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Executives

Timothy Sullivan - President & CEO

Craig Mackus - Chief Financial Officer & Secretary

Luis de Leon - Chief Operating Officer - Underground

Kenneth Krueger - Chief Operating Officer - Surface

Kent Henschen - Director, Corporate Communications

Analysts

Ann Duignan - J.P. Morgan

Andy Kaplowitz - Barclays Capital

Charles Brady - BMO Capital Markets

Barry Bannister - Stifel Nicolaus

Kent Green - Boston American Asset Management

Robert McCarthy - Robert W. Baird

Joseph Hubage - Private Investor

Seth Weber - Banc of America/Merrill Lynch

Steve Barger - KeyBanc Capital Markets

Ben Elias - Stern Agee

Bucyrus International Inc. (BUCY) Q4 2008 Earnings Call February 20, 2009 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2008, Bucyrus International earnings conference call. My name is Dan and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the call over to your host for today’s call, Mr. Kent Henschen, Director of Corporate Communications, please proceed sir.

Kent Henschen

Thanks, Dan. Good morning and thank you to everyone for joining us this morning for Bucyrus’s fourth quarter and year ended December 31, 2008 earnings teleconference. In a few minutes I will turn the conference over to Mr. Sullivan, President and Chief Executive Officer of Bucyrus and Mr. Craig Mackus, our Chief Financial Officer. As is our practice, I’ll start today though, with reviewing the forward-looking statements and cautionary factors.

This call contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements maybe identified by the use of predictive, future tense or forward-looking terminology such as believes, anticipates, expects, estimates, intends, may, will, or similar terms.

You are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties and those actual results may differ materially from those contained in the forward-looking statements as a result of various factors, some of which are unknown.

Bucyrus’s policy on forward-looking statements including a list of factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. As well as risk factors relating to Bucyrus are included in Bucyrus’s 2007 Form 10-K filed with the Securities and Exchange Commission on February 29, 2008 and any other cautionary statements described in our other reports filed by Bucyrus with the Securities and Exchange Commission.

All forward-looking statements attributable to Bucyrus are expressly qualified in their entirety by the foregoing cautionary statements. Bucyrus undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Now I will turn the conference over to Mr. Sullivan.

Timothy Sullivan

Good morning, everyone and thank you for joining us today. We were very pleased with the fourth quarter results and obviously our year end 2008 results as well. As is customary, I am going to have Craig highlight those results.

Craig Mackus

Thanks, Tim. We’re going to go through the fourth quarter and year-to-date and Tim will talk about the markets and add a little bit color to some of the numbers, as is our custom. Before I begin, I’d like to remind everyone that our 2007 results include our underground mining segment results, since the May 4, 2007 acquisition of DBT and as a result, the financial results for 2008 are not necessarily comparable to the financial results for 2007 and may not be indicative of future results. Also you should be aware of the non-cash purchase accounting charges, which affect reported net earnings. I’ll address this later.

Sales for the fourth quarter 2008 were $721.8 million, an increase of $173.9 million or 31.7% from $548 million for the fourth quarter of 2007. Original equipment sales were $410.2 million, an increase of $117.9 million or 40.3% from $292.3 million for the fourth quarter of 2007 and aftermarket parts and service sales were $311.6 million, an increase of $56 million or 21.9% from $255.7 million for the fourth quarter of 2007.

For the full year of 2008, sales were $2.5 billion, an increase of $892.4 million or 55.3% from $1.6 billion for 2007. Original equipment sales were $1.4 billion, an increase of $513.5 million or 60.6% from $846.9 million for 2007 and aftermarket parts and service sales were $1.1 billion, an increase of $378.9 million or 49.4% from $766.5 million for 2007.

Surface mining sales for the fourth quarter and the full year of 2008 increased in both original equipment and aftermarket parts and services from the comparable period in 2007 and it was a result of the strength of new orders in 2008 for our products and services throughout the world and the positive impact of the capacity improvements we have made at our principal surface mining manufacturing facility in South Milwaukee, Wisconsin.

The high demand for our products and services was driven by high global commodity prices during the first three quarters of 2008. The increase in surface mining original equipment orders for the fourth quarter of 2008 was in electric mining shovels and for the full year 2008 was in electric mining shovels and draglines.

Increase in surface mining and aftermarket parts and service sales for the fourth quarter was due to large increases in the Chile, Canada and the United States markets offset by declines in other markets and the increase in the full year 2008, was in nearly all global markets.

Underground mining sales for the fourth quarter and the full year of 2008 was in both original equipment and aftermarket parts and service and reflects strong global demand for coal and strong coal prices throughout most of 2008. The increase in underground mining original equipment sales for the fourth quarter and full year of 2008 was primarily due to the strong global demand for high productivity longwall mining parts in connection with startups of new longwalls and major expansion of existing longwalls.

Gross profit for the fourth quarter of 2008 was $184.5 million or 25.6% of sales, compared to $136.3 million or 24.9% of sales for the fourth quarter of 2007. Gross profit for the fourth quarter 2008 was increased by $0.5 million of purchase accounting adjustments related to the acquisition of DBT, compared to a $7.1 million reduction for the fourth quarter of 2007. This had the effect of increasing gross margin for the fourth quarter of 2008 by 0.1 percentage points and decreasing gross margin for the fourth quarter last year by 1.3 percentage points.

Gross profit for the full year of 2008 was $682.5 million or 27.2% of sales, compared to $408.3 million or 25.3% of sales for 2007. Gross profit for 2008 was reduced by $10.8 million of purchase accounting adjustments related to the acquisition of DBT, compared to $22.3 million for 2007. This had the effect of reducing gross margin for 2008 by 0.4 percentage points, compared to 1.4 percentage points for 2007.

The increase in the gross profit for the fourth quarter of 2008 was primarily due to increased sales volume in both segments. The decrease in the gross margin percentage for the fourth quarter of 2008, compared to the full year of 2009 was partially the result of additional costs incurred related to the erection of draglines. The remaining decrease was a result of the mix of products sold.

Increase in gross profit for the full year of 2008 was primarily due to the acquisition of DBT and increased surface mining sales. Surface mining original equipment sales, which have lower gross margins were 52% of total surface mining sales for the fourth quarter of 2008, compared to 42% for the fourth quarter of 2007 and were 49% of total surface mining sales for the full year of 2008, compared to 43% for 2007.

Underground mining original equipment sales, which also have lower gross margins were 62% of total underground mining sales for the fourth quarter of 2008, compared to 65% for the fourth quarter of 2007 and were 60% of total underground mining sales for the full year of 2008, compared to 65% for 2007.

Selling, general and administrative expenses for the fourth quarter of 2008 were 8.1% of sales, compared to 12.2% of sales for the fourth quarter of 2007 and 10.3% of sales for the third quarter of 2008. These expenses for the full year of 2008 were 9.7% of sales, compared to 11.5% of sales for 2007. The low percent of sales for the fourth quarter of 2008 reflects the effects of the leverage of increasing sales.

Operating earnings for the fourth quarter of 2008 were $112.4 million, compared to $48.7 million for the fourth quarter of 2007 and were $382.6 million for the full year of 2008, compared to $173.1 million for 2007.

Operating earnings for our underground mining segment were reduced by amortization of purchase accounting adjustments related to the acquisition of DBT of $3.1 million and $27.9 million for the fourth quarter and full-year of 2008 respectively, compared to $18.3 million and $49.1 million for the fourth quarter and full-year of 2007 respectively. The overall increase on our consolidated operating earnings for 2008 was primarily due to the acquisition of DBT, it increased gross profit resulting from increased surface mining sales volume.

Net earnings for the fourth quarter of 2008 were $65.8 million or $0.88 per share compared to $61.9 million or $0.82 per share for the fourth quarter of 2007. Net earnings for the full-year of 2008 were $233.3 million or $3.10 per share compared to $136.1 million or $1.93 per share for 2007.

Net earnings were reduced by net of tax depreciation and amortization of purchase accounting adjustments related to the acquisition of DBT of $2.1 million and $18.8 million for the fourth quarter and full-year of 2008 respectively, compared to $0.2 million and $20.6 million for the fourth quarter and full-year of 2007.

Depreciation and amortization of future purchase accounting adjustments related to the acquisition of DBT is expected to be as follows; fixed assets approximately $0.6 million credits, $0.4 million net of tax per quarter through April of 2011. Intangible assets approximately $3.8 million per quarter, $2.5 million net of tax through April of 2019, the write up of inventory was fully amortized in 2008.

EBITDA for the fourth quarter of 2008 was $126.1 million, an increase of $87.3 million from $67.4 million for the fourth quarter of 2007. As a percent of sales, EBITDA for the fourth quarter of 2008 was 17.5% compared to 12.3% for the fourth quarter of 2007. EBITDA for the full-year of 2008 was $438.9 million, an increase of 92.7% from $227.8 million for 2007. As a percent of sales, EBITDA for 2008 was $17.5 million, compared to 14.1% for 2007.

EBITDA includes the impact of reductions for non-cash stock compensation expense, severance expenses, gain or loss on sale of fixed assets in the inventory of fair value purchase accounting adjustment charged across the products sold. These reductions were itemized in the EBITDA reconciliation in our press release.

At December 31, 2008, our total backlog was $2.5 billion, $1.7 billion of which is expected to be recognized within the next 12 months. This represents a 73.6% and 51.4% increase from the December 31, 2007, total backlog of $1.4 billion and 12 months backlog of $1.1 billion respectively.

Our total backlog at September 30 was $2.5 billion. The strengthening of the U.S. dollar in the fourth quarter of 2008 has reduced our December 31, 2008; backlog by approximately $70 million when compared to our backlog calculated as of September 30, 2008 exchange rates. New orders for the fourth quarter and full year of 2008 were $717.8 million and $3.6 billion respectively, compared to $693.7 million and $1.7 billion for the fourth quarter and full-year of 2007 respectively.

Included in our surface mining aftermarket parts and services, new orders for 2008 were $281.5 million related to multi-year contracts that will generate revenue in future years. At December 31, 2008, our total debt was $571 million, compared to $536.1 million at December 31, 2007. Our cash balance was $102.4 million at December 31, 2008, compared to $62.8 million at September 30, 2008 and $61.1 million at December 31, 2007.

Receivables have increased to $636.5 million at December 31, 2008 from $554 million at September 30, 2008 primarily due to high original equipment billings in the fourth quarter. Collections and receivables have been strong so far in early 2009. Inventory turns improved slightly in the fourth quarter to 3.1. The current global credit crisis has had minimal impact on our cash investments and debt instruments.

Capital expenditures for 2008 were $118.8 million, which includes $45.5 related to the expansion and additional renovation of our facilities in South Milwaukee. We expect our capital expenditures for 2009 to be between $60 million and $70 million; however, we will evaluate our capital spending as economic conditions change. We believe that cash generated from our operations and existing credit facilities will be sufficient to fund our cash requirements for 2009.

Now I’ll turn it back to Tim for further discussion.

Timothy Sullivan

Okay, I guess with a summary of some of those financials we had originally given guidance in the revenue of $2.425 billion to $2.475 billion. We came in at $2.5 billion, which obviously exceeded our guidance and on the EBITDA, we gave guidance of 445 to 465 coming in at 458, right in the midrange of our guidance and both of those results were achieved really fighting some foreign exchange headwinds as we closed out the fiscal year, and I think we also reported that we did have a margin hit one time occurrence with some of the subcontract developments that we are trying to do on a couple of continents, both in North America and in Australia and those subcontract issues obviously affected our gross margin for the quarter, obviously moving it down a little bit and that was somewhat disappointing not to be repeated.

Sales increased nicely in both segments in the fourth quarter compared to the third quarter, which was predicted. New orders were $718 million, obviously another strong quarter. Backlog a $2.5 billion and I will reiterate what I’ve been saying the last couple of quarters, that’s a very solid backlog. The only issue that we’ve had with our backlog is we are trying to restructure right now about $6 million worth of Room & Pillar Equipment in central Appalachian, which I want to talk a little bit further about when I talk about the markets.

The underground segment continued to move forward with their master plan of managing effectively SG&A and obviously improving margins, which obviously is moving them towards their EBITDA percentage goal comparable to our surface operations. Let me talk a little bit about the market. I think everyone’s aware of the fact that we are the last in to any cycle. We are the last out of any cycle. So, any cycle that does have any type of a downturn, there’s a tail on it and we benefit from that tail. I mentioned that we did have a strong fourth quarter. We expect to have a good strong booking first quarter.

Quotation activity is high, which probably smacks in deference to a lot of the other news that’s being reported in the marketplace, but our stuff moves very slowly. In other words, people, when they buy our equipment, we put it in backlog, it stays in backlog and what they’ve got plans for large equipment; they basically continue those plans until their needs are satisfied. So, we are relatively bullish about the first quarter.

As we move through 2009, it’s a little bit less certain as to what’s going to happen in the marketplace. We’ve all been reading about the fact that all the big multinationals plan to reduce the CapEx spending in this fiscal year, we believe that to be true. At this point in time, it’s not necessarily affecting us.

Let me talk a little bit about the commodity markets. I just returned from China. I think the good news about where we are with commodity pricing is that it has found its bottom, at least for now and the good news about that is I think production was pulled off the market so rapidly and in a very controlled fashion in the fourth quarter that the basement on pricing was established prior to pricing, diving down to five or even 10 year averages.

So, we’re above those five or 10-year averages in virtually every commodity and if you’re reviewing the inventory levels in Asia, iron ore has pretty well been moved down to the fact that inventories have been depleted. The same is fairly true for steam coal and for copper. The only inventory that remains fairly high in the Asian corridor is coking coal. That inventory has not been worked down yet to replenishment levels. I did say that pricing has found its bottom.

I believe that to be true, but we really won’t know exactly, where we stand on commodity price until the Asian negotiations are completed. Typically those are announced here toward the end of the month of February. I suspect that we may find that iron ore, international iron ore prices, copper prices, steam prices, and coking coal prices may drift further into the first quarter just for the fact that things are pretty volatile out there right now and obviously the end-users of those commodities in Asia are going to be pushing for the lowest price as possible even though their inventory levels have been depleted.

So, we’re reasonably bullish about the situation there, as far as pricing being well above a cash cost to produce those commodities, which obviously bodes well for stabilizing the commodity producers and then hopefully our business as we move forward.

I think one positive that came out of the discussions I had last week in China is that the Chinese stimulus package seems to be hitting the mark. It’s a beautiful thing I guess about state capitalism. They can pinpoint and sharpshoot exactly, how they want that stimulus package to work. Their impetus and what they’re trying to achieve with the stimulus package is to continue with their infrastructure needs, roads, railroads, power plants. They are all being built.

Nothing has slowed down as far as their infrastructural spend and they are obviously trying to create a stronger consumerism, domestic consumerism with their export markets faltering, not the least of which is the U.S. market. So, they are trying to promote a lot of consumerism. I found it interesting in the China Daily last week, there was an elderly couple that were actually had just bought a washing machine and we’re taking it home on the subway.

This is the type of thing that the stimulus package is trying to do. It is trying to promote the purchasing of durable goods by the populace in China and it seems to be having some effect. How much that will drive the demand for commodities, particularly in the durable good areas of copper and iron ore and coking coal, I guess is yet to be seen, but you can see that it’s been out there for some weeks now and it seems to be having some traction. I guess we can only hope that any stimulus package that we have in the United States also has some positive effect.

The U.S. market is a little bit less certain and again, you need to break it down by some various geographic areas. Our primary focus in the U.S. market is coal. If you look at the statistics as we sit here today, power demand is off by about 1.5%, but coal production is also off by a little bit more than 1.5% and this is obviously good. It just continues to show the discipline that we do have in the commodity market, not only internationally, but also domestically. When the demand does falter, the producers do pullback production.

Inventories are a little high on coal around the United States obviously because the demand being down, but if production continues to be less than demand as we move through 2009, I see a stabilization of supply and demand on the coal side of the business. With one corollary to that and that’s Central Appalachia. We had a very large boom in activity in Central App, primarily due to the export demand that was generated by the fact that countries like India were importing a lot more coal from traditional suppliers of coal to the European market, primarily South Africa.

So, as that South African coal started to move to India, it created opportunities for East Coast producers of coal and particularly in Central App and those mines were able to find some very lucrative export markets in 2008. We don’t see that happening in 2009 and I think that will probably affect Central App more than any other region in the country.

It could affect to a much lesser extent, but it could affect Northern Appalachian Mine as well, and again keeping in mind where we have the most exposure, Northern App, primarily longwall applications; Central App, primarily room & pillar applications, not our best market.

So I think overall, if you look at all the statistics that are out there, things could be a lot worse for the commodity market. The discipline internationally and domestically has been very, very good. Does that mean that we are in for a recovery? I don’t think anyone knows the answer to that, but I do believe that we feel that the fact that we are able to pullback production, keep commodity pricing at a reasonably good level, certainly well-off the highs that we saw in 2007 or 2008, but well above the five and 10 year averages will bode well in the not-too-distant future for some of the commodity providers.

If the stimulus package in China does do what we expect it to do and hope it will do, we may get a little bit more activity than we would expect necessarily out of some of the international commodity producers as we move towards the end of 2009 and beyond.

What we plan to do as a company for 2009 and I’m leaning up here to give you what we see to be our guidance for the year and we are giving guidance. We have the luxury of long lead times and a very strong backlog. Our strategy for the year is to basically maintain flat revenue in 2009 in comparison to 2008.

So in other words, we have put a plan in place, which will approximate $2.5 billion in revenue for 2009 or flat 2008/2009 as far as revenue is concerned. The reason we’re doing that is because, obviously we have a strong backlog and we have long lead times. We have the ability to work with our backlog to some extent.

So we’ve effectively moved about $100 million of our backlog into the first half of 2010, that’s both on surface and underground. We are able to move some new unit sales, primarily longwall business and shovels into the first half of 2010. We want to make sure, we’re protecting to some extent for potential softening in the demand for our equipment.

We fully expect that there will be some, we’re not sure exactly how much as we sit here today, it doesn’t look like there is going to be significant amounts at least until the second-half of 2009, but we want to make sure that we are protecting for that possibility. That then relates to an EBITDA range of between $460 million and $475 million as far as EBITDA for 2009 and again, I think I need to specify why we’re also backing down a little bit on these numbers.

We have planned negative foreign exchange effect on our numbers for 2009 of approximately $190 million. Obviously, that may change as we move through the year if the dollar does begin to weaken, which is predicted that could obviously help our guidance and our predictions for the year as well.

As usual, as we move towards mid-year, we will adjust that guidance if we have either positive or negatives on either side of the ledger. That’s where we are at. I think one other thing that I should mention there was a confirmation that we did make a couple of acquisitions in the fourth quarter. We plan to continue that type of activity as we move through 2009.

If we see opportunities to grow our revenue and earnings, with bolt-on acquisitions, obviously our balance sheet is in good shape. We have the ability to fund those types of things with internal cash flow and obviously with the plan that I have put out here and with the backlog that we do have, we do expect a very strong free cash flow as we move through 2009.

We currently have $100 million on the balance sheet of cash. So, we’re in a position to continue that type of activity if the right opportunities present themselves as well and we planned to that.

With that, I think we’ll open up the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ann Duignan – J.P. Morgan.

Ann Duignan – J.P. Morgan

My question is around your mix in 2009. If you could talk about given the significant slowdown in after-market orders, how are you feeling about the margin mix in both business segments going into ‘09 and through ‘09?

Tim Sullivan

Well, we don’t really see a slowdown in after-market business. As a matter of fact, if you look at our installed base in machinery, we have effectively with the DBT acquisition and with the new business that we have had here with new machines over the last two or three years, we have effectively tripled our installed base in machinery. Now it’s just shy of $30 billion.

So our projections for the year do not really show any falloff in aftermarket activity. In some respects, we think that we are probably going to be at least equal to what we had in 2008 and maybe even more. So the mix for 2009 is planned right now to be fairly similar to what we had in 2008 as far as new machine business to after-market.

Ann Duignan – J.P. Morgan

And then just out of curiosity, I know that you have continued to make small acquisitions. Given the uncertainty in the market place and given your uncertainty kind of beyond 2009, can you talk a little bit about your capital allocation strategy? I guess we are seeing a lot of companies’ kind of pull back on acquisitions and be very prudent with their cash kind of just in case. Can you talk a little bit about what your strategy is and why you are so comfortable spending the cash on acquisitions?

Tim Sullivan

I think two things. I didn’t mention that and I should as far as our guidance. We will be cutting our CapEx in half. We spent about $118 million in 2008. We are projecting to spend $60 million in 2009. We’ve got a strong balance sheet. We’ve got a very large installed base machinery.

Even if the OE business starts to fall off appreciatively as we move through 2009 or into 2010, we still believe that we know how to manage this business through that type of a possibility. And this is the time, if there’s opportunities out there and you can pick them up and they don’t cost a lot of money, but they position us for not only current and near-term revenue and earnings growth, but even longer-term opportunities, we feel that’s the thing to do.

Ann Duignan – J.P. Morgan

Okay and just one final quick one. Have you had any customer requests for postponement of deliveries or push out of deliveries or cancellations?

Craig Mackus

We have had about $6 million, which is actually almost not worth bringing up in Central App and we are working to push those out at the customers’ request. We actually initiated ourselves our own request to a few customers to try to push some long-wall business and some shovel business out into 2010 to start to level off that backlog and try to start protecting ourselves for what we see potentially happening in 2010. So we initiated some of it. Very little of it was initiated by one of our customers.

Ann Duignan – J.P. Morgan

And no cancellations?

Tim Sullivan

No cancellations.

Operator

Your next question comes from Andy Kaplowitz - Barclays Capital.

Andy Kaplowitz - Barclays Capital

A question about your SG&A, you are keeping a very low absolute dollar amount of SG&A as your sales are going up. So I guess my question is as we go forward in 2009, how much capability do you have to sort of keep that dollar level where it is or even lower it? It seems like you are doing a good job of keeping SG&A as a percent of sales low.

Tim Sullivan

Well, I think that’s one thing we pride ourselves in. We run very low SG&A as it compares to anyone else in the industry. That’s one of our strengths. We will keep it low as we move through 2009.

At this point in time, we feel we can do everything we need to do with our current headcount. That doesn’t mean that we won’t refine our organization and do some things as we move through 2009. But the idea is to basically level off the employment levels and move through 2009 in a very similar fashion to what we did in 2008.

Andy Kaplowitz - Barclays Capital

Is there anything that you cut in 4Q ‘08 as part of that SG&A? Is there anything special about it or is it just cost containment?

Tim Sullivan

Well, it’s been a couple things. Cost containment obviously is something that we work hard at every single day. But I am continuing to be gratified by our underground segment and what they’ve been able to do to gradually and systematically bring their SG&A inline with what we believe to be appropriate. And that’s what our surface levels have been.

So if you look at our plan and then what we plan to do for 2009, we expect both our underground and surface operations to achieve about an 8% SG&A as a percent of revenue for 2009. And so our underground group has worked really hard to get to that number and then we expect that they will achieve that for this year.

Andy Kaplowitz - Barclays Capital

And then you said in your press release that you tapped a revolver around just timing of payments, so just I want to talk about that for a second. It seems like it’s totally timing, but in this environment I think just asking you about it, and Craig mentioned that receivables were strong in 1Q already. So could you give us a little more color around cash payments from customers?

Craig Mackus

Yes, I will handle that. In the fourth quarter, we had a number of shipments that did occur and with the year-end coming up, I think some customers just didn’t pay us at the end of the year like we thought. As an example, in the month of January alone on our surface side, our billed receivable balance declined $75 million between January 1 and January 31.

So by the end of January, our revolver was paid off. So we had a timing issue where we received a tremendous amount of money in the first week of January, which seems to typically happen every year where customers don’t pay us at the end of the year. They pay us the first week of the following year probably related to their capital budget spending also.

So it is very volatile with the price of long-walls and chills and draglines. The numbers can fluctuate at any point of time based on the balance sheet date.

Tim Sullivan

I should mention too that we worked with a couple of the customers that were restructuring some of their debt and their financing in the fourth quarter. And to accommodate that, we allowed them to push their payments into January. And again, that’s just trying to work with our customer base as they’re moving through a fairly volatile financial market right now. But credit worthiness is never an issue. It’s just a matter of working with them to make sure that we can mutually arrive at a good solution for both companies.

Andy Kaplowitz - Barclays Capital

And one more question if I could. You’ve been talking a little bit about the Indian draglines over time, Tim. Any sort of update on what’s going on in India in general?

Tim Sullivan

Yes, I just got an update this morning. We’ve got four draglines and some shovels out there. That business I can tell you needs to happen between now and the end of March or it could get delayed into the latter part of the year. There are elections coming up in India in April. And this is all government, so if the elections do happen as planned in April, by the time they reshuffle the cabinet and make decisions, we are looking towards the end of the third quarter probably more into the fourth quarter.

So our people on the ground in India are monitoring the situation. The equipment purchases are going to happen. That’s never in question. The Indians always buy what they ask you to bid. It’s just very painful how long it takes at times. So we are hopeful that if we get some good news in March one way or the other on this business, we will get some things booked. If not, I am not optimistic it’s going to happen until the fourth quarter.

Operator

Your next question comes from Charles Brady - BMO Capital Markets.

Charles Brady - BMO Capital Markets

With respect to your last comment on the Indian market, if in fact those bookings get pushed out into the end of ‘09 rather than the first quarter here, that has no impact on your assumption for ‘09 revenue levels, correct?

Tim Sullivan

No, we discount the Indian business. We shouldn’t obviously, but we discount it almost entirely and take it as a plus when it does happen just because it’s so unpredictable.

Charles Brady - BMO Capital Markets

With respect to, you’re pushing out some of the surface and the underground business into 2010. On the surface side, where does that put you in terms of production, your capacity level now to at least 24, probably more than that to what you will actually build out in ‘09? Do you have any concerns that if you’re going to be at sub-optimal capacity that might hit some of the margin at all?

Tim Sullivan

No and you hit the nail on the head. We basically are going to maintain 2008 production levels. Our surface team is working right now actually to make sure that they optimize plants to effectively ship and maintain margin levels that were established in 2008.

Quite frankly, I hope a bit of an up-tick in margin opportunity and that is why our EBITDA margin is up a little bit, because I think we are going to get some efficiencies out of all that money we spent here in the surface plant in South Milwaukee.

Charles Brady - BMO Capital Markets

And then just a final question. What is the FX rate you’ve got embedded into your assumptions?

Craig Mackus

The biggest one is the euro and we are using 127. And as you know, we average in the 140s in 2008, low 140s.

Operator

Your next question comes from Barry Bannister - Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Just to be clear, Tim said your SG&A target would be 8% in ‘09 and your sales goal is flat. So that implies SG&A would fall from $244 million or 9.7% of sales in ‘08 to $201 million or 8% in ‘09. That seems a little bit extraordinary. How would you be achieving that?

Craig Mackus

Yes, we’re looking for those segments to be at around 8%. We do have the third segment that doesn’t generate any revenue and that’s the corporate people.

Tim Sullivan

That’s Craig and myself, we get paid a lot of money.

Craig Mackus

So when you look at the whole amount, the spend rate will be somewhat comparable to where we were in the fourth quarter, because that obviously is the two segments and the corporate. I think if you look at like the first two quarters and the third quarter we had a little bit high for a couple of anomalies, but we have been running around the $60 million range most of the year except for the third quarter. So, we see us staying around that level.

Obviously, it can fluctuate from quarter-to-quarter, some exchange rates, FX contracts that can move the needle a little bit from quarter-to-quarter. But generally, we are looking at for the current economic situation though really not having many new hires unless they are strategic in the organization, try to maintain the same levels that we are at today.

Barry Bannister - Stifel Nicolaus

Okay, so more like $60 million a quarter?

Craig Mackus

Yes, something like that, around there as a round number.

Barry Bannister - Stifel Nicolaus

And corporate would be additional?

Craig Mackus

No. Corporate is part of that.

Barry Bannister - Stifel Nicolaus

Okay, now you said your sales would stay flat at $2.5 billion and your backlog is $2.5 billion. About two-thirds of that is realizable in ‘09. So the implication is that your orders would have to fall to something like $800 million, down 75% year-over-year. Is that what you are saying?

Craig Mackus

No, I think that $800 million, that would be for what we need to achieve our sales plan in 2009. Obviously, some of what we book in 2009 would go into 2010. So we are looking to make sure we have activity in 2009 that will translate into at least at the minimum flat activity in 2010 unless the market starts to recover sooner. Then we can adjust our schedules accordingly. We want to make sure we maintain at least some consistency between the year or so. We’re trying to fill in 2010 and keep 2009 fairly stable.

Barry Bannister - Stifel Nicolaus

Well, you are still planning, though, just over 60% of the existing backlog burning in 2009, right?

Tim Sullivan

Yes, that’s correct.

Barry Bannister - Stifel Nicolaus

So then to be flat on sales, you would only need the net difference to be an orders number of maybe $800 million to $1 billion?

Craig Mackus

That’s correct, yes.

Tim Sullivan

That is the book-to-bill number. That’s correct.

Barry Bannister - Stifel Nicolaus

Which would imply a 70% or a 65% type drop in year-over-year orders and I know the world is kind of paranoid schizophrenic now, but isn’t that a little extreme?

Tim Sullivan

A little conservative, I think, and that’s why I say we probably have to readjust things and look at things at mid-year, but that is conservative. But we want to make sure that we don’t have to undo what we’ve built up here either.

Barry Bannister - Stifel Nicolaus

All right, then just lastly, would you give us the actual dollars that gross profit was affected by the dragline erection cost in the fourth quarter and the sub-contractor issues that you enumerated?

Tim Sullivan

Yes, I’m not sure we can break those dollars out. We could I guess, but I’m not sure I want to.

Barry Bannister - Stifel Nicolaus

It was probably a point of margin or something. I mean can you give us, margin did drop in surface.

Tim Sullivan

It is about like that, I think. It was disappointing, Barry. Obviously we’ve talked about the fact that we are trying to ramp up our capability and go from three draglines a year to five draglines a year. And we are bringing some new guys in from a subcontract standpoint and we had a couple fumbles out there that cost us some money. You’ve got to manage these things very, very carefully on draglines, because a hiccup here and there can add to that kind of a number as far as a hit to the margin.

Barry Bannister - Stifel Nicolaus

Okay, we will follow up later. Thanks a lot, guys.

Operator

Your next question comes from Kent Green - Boston American Asset Management.

Kent Green - Boston American Asset Management

My question pertains primarily to use of the cash and I know the acquisitions, but it seems that you’re going to be generating quite a bit of cash this year. What about share buybacks, reduce debt? What’s are the priorities besides acquisitions?

Tim Sullivan

No share buybacks, no dividend increase. I think really most of the investors are on our stock, I think that this is true, I expect this company to grow. And if you go into a market like we’re going into right now, there’s going to be some very, very good opportunities to do that and we expect to do that. We will manage our cash carefully. And we as I mentioned in my comments, free cash flow for this year will be very robust and good. So we will be fine.

But we really believe that we have to take opportunities that present themselves in this type of a market to grow the business for not only the near, but medium and long terms. So we will be careful and we think we know what we’re doing here, but we want to grow the business, not necessarily buy-back stock or increase dividends or pay down debt either.

Kent Green - Boston American Asset Management

A follow-up question would be that what particular areas geographically or product line are you more interested in acquisitions?

Tim Sullivan

We are open to just about everything. The two acquisitions that we did make in the fourth quarter, one was in the United States, in Appalachia, and that was for our belt systems business.

The other business was in the Czech Republic, and that was a manufacturing and service facility in Ostrava, which is right in a very good area for a high degree of underground activity and very, very low cost labor. So that acquisition, I guess both acquisitions technically fall within more of our underground segment. The Ostrava operation in the Czech Republic will be able to service both surface and underground opportunities.

The one that was in Appalachia is primarily belt systems, which is a growth opportunity for us. I will tell you we are looking at a lot of things. It goes across all product lines and it goes basically around the world. We’ve got a pretty broad base of opportunity we are looking at right now.

Operator

Your next question comes from Robert McCarthy - Robert W. Baird.

Robert McCarthy - Robert W. Baird

I wanted to ask you about how to think about your production plan through the course of the year, Tim. If you are going to be flat on the revenue line for the year, and given that you were generally expanding production through the course of 2008, what does that imply for how production lays out if you will in 2009? Are you lowering levels now to keep it flattish or are you assuming that you can operate at current levels and that you might need to take out production later in the year subject to how the order environment works out or what?

Tim Sullivan

One of the things we’ve talked about over maybe the course of the last couple years, we do use subcontractors and those subcontractors are obviously used when we are ramping up quickly to assist with volume and with opportunities that we don’t want to miss.

From the same token, as we move into fiscal 2009, we will be bringing some of that sub-contract work back in, so we can balance off our workforce and make sure that we don’t have issues there. It’s really keeping what we have flat and moving the sub-contract around to make sure that we’ve got balance loads going through our shops.

Robert McCarthy - Robert W. Baird

Okay, so that will help support profitability. How do we think about revenue comparisons as we move through the year?

Tim Sullivan

What do you mean revenue comparisons, Rob?

Robert McCarthy - Robert W. Baird

Well, your revenue grew steadily through the course of 2008. Do we look for your revenue to be roughly flat in each quarter of 2009 or do you expect to start out with positives that go negative or vice versa?

Tim Sullivan

Well, it’s always a little choppy. First quarter is probably going to be a little bit light on revenue, which is typical for us. We said we tend to have a pretty strong fourth quarter in revenue and obviously that was demonstrated in our numbers.

Robert McCarthy - Robert W. Baird

Yes and then the seasonal.

Tim Sullivan

Right, but relatively flat. I mean, we’re going to try to maintain as much flat revenue as we can. A lot of that is going to be based on the book-to-bill, how the parts business hits, and that comes kind of in bits and starts too. Sometimes we get these big orders that come in on top of us, but it’s going to be we think by the way we’ve managed the backlog and moved some of that work into 2010, it’s going to be a relatively flat, consistent performance quarter-to-quarter as we move through 2009.

Robert McCarthy - Robert W. Baird

And then, understanding of course that the after-market business won’t be nearly as cyclical as new machine orders might be, there’s still some level of backlog, sort of minimum level of backlog that you need to have to run the business at a $2.5 billion revenue level.

What I’m getting at is you had a previous question about order levels needed to sustain backlog above zero, but you’re not going to run backlog down to zero. So is there a way to talk about that, Tim, in a way that would help us understand sort of what kind of order activity needs to occur to support the outlook?

Tim Sullivan

Well, obviously to support a $2.5 billion revenue stream we need to have a backlog approaching as we move into any particular year about half of that. I think we are comfortable now that that’s the right number for this year. We hope that we have a strong enough first half, first three quarters of this year with some new machine activity to build that backlog so that we can at a minimum flatten out 2010 as well. It’s all going to be based on the activity we have.

The good news is we have had some pretty good activity here in the first quarter. Is that going to sustain itself through all four quarters of 2009? Hard to say right now, I think once we find out what the pricing is going to be like out there internationally in the next few weeks, that’s going to settle things out.

People are really sitting back and waiting right now, letting inventories run down, letting the price negotiations finalize. When those prices are done, you were going to see a lot more firming I guess of purchasing plans from the big producers out there. They will get a better flavor for what their fiscal years are going to look like, and then we hope that it won’t be as bad as some people think it’s going to be. I think it’s going to be reasonably okay.

Robert McCarthy - Robert W. Baird

Okay, then if it’s okay, I would like to ask just a couple sort of modeling-oriented questions. Can you share with us what kind of revenue carry over in ‘09 that we will get from the two small acquisitions you did in the fourth quarter?

Tim Sullivan

Yes, you’re not talking a whole lot, but you are going to be in the range of $50 million to $100 million in revenue between the two. And they are obviously new businesses for us and we think that there’s growth opportunities. We are going to be fairly conservative with our projections for 2009, because of that obviously new managers going in place and that type of thing. But we think minimally $50 million and could stretch into the $75 million to $100 million if everything goes according to plan this year.

Robert McCarthy - Robert W. Baird

Okay, and Craig, in the way you’re looking at cash flow for the year, can you give us an idea of what you would expect to see in terms of change from traditional working capital, and then specifically customer advances and deposits, progress payments, etc.?

Craig Mackus

Our internal plans for inventory, as you know, I’ve mentioned we did 3.1 turns. We have set plans and goals to get to 3.5 turns. Obviously, if you do the math that’s a significant amount of working capital you generate. The receivables days were probably in the 70, 71 range which was as of the end of the year, which is higher than what we would like. We would always like it to be lower, but there’s so many facts and circumstances, and the numbers are sort of big that if you look at any point in time, it can kind of fluctuate.

If you get a $20 million or $30 million payment from one customer in one day, like at the end of the month versus the next day or the next quarter, it’s going to fluctuate with the numbers. So receivables are high at the end of the year. It theoretically should be lower as you go forward, but it’s all timing at any point in time. So, receivables were probably, I wouldn’t recommend a lot of cash generation for that, although it could happen. It’s all timing.

On the advance payments, we are continuing to get advance payments from our customers. I would say in this credit situation, it may be a little more difficult than it has in the past to get cash. But so far, we are still getting progress payments under the normal process we have been in the last couple of years, but we will have to monitor that closely. That could possibly be less cash for us.

Robert McCarthy - Robert W. Baird

And you’re hoping you can get to that 3.5 turn level maybe as a run-rate by the end of the year?

Craig Mackus

By the end of the year, yes.

Operator

Your next question comes from [Joseph Hubage] - Private Investor.

Joseph Hubage - Private Investor

Sir, I have a couple of qualitative questions, not with the fine points that a lot of these analysts ask you. And they sort of generate in the direction of government intervention and the trending of the world towards a hybrid of capitalism and socialism. And sort of in the light of the low price of your stock, which is at three-year lows, and also in conjunction with that, the vulnerability of your company to take over and supplemented by the idea that the U.S.

Department of Energy recently outlined the possibility of coordinated research and development activities with the Chinese government concerning pre-combustion, post-combustion, and carbon sequestration studies for the coordination of carbon-emitting electricity generation in a global sense.

Now, it seems to me that at this price level, your company is vulnerable to takeover. And in that light, would be at a price of 20. That would represent only 8% more that China Aluminum invested in Rio Tinto. So is there any office in your company that monitors predatory takeover capabilities? And is there the idea that maybe Bacyrus itself would consider also in the light of shareholder benefit the sale of Bacyrus outright above $20, $30, $40?

Tim Sullivan

Well, I can’t really comment on the possibility of this company being purchased and really I can’t address that question. Anything could happen in any market. We think that we are fine where we are at right now. We think the company has got a great deal of value left for U.S. investors. We are not really worried about that opportunity or possibility. I’ll tell you, we’ve only got a few minutes left. I am happy to talk with you about that privately if you would like to give me a call.

Joseph Hubage - Private Investor

I am a private investor, sir. I don’t have your number. I could call your switchboard.

Tim Sullivan

414-768-4099.

Operator

Your next question comes from Seth Weber - Banc of America/Merrill Lynch.

Seth Weber - Banc of America/Merrill Lynch

Craig, going back to your answer to a previous question where you talked about a little bit more difficult to get cash and progress payments. Are you guys doing anything differently to vet the backlog and to sort of go through your existing order book to make sure that it’s secure? Are you doing any new processes these days?

Craig Mackus

Well, we did undertake actually almost three months ago when the credit crisis was starting to actually go through customer-by-customer to make sure that we weren’t exposed to one, cancellation of backlog; and two, from a credit standpoint, make sure that the customers we had exposure to had good credit ratings or we had letters of credit to back up the sales activity that we had.

So yes, we actually went through in both surface and underground and have gone through that process and that’s why we know we haven’t had the cancellations, because we did a fair amount of work on that and feel that we got strong indications that won’t occur in the near future either. The answer is yes we undertook a special study.

Seth Weber - Banc of America/Merrill Lynch

Maybe if I could flip over to Tim, can you talk about the competitive environment in the local market in China, what you are seeing from the local manufacturers there?

Tim Sullivan

Yes, it ebbs and flows in China. We had a good run there for a while in the underground business and then they started supporting their local producers. A lot of the local producers are stumbling and some of the more high production mines and we are cautiously optimistic that we are going to have some more opportunities in that market as we move through 2009 and 2010. But it’s going to be one of those tough markets.

We discounted to some extent on our projections just for the fact that it’s difficult to do business there. But we have some opportunities there in some of the high production mines that we think we can sell some product here as we move through 2009.

Seth Weber - Banc of America/Merrill Lynch

So, you are kind of out of the roof support. I mean you’re talking about things like long-walls and --

Tim Sullivan

Yes, virtually everything in China is long-wall, so it is roof support, AFCs, and shears primarily.

Seth Weber - Banc of America/Merrill Lynch

Okay, I thought the Chinese had pretty much captured the roof support business.

Tim Sullivan

Well yes, but again, one of the things that they don’t have that we have is the automation and control technology. And then the high production faces, they have not been able to replicate or duplicate I should say our technology and they are not performing very well. So we’ll see how that goes. I think we still think we’ve got opportunities there.

Seth Weber - Banc of America/Merrill Lynch

Okay, then just lastly on your comment about wanting to go from three draglines to five, is that based on increased interest from your customers or you are just kind of projecting out where you see the market maybe going over the next couple of years?

Tim Sullivan

It’s based on our five-year projections on what customers have told us that they want to buy. Obviously, some of that has been put on hold right now to a greater extent. But we still believe that there is some decent dragline activity out there and it’s going to be required. These mines are going deeper and deeper and as they go deeper, they need to get bigger draglines.

So we’ve established that subcontract network. We obviously stumbled a little bit in execution, but we still believe that there is some strong dragline activity that’s going to be delayed somewhat.

Operator

Your next question comes from Steve Barger - KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets

I hear what you are saying about the bigger installed base of equipment likely leading to solid after-market revenue in 2009. But do you have a sense as to what the aftermarket sensitivity is to production declines i.e., a 5% production decline translates to X decline in after-market?

Tim Sullivan

Yes, well we run those sensitivities and that’s why we’ve been somewhat conservative with our book-to-bill on after-market for this year. But, I think the thing that we cooked into those projections is the fact that we’ve had such a still a very, very large increase in the installed base. That has a fairly significant effect on what we believe the book-to-bill will be on after-market. Even though the production levels are down, machines are still running. Even if you have got a mine like Escondida where we have 14, 15 shovels, they are still producing copper ore and they still are using parts.

So that’s the beauty of the industry and it’s the beauty of having $30 billion of installed base. They will continue to generate parts and service business even if the pricing of the commodities is down significantly and even if the demand falters somewhat. And those are the sensitivities we run to determine what the book-to-bill would be on after-market for the year.

Steve Barger - KeyBanc Capital Markets

Okay, but as it stands right now, you are saying that the machine deliveries you’ve seen over the past few years should offset the sensitivity you would normally expect to see on a flat installed base when you see production declines?

Tim Sullivan

Correct, correct.

Steve Barger - KeyBanc Capital Markets

So, you are basically two-thirds of the way through the first quarter. Can you talk about the aftermarket OE mix that you are seeing in this quarter versus 4Q ‘08 or all of 2008? Is it essentially the same?

Tim Sullivan

Right now it is the same.

Steve Barger - KeyBanc Capital Markets

Okay and I heard the revenue and EBITDA guidance. You didn’t put out an EPS range, right? Unless I missed it.

Tim Sullivan

No, we usually don’t.

Operator

Your next question comes from Ben Elias - Stern Agee.

Ben Elias - Stern Agee

I have a question regarding the guidance that you have given and the fact that you are moving some backlog into 2010. You do want to maintain flat revenues from ‘08 to ‘09 and possibly keep them flat for 2010. What happens later in the year if orders don’t really materialize? What is the breakpoint in how you look at the world? Do you still want to keep ‘09 flat with ‘08 or do you want to make sure there isn’t a big, steep drop off between 2009 and 2010?

Tim Sullivan

Well, we’ve done everything we can with ‘09. In other words, we have got commitments out there to our customer base. We’ve been able to move what we’ve been able to move. We might have moved more if we could, but we didn’t, because we couldn’t.

If the order intake levels are not to the level of what they need to be to keep ‘10 flat with ‘09, obviously we will have to make some adjustments to our workforce and how we do business as we move towards the end of the year to prepare for that possibility. Been there before, done it, hope we don’t have to do it.

We know how to do it, quite frankly. We’ve been around for a long time, but our intent is to try to load as much revenue and earnings into that plan for 2010. And quite frankly, some of these bolt-ons that we are doing is to try to provide some of that cushion into ‘10 so that we don’t have to dismantle what we put together here in the last three or four years.

Ben Elias - Stern Agee

And when I look at the mix of business between original equipment and after-markets on the surface side, there aren’t too many quarters where original equipment is above after markets. It was this quarter, now was that because of some of the machinery that was idled and some slippage on contracts or was it just the volume of deliveries on the original equipment side?

Tim Sullivan

Yes, it’s a mix. Every quarter is a little bit different and obviously on the bookings side, dragline helps a lot as far as loading in backlog. But our business is little lumpy just because of the fact that we do build and make some very high capital type equipment. And that’s why we do have inconsistency between quarters. But all-in-all, it all flushes through to the end as we move through the year.

Okay, we are going to cut it off at that level to make sure that we maintain some discipline with our timeframe here. Obviously, we are always open to anyone’s calls and questions and feel free to call us if your question was not on this call. I think in general, we feel pretty good where we are at.

In some respects, I sometimes think like I’m standing here as a witness to a train wreck. We are currently witnesses only and as we move through 2009, we think we’ve put together the right plan for the right time as we establish and protect 2010 and start to build on 2010.

We feel pretty solid about our guidance. As I mentioned previously, we will be adjusting guidance at mid-year, if we do have some sustainability to the current demand that we have seen here already in the first quarter. With that, I appreciate everyone joining the call and your interest in Bucyrus and we will be talking to you again at the end of the second quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Bucyrus International Inc. Q4 2008 Earnings Call Transcript
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