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The Quite RESURRECTION OF TEREX CORP


Published in: Diesel Progress North American Edition
Date: 3/1/2000
By: Brezonick, Mike

Company rebounds from near disaster to record profitability; chasing customers, not the competition; not in it for pats on the back

The world is full of rags-to-riches stories, come-from-behind victories and one-punch, 15th round knockouts. And certainly the mobile equipment market has seen its share of dramatic turnarounds.

Yet there may never have been anything quite like the resurrection of Terex Corp.

Just a few short years ago, the company tottered on the brink of bankruptcy and was literally at the point of daily deciding what bills it needed to pay to keep going. Now, while 1999 sales are yet to be officially reported, the company's overall revenue will be in the neighborhood of $2.3 billion (including acquisitions made during 1999) and profitability is at record levels.

That kind of near-Biblical recovery normally prompts corporate PR machines to churn at high gear, shouting the news from the housetops and vying for industry awards. Yet aside from the financial press, relatively little has been said about the company's resurgence and Terex hasn't gone out of its way to change that.

"We're not really in this to win pats on the hack from the industry," said Ron DeFeo, chairman and chief executive officer. "For the financial community, I have an obligation to get our story out. But beyond that, we tend to be quieter than a lot of the others.

"We want to chase customers, not the competition. Our mission is to deliver better products to our customers, deliver better value. That's what we have to do, regardless of what anybody else in the industry does. I'm not criticizing the others. If I were sitting in Glen Barton's shoes, I would act and do a lot of things differently than what I do here. Companies have heritages, they're dynamic organisms.

"But we don't have the attitude that we're one of the big guys in the market. We're by no means successful in my judgment. We are more successful than we were yesterday, but we are by no means successful. I think it's always good to have the attitude that no matter what you did today, you can do a lot better tomorrow."

If that attitude seems unusual for a company that has established itself as a major player in the mobile equipment business, it's just one of a number of unusual things about Terex. Consider:

* There is no corporate sales and marketing organization, as the sales function is maintained within each operating division.

* There is no corporate engineering or purchasing function, as those too, are maintained at the operating divisions.

* While the company has a network of global distributors, it seems less tied to its distributors than most manufacturers and sells direct as often as possible.

* While maintaining its low profile, Terex has been one of the most acquisitive organizations in the world over the last four years, spending in the neighborhood of $800 million and purchasing 13 companies (see related story).

Finally, for a multibillion dollar organization, Terex seems less tied to status and tradition than most. In an era when many ompanies operate from plush corporate facilities, Terex is run from a comfortable, yet definitely non-ostentatious suite of offices on the third floor of an unremarkable, unmarked three-story office building next to an IHOP in Westport, Conn.

"There are a lot of people in this industry who want to be like the big guys," said DeFeo. "God love those big guys, they're great, but that's not our goal in life.

"I'm running Terex and if we're going to be successful, I can't try and run it like Caterpillar. We have to figure out what we can do, not what everybody else does."

What Terex has done, as well as anybody else in the industry over the last several years, is make money. Since 1994, the company's revenues have risen from $314 million to $2.3 billion. Similarly operating profit has skyrocketed from $10.4 million to an estimated $180 million for 1999.

In the process, Terex has established itself as a top three competitor in 11 of the 13 equipment markets in which it competes and is a leading player in telescopic mobile cranes, high-capacity surface mining trucks and hydraulic mining shovels above 200 tons, according to company and industry sources.

Terex Corp.'s business is primarily divided between two segments, Terex Lifting and Terex Earthmoving, both of which account for roughly half of the company's sales. On the lifting side, approximately 67 percent of the business is from North America, while the remaining 33 percent is overseas. The situation is almost reversed on the earthmoving side, as 55 percent of the business is offshore and 45 percent is in North America. In all, some 44 percent of Terex's overall business is in the international markets.

On the product side, Terex sells 13 different kinds of machines, with hydraulic mobile cranes, crushing and screening equipment, off-road trucks and surface mining trucks combining for 58 percent of total sales.

"Terex is a complicated story," said DeFeo, who came to the company after a three-and-a-half-year stint at Case and 10 years at Procter & Gamble. "This has not been a simple operating turnaround. It's more complex than that. And one of the reasons we have maybe been a little bit quiet, is because of all the stuff we've gone through.

"I'd characterize Terex as having gone through three periods since I've been here. The 1992 to 1995 period was a classic period of survival. We had more financial operating and public relations and regulatory issues than almost any company could ever find themselves in. The 1995 through 1997 period was a period of restructuring. And then in 1997, we really began to be focused on growth -- who are we going to be when we grow up.

"The overriding philosophy through it all is making equipment that makes our customers money. That's our mission statement. You won't find it on a lot of business cards or all over the walls of our facilities, but you will find that in everything that our people do and the way the company is organized. If we're to be successful we have to deliver the user of the equipment a proposition which results in their improved performance, profitability, return on invested capital to rental companies and productivity to earthmoving companies?

The first order of business when DeFeo took over operating responsibility in 1993 was simply finding a way to stay in business. During that period, Terex faced investigations by the SEC IRS and the U.S. Dept. of Labor. In addition, they were also probed by the intelligence agencies of two nations. "We were accused of building the Scud missile launchers for the Iraq war," DeFeo said. "We never did any of those things, but it was in the newspaper. Those kinds of things were around and so we had a lot of regulatory issues to fix. And simultaneously, we had a lot of operating issues.

"Many other companies perhaps might have gone into bankruptcy. My view was you don't go into bankruptcy unless you have absolutely no other choice. And we had choices. We just had to execute."

Execution, in this case, meant a series of strategic moves that included divestiture of the company's majority holdings in trailer manufacturer Freuhauf and its re-engineering and sale of Clark Material Handling, which DeFeo called "a terribly underperforming company" that Terex had purchased in 1992.

"It was a half-billion dollar company and it was losing $30 million a year," DeFeo said. "It was a tremendous cash drain Terex could not afford. It had 1750 people. It had five factories. It's SG&A (selling, general and administrative expenses) was around 15 percent of revenue. We looked at it and we said we're going to have to change this company.

"And they said, well, we can't do it, otherwise we'll lose the dealers. I said, well, no one wants to lose dealers but how can you have a company exist losing a tremendous amount of money like this? It was a classic example in that suppliers that sold to Clark made money and the dealers that sold Clark made money but the jerks in the middle just were funding everything.

"From a financial standpoint we had very, very little maneuvering room. We were running the company which was about a billion dollars back then with only a $20 million bank revolver and that was fully drawn and we had to run the company where every day we decided what checks to pay. And if you've ever been in a business where you didn't have cash, you come to appreciate just how important cash is."

But things began to change quickly. A distribution center was moved. Five factories were reduced to two and head count went from 1750 to 940. "And lo and behold," said DeFeo, "in 1996 the company made somewhere around $18 million of profit compared with a $30 million loss.

"So while the dealers may have been annoyed or we may have put them through some difficulty, we were delivering them products, decent products, and they were buying them and the customers were buying them. The dealer loyalty may not have been what it was beforehand because we had fundamentally turned the franchise upside down -- but we still had a franchise?

Terex then made two key moves that in some ways set the table for all that was to follow First, it bought PPM Cranes from Legris Industries, then sold Clark at a $50 million profit. "Despite the fact that we were financially weak and still owned Clark, we knew it was a one-time opportunity to improve our crane business," said DeFeo. "As we had looked at our business in 1994 with no cash, we were trying to figure out what business could we be big in, where we could really make a difference. And our team decided that we thought we could be big in the crane business.

"At the time, we had 10 percent market share under a tired product name (Loran). Grove had a 60 or 65 percent market share and many people in the company looked at us as if we were from Mars. How were we going to attack the market leader, the dominant player, from Waverly, Iowa, with the brand name of Lomin? And it wasn't like we had a big cash daddy that was going to fund our foray into this business.

"But we believed we could do it and we were also making real progress in our Terex truck business in Scotland. We were a good number three brand and if we could just improve a little bit in some areas, we could make some money if we got our costs down. And that would fund some other things that we were trying to do."

Along with the acquisition of PPM, Terex also set about reorganizing its existing businesses. In cranes, for example, it streamlined the product line from five machine brands to two, improved the manufacturing efficiency in Waverly and eliminated its field sales organization.

"People would say to us, how can you eliminate a sales organization?" said DeFeo. "We didn't eliminate the selling activity. What we wanted to do is flatten the organization and get away from all the titles and get people to be customer responsive. We actually went to the point at one point in time of taking the supervisor on the factory floor and had that supervisor be responsible for a certain amount of customers' orders and giving the customer that factory supervisor's name. I even called the supervisor pretending to be a customer just to make sure he would be responsive.

"Is it bad for the operations vice president to deal with customers? Who said he can't deal with customers? Is it bad for the guy that's in engineering to deal with customers? The fact is that everybody in our organization is a sales person. So it's not like we don't have a sales organization. We just don't have the traditional organization.

"In the crane business the customers are very consolidated. You have 15 or 20 crane rental companies that represented 80 percent of the business. So if you don't have, for example, a dealer interpreting the customer and then a salesman interpreting the dealer and then a director of sales interpreting the salesman and the vice president of sales interpreting the director, who in turn has to go to the vice president of engineering to interpret the vice president of sales, who then goes down to his director of engineering and his eventual draftsman who could give a damn about what that salesman has to say because of course salesmen don't really understand the technology capable in the business -- all of a sudden the engineer has to look at the customer in the eyes and say why he's doing what he's doing. All of a sudden the engineer becomes a businessman and that's what you want.

"What we also did was send them plane tickets and bring them to our factory for a couple of days. It cost us a lot less to do that and we passed the savings along to the customer.

"You be the judge. We went from a little over 10 percent market share to 47 percent market share with maybe one or two official sales people."

Those changes buoyed Terex's overall business, as it allowed the company to embark on a very aggressive strategy of acquisitions. It also, DeFeo said, ensured that Terex's equipment provided the customer with just what they needed- no less and most significantly no more, either.

"Let them buy somebody else's product for the very specialized application' DeFeo said. "Our philosophy is making products simple, available and cost effective. The user of our equipment requires it to be simple and we don't want to interfere with that.

"What we tried to do with our crane business is tailor the crane to the needs of the customer base. To give you a metaphor, if you go out in the rain and don't have an umbrella, there's a good chance you're going to get wet. In our business, if you go out in the marketplace and eliminate all the intermediaries there's a good chance you're going to get the message.

"In reality, we can deliver a new product to the market in nine months because we aren't interpreting each other all along the way. And I'm going to make the customer a lot of money when he buys my product for 25 percent below the competitors and rents it for about the same price. Guess whose product he's going to buy, very routinely? It's a principle of business -- develop your product for the needs of the marketplace, don't develop it to the capability of your technology.

"This is the thing that people don't understand about us. They think we're simply a low price seller. We were able to drop prices because we didn't have the cost. We didn't have the field sales organization. We didn't have the big engineering organization. We focused on core products.

"We're making as much as anybody else in the business. Our competitions gross margin was 25 percent, ours was 18 percent - so much less. But their SG&A as a percentage of revenue is 18 percent and ours is 7 percent. So it's not what your gross margin is. It's how much is left behind."

Another important aspect to the Terex manufacturing philosophy is its heavy reliance on suppliers. Terex outsources approximately 80 percent of its machine content, which is certainly among the highest percentages in the industry. DeFeo said the company seeks to get "local or low cost supply depending upon what the priority is," although there is some vendor rationalization among a few major components, including engines.

"In a cyclical business, fixed cost kills you because you make bad decisions trying to cover your overhead if the volume goes down," he said. "And in today's world you can outsource almost anything.

"It makes no sense for me to cut steel even though I use a lot of steel. I can, on my CAD/CAM system, download to several steel companies the design of a new door or the design of a new part and they can have it back to me in 48 hours produced to my specifications. So why should I have that capability internally?

"If I have it internally I've got to keep it running and ultimately I'm going to be doing stupid things to keep those machines running. And I've got to keep employees around to keep those machines running so my fixed cost goes up.

"We have no corporate purchasing function. I don't believe we will ever have a corporate purchasing function. There are certain components we do look at and coordinate discussions with certain suppliers -- engines being one, hydraulic cylinders another. But for the most part I would sacrifice corporate purchasing savings for local economy to deliver customers value. I do not want to force on a market a product they don't want because I can save a little bit.

"What I really want to do is empower the local guys to get the best things they can and run their business well. What happens when you create a central purchasing unit is that the local people don't identify at all with what happens, so the ownership goes away. I want the guys locally to be thinking about how much their business cards cost. People waste money in businesses all the time because they don't treat the money like it's their own money.

"So that's the philosophy. It is their money and they will make a bonus or not make a bonus depending upon how well they do."

And DeFeo believes that the Terex philosophy allows for the technology for machines to advance without being forced by the manufacturer. "The technology changes that will have a dramatic impact on how things happen are going to be driven by the suppliers," he said. "So my belief is to stay close to the suppliers.

"If supplier X comes in with a new control panel on aerial work platforms, we let them take that lead. Now you can say, well then it's not going to be proprietary to you, they're going to sell it to several people. You should be designing your own proprietary systems. I have a different view and it's that I don't really want it to be proprietary because my customers don't want just to buy this special product. They want to buy something that their people can use and use with some level of knowledge."

The other industry paradigm Terex has turned on its ear concerns distribution. For most equipment manufacturers, the 11th Commandment is thou shalt nurture thy distribution. For Terex, dealers are an important part of the whole, but DeFeo makes it clear where his primary allegiance lies. "We sell direct and we sell through dealers," he said. "We don't dislike dealers but we believe that dealers need to earn their own value. I need to develop a franchise and my job is not to be the dealer police.

"I will sell to anybody who can pay for the product. I will not sell around a dealer if they're doing a good job but at the same time, I will not be tied to distribution for distribution's sake. Everybody's got to earn their right to compete."

Especially, he said, in an equipment market that is changing dramatically for a variety of reasons, chief among them the rental trend.

"I've known the rental business now for a long time," said DeFeo, who is also on the board of United Rentals. "When I was in Europe with Case, the U.K. market was a rental market and that was some time ago.

"Buyers, users and owners of equipment are going to continue to seek the lowest cost of ownership. There will be a market for people to own equipment. There'll be a market for people to rent short term. There'll be a market for people to rent for purchase. It empowers the customer to make the right business decisions for that customer because and this is why I think it's good -- rental is simply another form of distribution.

"Yes, buying power has shifted to the rental companies. But what I tell people is get over it. Organize for it.

"If all of a sudden instead of having 5000 buying decisions being made among a lot of mom and pop rental companies, you now have 10 buying decisions being made, why do you still have the same sales organization you had? Why are you paying that sales organization $125,000 a year?

Whose fault is it? Is it the rental company's fault? I don't think so. You have to change your business.

"If the rental company is not concerned with having the latest technology then why do you have all those engineers? The reason people are blaming the rental companies is because they don't want to change. It's painful. But they have a choice. Change or be a dinosaur."

The changes will continue at Terex, though the goals won't. "We have some challenges," said DeFeo. "We've got to continue to grow. We also have to continue to de-leverage our balance sheet. We also have to continue to improve our franchises and we have to continue to deliver consistent earnings through the time period. Many companies saw significant earnings reductions in 1999. Terex's earnings went up approximately 40 percent. We feel pretty good about that, but we've got to continue that kind of growth.

"I think another critical challenge is our Asian strategy. We need to develop a broader Asian and Latin American capability than we have today so that we can become more global as opposed to multinational which is really what we are today

"The Terex of today is less dependent upon any one product or any one market. Forty-five percent of our business is in North America. That means 55 percent of our business is someplace else. The biggest product category we have is only 19 percent of our revenue and not all of that is in one market. So we have very much diversified our business face and we're going to continue that.

"I think we can be $3, $4, $5 billion in the next few years. But if we're not, that's okay too. I just want to remain highly profitable. What Terex wants to be when it grows up is to have the best value equity in the capital goods business."

Terex's Product Diversity

As this chart indicates, hydraulic mobile cranes, off-highway and surface mining trucks and crushing and screening equipment were 58 percent of Terex's business in 1999.

Hydraulic Shovels 8%

Surface Mining Trucks 10%

Crushing & Screening 15%

Asphalt Plants & Pavers 4%

Off-Highway Trucks 14%

Hydraulic Mobile Cranes 19%

Container Stackers 3%

Boom Trucks 3%

Tower Cranes 3%

Lattice Boom Cranes ?

Material Handlers 7%

Utility Aerial Devices 6%

Aerial Work Platforms 5%

TEREX PORTFOLIO

TEREX EARTHMOVING

Ernest R. Verebelyi, President

TEREX CONSTRUCTION

Products -- Rigid trucks to 100 tons, articulated trucks to 40 tons, motor scrapers

Major Brands - Terex

Manufacturing Sites -- Motherwell, Scotland

TEREX MINING

Products -- Rigid trucks to 340 tons, hydraulic excavators to 800 tons, bottom dump vehicles

Major Brands -- O&K, Unit Rig, Lectra Haul, Dart, Payhauler

Manufacturing Sites -- Tulsa, Okla.; Batavia, Ill.; Dormund, Germany

TEREX LIFTING

Fil Filipov, President

TEREX CRANES

Products -- Rough terrain cranes, truck cranes, all terrain cranes, truck-mounted boom cranes, tower cranes, lattice boom cranes

Major Brands -- Terex, Lorain, PPM, P&H, Bendini, American, Comedil

Manufacturing -- Waverly, Iowa; Conway, S.C.; Olathe, Kan.; Montceau-lesMines, France; Crespellano, Italy

TEREX AERIALS

Products -- Construction and articulated aerial work platforms, slab and rough terrain scissor aerial work platforms, vertical lifts

Brands -- Terex, Simon

Manufacturing -- Milwaukee, Wis.; Cork, Ireland (Milwaukee scheduled to be closed)

TEREX TELELECT

Products -- Truck-mounted aerial devices, digger derricks

Major Brands - Telelect

Manufacturing - Watertown, S.D.

TEREX HANDLERS

Products -- Container handlers, material handlers, rough terrain telescopic boom forklifts

Major Brands -- Terex, Simon, RO, Italmacchine

Manufacturing -- Baraga, Mich.; Perujia, Italy

Terex In The '90s: Let's Make A Deal

While there may have been companies that ha swung bigger individual deals in the last 10 years in the mobile equipment industry, no company has been as consistent a shopper as Terex. Over the past four years alone, Terex has acquired 13 companies (see chart) and even before that made several strategic acquisitions, including PPM Cranes and Koehring.

"We've grown a lot through acquisitions but we've also grown internally a lot," said company Chairman and CEO Ron DeFeo. "When you look at our revenue, probably half of our revenue growth has come from market share gains and growth and the other half has come from acquisitions. Basically, we're trying to grow 20 percent per year, about half of which will come from acquisitions and half of which will come internally.

"Concerning acquisitions, we look for two things: what is the strategic fit with our existing business and what is the financial impact? Strategic fit is often hard to put your finger on, but it has to come back to is it in our existing product categories or close? Is it a bolt-on acquisition for what we're currently doing or is it a produce line extension?

"For example, the Powerscreen mobile crushing and screening equipment, classic product line extension. So when we were thinking about that acquisition we said Power Screen really gives us the ability to take our rigid trucks and our O&K shovels for this quarry and extend it all the way through. Then with Cedarapids, we can offer a pretty complete product line for that segment of the market. So that's really a strategic fit.

"But it's got to make financial sense and the way we look at it is it has to be, after financing costs, accretive per share from day one. We have to be able to see a way to make money for our shareholders. We don't want them to wait."

The Shopping List

Company Date of Purchase Revenues Products

At Purchase

Princeton November 1999 $50 million Truck-mounted forklifts

Cedarapids August 1999 $180 million Crushing, screening equipment, pavers, asphalt plants

Powerscreen August 1999 $370 million Crushing, screening equipment, light construction equipment

Amida April 1999 $30 million Light towers

GRU Comedil December 1998 $25 million Tower cranes

Peiner HTS November 1998 $20 million Tower cranes

Italmacchine November 1998 $23 million Telescopic material handlers

American Crane July 1998 $27 million Lattice boom cranes

Holland Lift May 1998 $15 million Aerial work platforms

O&K Mining March 1998 $250 million Large hydraulic mining shovels

Payhauler January 1998 $25 million Large off-highway trucks

Simon April 1997 $194 million Aerial work platforms, boom trucks

Baraga April 1997 $15 million Rough terrain forklifts

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