RERMAG

We Have to Build Our Infrastructure

Up front and provocative as ever, Terex CEO Ron DeFeo offers thoughts about the sub-prime mortgage crisis; growth in international markets, namely India and China; responding to customers; improving operations; lean business management; and calls for an investment in United States infrastructure.

RER: The sub-prime housing mortgage crisis and the housing slump in the U.S. have been deeper and had wider-reaching effects than was predicted. Are you concerned about the direction of the U.S. economy? Predictions are ranging wildly from right on the verge of recession to this being a minor blip on the screen in the overall picture. How do you see it?

DeFeo: Uncertainty by definition leads to greater risk but I think we are going to be all right. The U.S. housing industry is a mess, the effects of which are not totally over. More bad news will happen but the overall U.S. economy is balanced and our industry will find alternative customers for our equipment both at home and abroad.

How has the housing slump affected Terex to this point and how could it affect it in the future?

Several of our products have declined substantially — telehandlers, mixer trucks and the small dirt products in general. Fortunately (at least today) we have only about 5 to 7 percent of our revenue exposed to this downturn. As the housing downturn affects confidence and non-residential construction, this could have a greater effect but the diversity of our global business has more than offset these effects. We are going to end 2007 with record revenues up 15 to 17 percent. Not bad for supposedly a down year!

You've been quite bullish about potential for growth in India. How has the Indian market been developing for Terex this year and what are your expectations in the foreseeable future?

India is a great opportunity. We recently purchased the majority position in our joint venture there. We now own 70 percent and make a very competitive backhoe loader. We are building a new factory for another product line to be completed late in 2008 and expect further investments. There is a lot of opportunity but the market is challenging.

How about the Chinese market?

We continue to work like many others to find the right mix of investments in this vast country of China. There are many influences on a business there including the role of the government and the support that is provided to the indigenous Chinese manufacturers. We are successful but it is hard work.

How do you see the growth of rental in the years to come in the U.S. and internationally?

As I have stated in the past, rental is a channel but this channel is constructed upon an economic base that should be stronger when there is financial uncertainty in the market. Why own when you can rent? This should be the question if you are unsure of your utilization or your next job. So the current credit uncertainty — due to sub-prime issues etc. — should be viewed as a rental opportunity.

You're not an engineer but what kinds of innovations do you expect to see on equipment in the foreseeable future?

I am not an engineer but I am a marketer and the only innovations that count are the ones that truly help the owners and users (as opposed to the ones dreamed up in a lab or office). Look for continued emphasis on reliability, and as the engine issues emerge due to regulation changes lots of work will go into maintaining high performance and meeting emission standards.

Telematics are growing in relevance but we have to be careful that we do not add cost for the sake of information that is never looked at. The type of application is going to drive innovation. Anything that improves efficiency and returns on capital will be desired. Don't expect someone to invent a new way to dig a hole anytime soon.

How about rising oil prices. Is this a concern to you?

What concerns me is our lack of an energy plan for the next 100 years. We cannot be dependent on fossil fuel forever.

You've spoken about Terex becoming more operations-oriented as a company, rather than being acquisitions-driven. What can you report about progress in this area in 2007 and what can you tell us about your plans in 2008?

We are being successful building competency across our company. Every business is tackling the hard issues that we face. Our aerial work platform business is globalizing. Cranes are modernizing and systematizing production. Construction is consolidating and building marketplace density. Materials processing and mining is innovating productivity solutions that deliver exceptional value.

As a corporate team we are leveraging purchasing, measuring customer satisfaction, initiating diversity hiring practices that will change our workforce long-term, and we are hiring on the campuses and universities around the world. And while doing this, our returns on capital are the best in the industry at over 40 percent. The Terex team works hard.

At your press conference at the Bauma show in Munich last year, you spoke about wanting Terex to become the most customer-responsive company in the industry and you said you had a way to go to achieve that, trying to bring so many companies together. What progress would you say you've made in the past year becoming more customer responsive?

I think our Genie team is a model of responsiveness, yet they have a lot of room to improve. As I look across Terex we are building the foundation for this initiative. There is a new aftermarket team, an IT investment running into the tens of millions of dollars to consolidate information and a customer measurement system to give us insight into what we need to fix. This is a long-term journey. We are still a freshman in high school!

You also spoke at Bauma about developing the Terex Business System, having hired lean experts and so on. Can you speak a bit about what kind of progress has been made this year in terms of “lean” developments, and what other process has been made towards the development of the TBS and where will you be taking this?

Each quarter we conduct over 500 continuous improvement events led by experts in process improvements. We are building a culture of change and this is what the TBS process is all about. We are rolling out a comprehensive training and development program to deepen our expertise. I see this as a way of life with the measurement of success our financial and customer performance.

You mentioned at the Bauma show that you buy more steel than some car manufacturers but you buy it from 1,000 different suppliers. Any progress in 2007 on reducing the number of suppliers you deal with (in steel or any other area) and what plans do you have along those lines in 2008?

We are really active here. We have hired and built comprehensive commodities teams for many of the things we buy globally. Suppliers to Terex need to re-examine how they do business with us as we are demanding improvements. It is not just about cost but also on-time performance. We can do better at planning but the supply base needs to step it up too.

Overall are there other goals you can share for 2008 that I haven't asked you about? Any particular plans for 2008 that would be of particular interest to your rental customers?

Our 2008 goals keep us on a path to be 12×12 in '10. I set this goal up as a stretch target over a year ago. This means we want to be $12 billion in revenue with a 12-percent operating margin in 2010. We are ahead of the pace we need to get there and I plan on meeting or beating this goal. I will be expecting to stay ahead of the pace required in 2008.

Any message in particular for rental companies right now? Any thoughts about what you expect we'll see from the larger rental players, or from independent rental companies?

Rental companies need to continue improving their operations and generating cash flow. Focus on the basics. Generating cash by not buying equipment is a going-out-of-business strategy. Generating cash from renting and selling products and services at fair margins is the only recipe for the future. Ask your suppliers to help with fleet management. You might be surprised when the question is not just about the price.

Anything you'd like to add?

We have to find a way to stop the bridges from falling, the potholes from causing crashes and the airports that stop commerce due to congestion. This is a hot topic for this century and we need leadership that builds a better America. We have to stop using up our infrastructure and start building it. We are running the risk of falling behind the rest of the world. I don't like that one darn bit!

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