation impact of foreign currency exchange rate changes. The addition of
the Port Equipment business provided a 3% uplift to net sales in the
period. On a sequential basis, fourth quarter 2009 net sales
increased by 8%, with 3% related to the Port Equipment business and the
remaining Crane businesses showing the strongest increase. On a
consolidated basis, we incurred a loss from operations in the fourth quarter of
2009 of $90 million, compared to operating income of $7 million in the prior
year quarter, excluding the impact of the goodwill impairment
charge. This was mainly due to the net sales reduction. I am
encouraged by the sequential improvement related to margin improvement, material
cost reduction and absorption, which all improved over the third quarter
2009. These were partially offset by unfavorable impacts in warranty
and transactional foreign currency, as well as less profit released from
inventory than in the prior quarter. We continued to make good
progress on cash generation from working capital reductions, which contributed
$430 million for the full year. Our backlog is similar to third
quarter 2009 levels and down 46% from the fourth quarter of 2008. Net
Debt, including the cash from discounted operations which we will keep, was
relatively flat sequentially as working capital improvements largely offset the
operating loss. Working capital reductions in the fourth quarter
would have been more significant; however, we stopped discounting receivables in
our continuing operations which had an unfavorable sequential impact of $68
million to this Net Debt figure.
Although
not detailed on the chart, I will comment on the tax expense in the fourth
quarter as we took some discrete charges related to changes in our uncertain tax
positions and provided a valuation allowance on the deferred tax assets of a
European operation. In total, these amounted to additional expense of
approximately $.27 per share for continuing operations. The loss from
discontinued operations of $.14 per share includes tax expense for uncertain tax
positions and the removal of APB 23 assertions for certain Mining subsidiaries
to be sold of approximately $.26 per share. We also incurred a loss
due to costs related to the disposition of discontinued operations associated
with the Mining and Load King trailer businesses in the fourth quarter of $.12
per share. As indicated in the release, we also had pretax charges of
$27 million for restructuring or approximately $.17 per share.
Page 5 of
the presentation outlines the net sales trend for the last five quarters,
demonstrating the relative stability of most segments during 2009 and the uptick
in Cranes in the fourth quarter, which is somewhat related to the Port Equipment
business acquisition and solid demand for the higher capacity crane
products.
Page 6
bridges the $97 million change in operating profit from the prior year’s quarter
to the operating loss for Q4 2009. The margin impact of close to $200
million on the net sales decline represents a decremental margin of 33% when
compared to the prior year period, including mix and pricing
changes. Net restructuring, mainly associated with the reduction in
headcount, was $8 million lower this quarter, with total charges of $10 million
in the period, of which $2.5 million was in cost of sales and $7.5 million in
SG&A, while current period capacity variance of $17 million and
underabsorption combined for an unfavorable impact of $11 million versus
2008. SG&A and other cost of sales had a net positive effect
given cost reductions, profit released as inventory was delivered to third
parties, and reduced material input costs. These were partially
offset by charges related to inventory and negative transactional
foreign
currency
impacts. Overall foreign currency translation impact was $10 million
favorable. The breakdown of the causal by segment varies somewhat by
issue but is disclosed for transparency.
Let me
refer you now to page 7. I will not go through the detail on the
annual comparison but would point out that the continuing operations of the
Company delivered significant profitability in 2007 and 2008. We
believe that the portfolio has been improved by the changes we made in 2009 and
is well positioned for future growth.
Now I
will turn it over to Tom to provide an operational update.
Tom Riordan - Terex Corporation - President and
Chief Operating Officer
Thank you
Phil and good morning everyone. I will cover working capital
improvements and cost reduction results for 2009 and then discuss the current
state of our business.
Let’s
move to page 8 of the presentation. One area that is always
challenging during a business downturn is working capital, which has been a
primary area of focus for the Company during 2009. At the start of
the downturn in mid-2008, we made a conscious decision to minimize the inventory
burden to our distribution partners and customers. During the last 18
months, we drastically cut production rates to reduce channel inventory
levels. I am very pleased that we were successful in significantly
reducing our inventories by $538 million of cash impact, excluding discontinued
operations. Our businesses have done a great job of selling off
finished goods inventory and working with our supply chain partners to minimize
the impact on their businesses by adjusting schedules. As you can
see, inventory turns and net cash days are beginning to move in the right
direction. While working capital in total is still high as a percent
of revenue by historical standards, we believe this will continue to improve as
we return to more consistent run rates of production. However, I
would also add that we need to be attuned to the short delivery requirements
that our customers now have, and we need to have appropriate levels of product
available if we are to be competitive in the market.
Moving on
to page 9, this is a chart we have included to demonstrate progress in getting
our business “right sized” and costs in line with expected
revenues. Overall, we have reduced controllable spending by $246
million in Q4 2009 compared to our peak run rate in Q2 of 2008. This
is nearly a billion dollar annualized run rate of cost reduction, and
demonstrates our ability to “flex” our business model. The Terex
manufacturing teams have done a great job in reducing spending by 51% during
this time frame. Our commitment to cost reduction is continuing, as
we recently reached agreements with some of the union representatives of the
Port Equipment business. That restructuring is underway, along with
several other Terex businesses in the U.S. and Europe. The Terex team
members being affected throughout our operations are being true professionals
about these required changes, and I am very appreciative of the support and
dedication they have shown while knowing they will be leaving the
Company. I think this speaks volumes about the culture and character
of Terex.
I would
also point out that we have reduced the SG&A expenses of our businesses by
34% over the last 18 months. As we have discussed before, I think we
have been very judicious in retaining talent in product engineering for new
product development, IT professionals for the Terex Management System (our ERP
implementation), the variety of financing and risk professionals who work in our
Terex Financial Services group to find financing solutions for our customers,
our Supply Management team working on driving cost reductions with best cost
country suppliers, as well as others in critical functions. While we
have been aggressive in reducing structural costs, we also need to improve our
capabilities for the future.
Let’s
move on to page 10. One of the things I am most proud of is our
continued focus on safety. Over the last three years we have been
able to significantly improve the safety of our business
operations. With the changes that have been instituted and the focus
of our team members and leaders, we have prevented or avoided nearly 1000 lost
time accidents over the last three years compared to our safety rates at the
beginning of 2007. With all of the ups and downs we have seen during
those three years, this is a remarkable achievement.
Let me
give you a quick overview of how we see the current business environment today
by business. Our Aerial Work Platforms business remains
challenged. We are seeing very consistent order rates over the last
several quarters, but no sign of a real uptick in either of the two primary
markets (Western Europe or the U.S.). We believe most of our larger
customers will continue to wait for signs of improvement on equipment
utilization and rental rates before any change in buying patterns
occurs. Virtually every order involves a trade-in
package. With the current lower expectations around non-residential
development, we do not expect to see much of an improvement in order rates until
late this year or early next year. We are seeing increases in our
plant production rates by running to end market demand, even at these reduced
levels. In Q3 2009, we had our assembly lines down for over 30% of
the time, and in Q1 we will be down less than 10%.
Our
Construction segment is seeing reasonable order rates for our compact equipment
product line, both in Europe and the U.S. Our dealer partners
generally have appropriate sized inventories for the current demand
environment. With the limited inventory we have in the distribution
channel, we are seeing a solid increase in the production rates and hours worked
at our compact equipment facilities. Pricing is still very
competitive. Our Construction truck business remains challenged with
significant used equipment available and fleets being
underutilized. We do not anticipate an improvement until later this
year.
Our
Cranes business will likely be soft to stable overall for much of this
year. With tower cranes and lower tonnage mobile cranes having lower
rental rates and utilization by our customers, we expect to see order patterns
similar to the last six months. The higher capacity mobile cranes are
seeing better utilization rates and, as a result, better order
patterns. Our Port Equipment business is stable, with positive future
signs. The dry goods index rates are starting to increase along with
container pricing. We will also see some improvement in plant
utilization, with shut down days being reduced in most of our Cranes facilities
compared to six months ago.
At our
Materials Processing business, we are seeing reasonable order demand, which is
somewhat seasonal and also based on low inventories at our
dealers. By running to end market demand now versus reducing channel
inventories as we have during most of last year, we are ramping up production
rates compared to a year ago with very limited downtime. While we are
not declaring “victory”, this business is off to a reasonable start for
2010.
Moving on
to the developing markets, we continue to invest in talent, plant infrastructure
and products for these markets. We saw a double digit increases in
revenue for our business in China and parts of Africa, along with solid
increases in South and Central America. Our new Aerial Work Platforms
plant in Changzhou, China is on track to startup later this year. The
Hosur plant near Bangalore, India is making solid progress since it opened six
months ago, along with continued growth of our R&D center near
there. Additionally we have several other facilities in the advanced
planning stage in other areas. The majority of our capital
expenditures over the next few years will be invested in developing market
regions.
Let me
touch on a few other items. Despite the dramatically reduced inbound
material purchases in 2009, we were successful in continuing to improve our
material pricing. We expect this to continue for 2010, despite
suggestions that steel prices may increase later this year. Our teams
have made solid progress, which will accelerate as material flows more
consistently through our production plants.
As I
mentioned before, we have been very supportive of improving our new product
development process, including making sure we have the talent required to
accelerate our product launches. I am very pleased with the
significant number of new products being released in 2010 and 2011 throughout
each of our business segments. Some of these products are brand new
products for Terex, others are enhancements or product line
extensions. In addition to all of that, we are on track for all of
the Tier IV engine compliance and regulatory changes. We believe we
are well positioned with very competitive products in our major markets as the
recovery starts in the not too distant future.
Lastly,
while 2010 will be a challenging year, you should note that about 70% of our
forecasted profit improvement is based on internal improvements, such as
overhead cost reductions we made in 2009, improved productivity and cost
absorption in our factories, running our plants to end market sales
rates,
material
cost reductions, smaller manufacturing footprint and so
on. We are not counting on a significant improvement in our end
markets to drive our profitability improvement.
At this
point, I will turn it back to Ron.
Ron DeFeo - Terex Corporation - Chairman and Chief Executive
Officer
Thank you
Tom. Let’s turn to page 11 of our presentation. This provides some
detail of our outlook for 2010. For Net Sales, we are expecting about
$5 billion. This reflects only a modest amount of growth as the Port Equipment
and currency assumptions contribute substantially to this change, although
recent currency changes make this tough to predict. Interest expense
will be about $140 million and we expect to end the year at about a $1 per share
loss. Capital expenditures should be about $85 million and working capital as a
percentage of revenue is targeted to be less than 30%.
Page 12
highlights where we have been, where we are now and where we believe we are
headed without acquisitions. Our goal is to double the Net Sales level by 2013
with a 12 % operating margin, thus achieving a 20% growth rate and a 20% ROIC.
This results in an EPS of about $6 per share in 2013.
So, if I
may summarize on page 13, we have strong franchises that have performed well in
the past, and we believe they will do so again. The Construction segment should
experience top line growth and earnings performance will improve as we
concentrate on the stronger product niches in this segment. Our Materials
Processing business will be an early improving performer, much as we have
predicted for some time. Cranes will be choppy this year but still improving,
with excellent potential from the Port Equipment business in future
years. Aerial Work Platforms will be dependent upon construction and
infrastructure recovery in North America and Europe, and this likely will not
happen until 2011. We believe developing markets will continue to
grow and have a net positive effect. And, as Tom mentioned, we have
several new product launches that will be important contributors in the 2011 and
2012 periods.
Channel
inventory reductions and our focus on cash management in 2009 have positioned us
to build to demand again in 2010, adding about $200 million to our profits. We
will maintain cost control and the liquidity of the Company is strong and we
plan to keep it that way.
There is
no doubt that Terex is still a young company and, consequently, still
evolving. The base businesses we have are improving. This
year, market conditions remain challenging, but better than 2009. We expect to
continue strengthening the Company throughout the year. We appreciate your
continued support.