Joy Global Inc. F1Q09 (Qtr End 01/30/09) Earnings Call Transcript

Mar. 4.09 | About: Joy Global (JOY)

Joy Global Inc. (JOYG) F1Q09 (Qtr End 01/30/09) Earnings Call Transcript March 4, 2009 11:00 AM ET

Executives

Sara Wilkins – VP, IR and Corporate Communications

Mike Olsen – EVP, CFO and Treasurer

Mike Sutherlin – President and CEO

Analysts

Guo Shu [ph] – Barclay’s Capital

Henry Kirn – UBS

Philip Sharon [ph] – JP Morgan

Mike Gallo – CL King

Charlie Brady – BMO Capital Markets

Seth Weber – Bank of America Merrill Lynch

Mark Koznarek – Cleveland Research

Joel Tiss – Buckingham Research

Chris Weltzer – Robert W. Baird

Joe Box – Keybanc Capital Markets

Jerry Revich – Goldman Sachs

Barry Bannister – Stifel Nicolaus

Thomas Giovine – Giovine Capital Group

Alex Blanton – Ingalls & Snyder

Dan Stein [ph] – Robotti

Operator

Good morning. My name is Sade, and I will be your conference operator today. At this time, I would like to welcome everyone to the Joy Global first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator instructions) I would now like to turn the call over to Sara Wilkins, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Sara Wilkins

Good morning and welcome everyone. Thank you for participating in today’s conference call and for your continued interest in our company. Joining me on today’s call are Mike Sutherlin, President and Chief Executive Officer of Joy Global; Mike Olsen, Executive Vice President, Chief Financial Officer and Treasurer; and Sean Major, our General Counsel and Secretary.

This morning, Mike Olsen will begin with some brief comments which expand upon our press release and which provide the results of the fiscal first quarter 2009. Mike Sutherlin will then provide his insights into our operations and our market outlook. We will then conduct a question and answer session and would appreciate it if you would limit yourself to one question and one follow up before going back into the queue. This will allow us to accommodate as many questioners as possible.

During the call today our executives will be making forward-looking statements. These statements should be considered, along with the various risk factors detailed in our press release and other SEC filings. We encourage you to read and become familiar with these risk factors. We may also be referring to a number of non-GAAP measures which we believe are important to understanding our business. For a reconciliation of non-GAAP metrics to GAAP as well as for other investor information we refer you to our Web site at www.joyglobal.com.

Now I would like to turn the call over to Mike Olsen. Please go ahead Mike.

Mike Olsen

Thank you, Sara. Let's review the results for the first quarter of the 2009 fiscal year. In this quarter there were a number of factors which make comparisons to the first quarter last year a bit difficult. These factors include, foreign exchange rate movements, the inclusion of the operating results of the Continental acquisition, and order cancellations.

Over the next several minutes I will try to make these comparisons as clear as possible. Net sales in the current quarter were $755 million compared to $640 million in the first quarter last year, an increase of 18%. During the current quarter, net sales were reduced by $66 million due to the effect of translating sales outside of the United States denominated in non-US dollar currencies into US dollars. At the same time, the current quarter benefited from the inclusion of $80 million in sales of conveyor products from the Continental acquisition, which took place in the second quarter of the 2008 fiscal year. Excluding these two factors, net sales for the underground and surface mining equipment businesses increased approximately $100 million or 16%. The underground mining equipment business increased 28%, while the surface mining equipment business was substantially flat.

Net sales of original equipment for the underground equipment business increased by approximately $70 million; while sales of aftermarket products and services increased by approximately $30 million. Sales in the current quarter were strong in the United States, Australia, and South Africa more than offsetting softness in China and Eurasia.

For the surface mining equipment business, a slight increase in aftermarket revenue was substantially offset by a similar decrease in original equipment sales. Increased sales in North America were offset by lower sales in South America and Australasia.

Operating profit in the first quarter was a $135 million compared to $111 million in the first quarter of fiscal 2008. This $24 million increase in operating profit included a $10 million reduction due to the foreign currency translation discussed in connection with our net sales and it also included a $3 million benefit from the operating profit of the Continental conveyor sales. Including these items, operating profit as a percentage of sales increased from 17% in the first quarter last year to 18% in the current quarter. The improvement in both the operating profit amount and percentage was a result of the increase in net sales and the control of costs.

Operating profit for the underground mining equipment business increased from $63 million in the first quarter a year ago to $87 million in the current quarter, with the return on sales percentage of 22% in the current quarter compared to 18% last year. This improvement was due to increase in net sales and our aggressive management of spending during the current quarter. As was the case with net sales, operating profit for the surface mining equipment business in the current quarter was flat compared to the first quarter of fiscal 2008.

Similar to the underground equipment business, we closely monitored spending during the current quarter. Net income in the first quarter was $86 million, $0.83 per fully diluted share, compared to $71 million or $0.65 per fully diluted share last year. The effective tax rate was approximately 33% in both periods. We also had a cash tax rate of 23% in the current quarter versus 21% in the first quarter last year. New order bookings in the current quarter were $538 million compared to $870 million in the first quarter a year ago. Current quarter bookings were reduced by $84 million due to the impact of foreign currency translation and by a $161 million of order cancellation. The current quarter included the benefit of $68 million of bookings for the Continental conveyor products.

During the current quarter, $95 million of orders were cancelled from surface mining equipment customers, with $61 million associated with original equipment and $34 million associated with aftermarket backlog, while the underground equipment business reported $59 million of original equipment orders canceled. In addition, the crushing and conveying business reported a $7 million order cancellations during the current quarter.

Excluding foreign currency translation and cancellations on a basis comparable with a year ago, the company's surface and underground equipment businesses received approximately $700 million of new orders in the current quarter. On this basis, original equipment orders were approximately $230 million less than they were in the first quarter last year, reflecting the advanced ordering which was likely to have taken place in the 2008 fiscal year as well as the current softness in the original equipment demand. During the quarter, aftermarket orders for the underground equipment business were 17% greater than orders in the first quarter last year. In the same period, aftermarket orders for surface equipment were substantially flat after excluding a favorable backlog adjustment.

Backlog at the end of the first quarter was just below $3 billion compared to $3.2 billion at the beginning of the quarter. During the first quarter of 2009, we used $36 million for the operations compared to generating $86 million in the first quarter last year. This difference was primarily due to increases in inventories in anticipation of increased shipments in the next several quarters and a slowdown in the amount of customer advanced payments associated with original equipment orders.

At this point, let me conclude and turn the discussion back to Mike Sutherlin.

Mike Sutherlin

Thanks, Mike, and thanks for that financial review. I would like to add my welcome to those on this call. I think our press release gave a comprehensive overview of our markets, and I do not feel it’s necessary to recover that ground, but I would like to discuss how we see the forward markets impacting our business and the strategies and actions we are taking to adapt to this outlook.

There are clear signals that our markets are decelerating. Commodity demand is down and prices have fallen. This is reducing customer profitability and cash flow and they are deeply cutting their 2009 capital budgets. All customers are revising their capital expenditure levels down. Some of the announced cuts have been in the 50% range.

The cancellations we recorded were disappointing, but not totally unexpected. Like others, we have no cancellation clauses in our contracts for major equipment, such as shovels and longwall systems and we continue to enforce these clauses. However, the current market conditions go well beyond the scope of normal negotiations and the cancellations have been in conjunction with a series of other drastic actions taken by the customer. In these cases, I do not think it's effective or productive to pursue lengthy legal action for recovery. Conversely, I believe the commitments in goodwill we receive in these settlements will pay strong returns later. Especially, considering all of our business is with repeat customers. And our advanced payment policies keep us cash positive as we unwind these orders.

The cancellations we have received in the first quarter and to date are within the backlog risk ranges that we previously disclosed, both by category and by magnitude. The Central Appalachia cancellations were all for room and pillar equipment, and the aftermarket cancellations were primary for scheduled machine rebuilds. The rebuild cancellations were the result of the customer accepting the scheduled delivery of new shovels and parking their older shovels that would have been rebuilt in 2009.

We previously indicated an overall risk exposure of 5% to 15% of total backlog, and the first quart cancellations are about 5% of backlog. The remaining risk is substantially reduced by this quarter's cancellations. More importantly, the cancellations will not affect the revenue levels we have guided for 2009 and will have limited impacts on 2010. In addition, we are working to move later deliveries into the slots that these cancellations have made available. Although the customers revised capital budgets are a significant step down, they will still support the completion of many of the projects that are underway. This roughly covers orders we have in backlog plus some of our future prospect list.

The next phase beyond this includes projects that have been approved but not yet started, and these have generally been put on hold for re-evaluation. This re-evaluation will use a much lower forward commodity price forecast, and therefore I expect many of these projects to be slowed and some to be canceled. If market conditions do not improve, we would expect customer capital expenditures beyond 2009 to step down further to maintenance or sustaining levels. Our experience from prior cycles indicates that demand for original equipment can decline by as much as 75% from previous peak levels. If conditions persist, this could eventually determine our level of original equipment shipments. The remaining 25% of original equipment demand is not only driven by the projects underway but also by operating cost improvements that come from replacing older, less productive, less reliable machines with latest technology.

This is consistent with our experience in prior down cycles. For example, we introduced the 4100 model shovel and the AC-powered and high-voltage underground machines during down markets. So it's the right time to continue selected R&D investments that have line of sight to top or bottom line impact. Controls and automation advances allow automated sequences that are less dependent on operator skills, much like upgrading our factories from manual aides and drills to CNC machining centers, which we did in the 1980s and the 1990s. Controls and automation also enable manless operating faces and support remote condition monitoring and remote diagnostics. These technologies have already proven to significantly increase productivity and safety and yield rapid payback.

We expect to see more demand for this new technology with increased customer focus on operating efficiency. As a result, we are continuing our development of longwall automation, semi-autonomous shovel operation, and spot services to enable us to deliver technology with reliability. In fact, Smart Services is where automation and aftermarket come together for this company.

We are also continuing the development of the in-pit crushing and conveying system or IPCC. This could enable major reductions in the highest cost and service mining operations, the truck fleet, and will allow production capacity to increase to the loading rate of the shovel. Several customers have already indicated an interest in partnering with us for field trials in 2010. We will also continue to invest in our operations excellence initiative. This initiative has improved process efficiency and as allowed us to increase the output of existing factories. To date, it is implemented at less than half of our facilities and therefore offers significant upside with short payback. In addition and more importantly, this initiative will be pivotal to adapting to the decelerating markets ahead by allowing us to meet demand with fewer factories.

We see the emerging markets in general and China in particular to have growth potential that is high in both the near and the long term. We continue to make strategic investments in China. The P&H gear components factory on our Tianjin campus is in ramp-up phase. With this factory online and an established fabrication outsource partner in China, we eventually will be able to deliver shovels from China. This gives us a key advantage in the local China market and a diversified manufacturing base to better serve the global markets.

The Shengda acquisition is small, but strategic. To meet its demand for coal and to be able to close the dangerous township mines, China needs significant growth in production from the provincial mining companies to add to the growth it is already getting from the state-owned mining companies. Shengda gives us access to this large, important market with a very strong growth potential.

Our aftermarket is critical to serving the markets we see ahead. The aftermarket order rate has remained strong and I expect it to continue do so on a relative basis. This reflects the strength of our aftermarket infrastructure and our aftermarket services. Our aftermarket supports the highest levels of machine availability, measured both by individual machine and by fleet average. The benefit for the customer for additional production hours from mission-critical equipment is significant, and this creates a strong preference for our original equipment. This preference can be seen in our original equipment lead times, which are consistently longer than alternative choices. By relative strength, I mean that the aftermarket will follow the changes in production levels, which have historically been modest. Based upon past-cycle experience, we could see some demand decline under current conditions, but not likely beyond single digit percentages.

And finally, our strong financial position will be a major asset going forward. Our debt-to-market cap is low and we do not have any loan repayments until late 2011, and that is only $110 million. The next step of that is not until 2016, and in the meantime, we will favor the accumulation of cash over other discretionary uses as a hedge against the uncertainty in the markets ahead.

Given this outlook and our current backlog position, we expect to deliver our previous revenue guidance of $3.5 billion to $3.7 billion in 2009. Under current market conditions, we would expect 2010 shipments to be lower than 2009. We expect to carry backlog into 2010, and therefore, its revenue should be higher than the incoming order rate. And if the current market conditions persist that long, we could see 2011 as the year that revenues align to the incoming order rate.

Before concluding this, I want to inform you that Mark Readinger, the President of our P&H Division, has decided to accelerate his retirement plans and will be leaving the company. Mark has led P&H through an unprecedented period of growth, improvement and transformation, and he will be missed and his retirement is well earned. He also leaves behind a talented and experienced management team that will keep P&H on course as we search for his replacement.

So with that, I will now turn the call back over to the question and answer session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Andrew Kaplowitz of Barclays Capital.

Guo Shu – Barclay’s Capital

Hi, this is actually Andy’s associate Guo Shu [ph]. Can you hear me?

Mike Sutherlin

We hear you fine.

Guo Shu – Barclay’s Capital

In terms of the amount of backlog that you mentioned is at risk, are there any changes as in additions to assumptions this last quarter? In other words, is that percentage now 10% or less given the 5% in actual cancellations in the first quarter?

Mike Sutherlin

That would be correct. We believe that the risk ranges we identified earlier are still valid. The cancellations we have taken or our reduction from those and therefore we have reduced the ranges of risk that remain in backlog.

Guo Shu – Barclay’s Capital

How much of that category is scheduled for delivery in 2009 versus 2010 and beyond?

Mike Sutherlin

The cancellations we took?

Guo Shu – Barclay’s Capital

No, the direct.

Mike Sutherlin

The risk? It is more heavily weighted to the back end of our backlog. So we look at the second half of 2010 and into 2011, where we see the majority of the risk.

Guo Shu – Barclay’s Capital

Okay, got you. And you mentioned in the press release that aftermarket could see some pressure if mining production is sustained to the 20% decrease in production. So can you give us some idea of how much aftermarket sales and orders could decline if production remains down 20% in all of 2009?

Mike Sutherlin

Well, first we don't see the aftermarket down 20% on average, the extreme we have is in met coal and in iron ore, which are down 15% to 20%. We see copper down around 4% to 6%; thermal coal is down a modest amount, sort of in the 1% to 2%. So, across the commodities, the weighted average of those reductions in the aftermarket is still in the mid-single-digit range. So we have 20% as high point in the range rather than indicative of the range. So let us take a 5% decline in overall production levels, average across all commodities, all regions and we would expect to see a decline in the aftermarket revenues reasonably consistent with that. Maybe earlier in the process, a little bit more of a decline as they sort of deplete the pipeline, but on a sustaining level, we would see those reductions pretty consistent with the reduction in production levels.

Guo Shu – Barclay’s Capital

So what about aftermarket margins? Are you seeing any pricing pressure from customers with that weak production market? As in, do they have leverage in negotiating a lower price on existing orders versus the cancellation?

Mike Sutherlin

Well, we only see pricing pressure from our customers in weak markets. So yes, we continue to feel that we deliver a significant amount of value to our customers. We focus our business on value for money rather than price per product. In 2007, when the US underground coal market was weak, very weak for us, we still passed through price increases because we still had cost increases coming through and we didn’t feel that we should have to eat those cost increases in that environment. So we are pretty protective of our margins, we're pretty protective of the value that we add to the customer. But at the end of the day, it is always a negotiation back and forth, but I believe that we will hold pretty much what we have.

Guo Shu – Barclay’s Capital

Okay, thank you.

Operator

Your next question comes from Henry Kirn of UBS.

Henry Kirn – UBS

Good morning guys. Could you talk a little bit about where your equipment sits in the mine purchasing cycle? If CapEx of the mine is down 50%, could you talk about what they cut first and what holds them back?

Mike Sutherlin

Well, the first cuts are going to get on the CapEx budget. These are cuts in the 2009 CapEx budget. So, no one wants to leave the stranded investments or a project that is well underway and if you mothball it, you may actually lose the money you have invested because you would then have to go back later and rework everything that you have done up to date. So the tendency will be to not start new projects rather than to stop the projects that are underway and that is in fact what we are seeing, the other projects are underway tend to be completed.

New mine expansion projects won't be started. We're seeing a lot of the projects that we had queued up, particularly in Australia, we are seeing a number of those bigger Greenfield project expansions being pushed back to later years and that seems to be pretty consistent with the reduction in CapEx. We are seeing a reduction in the incoming order rate for our equipment, more pronounced on the surface side than the underground side, and I think the surface side is more pronounced because we had a book-ahead effect in 2008. We had an extraordinary number of shovels we booked in 2008, but because of longer lead times and customers wanting to make sure they had slots; so in effect, we got orders in 2008 that we would have normally gotten in 2009 or 2010 if the customer could have ordered on his preferred timing level.

So I think we're going to see a little bit of the effect of the book-ahead adjustment, and overall I think the reduction in CapEx that we will see for mining machinery will probably be pretty consistent with the reduction in the CapEx budget. I don't think they're going to be any worse than the reduction in the CapEx budgets and I wouldn't go out on a whim and say they're going to be better.

Henry Kirn – UBS

That is helpful. And in terms of your production capacity; could you talk a little bit about the opportunity to in-source components today that you may be outsourcing to stop some of the excess capacity or maybe on the other side of the coin, opportunities to move production to your lower-cost regions while you are running flat out?

Mike Sutherlin

Well, I will answer those in reverse order and as we look at the markets ahead and my view of the markets right now is that this is not going to be 12 or 18 months and bounce back. This is going to be a longer cycle to work our way through. And with that longer view, we're going to have the priority on closing down some factories and consolidating operations and other factors rather than reducing everything across the board and running them at half capacity rates. So we will use this as an opportunity to do that and in that process, we will look at cost productivity, efficiency factors and we will obviously take out of production the factories that are on the bottom of the performance list and favor the move of production to the factories that are on the top of the performance list. Regardless of what those reasons are, that will be a driving factor. We will look at that over near-term and long-term as well. So we have built up a significant investment in China; and we would expect China to do very well as we reevaluate where we're going with production.

Remind me again what your first question was –

Henry Kirn – UBS

It was on the opportunities.

Mike Sutherlin

Yes, the outsourcing. Yes, we do two kinds of outsourcing. We do some overflow outsourcing, where we have bottlenecks and we will send the work out and that is definitely going to come back in. We also have long-standing outsource partners that we have used and we will meet them at the end of this cyclical period. When the recovery starts, we will need those guys again. So we're not going to cut off what has been a very strategically effective method of increasing our capacity by outsourcing the low-value add. I don't think we can bring the low value add back into our factories cost effectively and we certainly can do that in the short run. So we will get some pullback from the overflow kind of work that we send outside, but where we have strategic partners that are doing work for us that they can do more cost-effectively than we can, to me it doesn't make sense to try to bring that work back in and be less efficient and higher cost of doing that. So some improvement from outsourcing, but we are just not going to go to the outsourcing partners and have them pick up all of our slack.

Henry Kirn – UBS

Okay thanks a lot.

Operator

Your next question comes from Ann Duignan of JP Morgan.

Philip Sharon – JP Morgan

This is Philip Sharon [ph], Ann Duignan’s associate.

Mike Sutherlin

I thought you had kind of a low voice there.

Philip Sharon – JP Morgan

My first question has to do with your backlog and bookings. So in your release, you noted that lower demand for original equipment could persist for a period longer than that covered by your current backlog. The article also points of scaling the business down to prepare for a range of market conditions in 2010. What is the range of market conditions that you're preparing for?

Mike Sutherlin

Well, we're not guiding 2010, but 2010 will be a year where we will have an incoming order rate that is lower than we had in 2008. I think the first quarter, we have some prime initiatives and the orders we took in the first quarter, so it may not be totally representative but it is a data point that we should all consider. 2009, we will be working down backlog because the order rate will be less than our shipping rates. We will carry some of that backlog into 2010 and my view right now is that 2010 will be a year where we will continue to work down the backlog we carried into the year and probably by the end of 2010 or by the second half of 2010, we will be working close to the incoming order rate.

Philip Sharon – JP Morgan

Okay. And just to push this a little more; how bad could revenues and margins be in 2010 and what is the risk of losing money?

Mike Sutherlin

We have model this out in our plans and preparations to downsize our business to the size of decelerated markets going forward. We have done quite a bit of modeling and based upon our own experience, we believe that there is a likelihood that market conditions continue that we could see reduction in our original equipment order rates by 75% from the peak levels of 2008. And again, based upon prior experience, we would expect the aftermarket decline to be in the range of 10% of those peak levels of 2008. And we would expect that market to have some margin compression. And when we put that all together, we still believe that we can deliver our objective of having EBIT margins 10% or greater at the top. We remain confident that we can do that under those kinds of assumed conditions on the top line.

Philip Sharon – JP Morgan

Okay. And my follow-up is what levels of working capital will the company target given the potentially challenging outlook in 2010?

Mike Sutherlin

The working capital for 2009 is going to be a little bit different than what we have seen in prior years. I will give you an overview and then Mike Olsen can then talk about some more details. But this business, for the last five or six years, has been getting some very strong advance payments tied to the strong levels of original equipment bookings. So for those last several years, we have been actually seeing advance payments increase on our dollar sheet year-over-year. In 2009, with lower levels of original equipment bookings, we expect the advance payments to slow and we expect the balance of advance payments on our balance sheet to decline. So we will have a period in 2009 where advance payments will deplete working capital rather than adding to working capital. So this will be a changing year for us in a lot of ways but it will certainly change the flow of cash that our working capital – but the other parts of working capital we would expect payables and receivables to maintain their current ratios and we would expect inventory to hold, in a decelerating environment, we would expect the inventory returns to hold with the AR, but we would expect to give up ground on advance payments.

Mike, maybe you can give a little more granularity on that?

Mike Olsen

Yes, and I think that a summary level, what our expectations are is that working capital that would in fact exclude cash and short-term borrowings, that is our definition of working capital. We would expect that as a percentage of a rolling 12 month sales number to be less than 20%.

Philip Sharon – JP Morgan

Okay, thanks very much.

Operator

Your next question comes from Mike Gallo of CL King.

Mike Gallo – CL King

Hi, good morning. The question I have is just sort of a follow-up on the trough margin question. I was wondering I guess as you look at some of the things that you can do to repair for reduced demand obviously into 2010 and 2011, I was wondering if there is any further specificity you can give us on some opportunities where you see to reduce cost or rationalize a higher cost capacity and you know, what kind of magnitude of cost do think there would be potential to take add as we head into 2010 or 2011?

Mike Sutherlin

We look at all options. We have done I think a good job of holding the cost down in the SG&A area. In fact, if you go back and look at our business we have added some SG&A cost with the Continental acquisition, we added some with the Stanmore acquisition a couple of years before that. So we have really done a pretty good job of managing and controlling costs in the SG&A area. So we probably have some efficiencies there but that is not going to be overly dramatic. It really gets down to the overhead costs associated with operating facilities. In a lower market, we would operate fewer facilities to get our production levels match the demand and in that process, we would see some significant reductions in costs associated with less facility overhead. So that is where we are looking, we're looking at higher low-cost areas, we're looking at traditional and emerging markets and obviously all things being equal, we want to be located where our costs are lower, we also want to be located where we see the market trends moving into the future as well.

We know if you on those numbers, 75% reduction in OE and 10% reduction in aftermarket, that is going to be a significant impact on the business. So we have to take out a significant amount of cost. We would do that under the presumption that we have got to reposition our business to that level, that trough level for an indefinite period of time and then we would grow the business back from there as the market improves. We are not going to hold on to cost under the assumption that the market is going to come back in the near-term. We're going to reposition ourselves for the long-term. We've got some R&D projects that we have been working on and some of those will – we will push some of those to the backburner, we will be very selective I think I mentioned some of the automation projects.

There is a lot of other stuff going on that we will defer. We have been working on a dragline project, we've got some prospects under way, but by the time we get to mid-year, if we're not close to gain order bookings for dragline for example, we will push that project, we will mothball it where it is and put it on backburner until we get to position where we think there is a realistic activity that would translate into an order before we put more dollars or put more effort into that. So I'm not going to give you a country-by-country or facility-by-facility build. You get an idea. We are just prepared to get those costs down to reach that 10% EBIT at trough conditions of revenue and we have an idea of where some of those cost cuts need to come and we are prepared to move in those directions.

Mike Gallo – CL King

Very helpful. Thank you.

Operator

Your next question comes from Charlie Brady of BMO Capital Markets.

Charlie Brady – BMO Capital Markets

Good morning. With respect to the order cancellations in the quarter, can you give us a sense or timing as to when those hit beginning of the quarter, end of the quarter and I'm assuming that subsequent to the end of January, there have not been additional cancellations?

Mike Sutherlin

Yes, last question is yes, you are correct on the last question; there have not been subsequent cancellations. In terms of timing, I think that those were primarily identified in January. So we had – one case was sort of late in January but I think on the aftermarket stuff we were talking to the customer about how to take out some of those rebuilds, because we already got an agreement from one customer to keep some new shovels and then to part the older shovels and so we tried to work with them on how to take the rebuild schedule and push the rebuild schedules back out. So that process was going on probably at the end of last year, but it didn't really get finalized until January and then the iron ore cancellation was late in January.

Charlie Brady – BMO Capital Markets

And with respect to the margins, on the incrementals on the way up, obviously pretty healthy; can you give us a sense of what you think the decremental margins on the way down is, I guess particularly if we get into really a drop off in the second half of 2010, if the order doesn’t get back-filled or the backlog – you are still backing on new orders, what those decremental margins might be if you see OE dropping down to that, down 75% from peak levels in 2008 and the aftermarket down to the amount that you have talked about?

Mike Sutherlin

Let me give you my view and then they will ask Mike to give you his because he's got a lot more, he's closer to that in the better feel, but we have looked at incremental margins in the 20% to 30% range, probably 30% in the earlier part of the cycle, 20% here in the later part of the cycle, or closer to the 20% number in the later part of the cycle. Going forward, we would – again based upon what I've seen with his business, we would look at those decremental margins to be probably in the low 30% ranges. This won't get the same leverage going down as you get going up so I wouldn't say 40%, but I would say 35% decremental margins.

Mike Olsen

Yes, I certainly would agree with that. As we have talked on earlier calls, I have been with the business for 30 years now and to go back to the downturn that we saw in the early 80s and I think a business that would in fact manage those decremental, those declining margins, if you're managing that in the mid-30s, I think you are doing a very good job at managing the business going into the down cycle.

Charlie Brady – BMO Capital Markets

Thanks very much.

Operator

Your next question comes from Seth Weber of Bank of America Merrill Lynch.

Seth Weber – Bank of America Merrill Lynch

Hey, good morning everybody. Just a clarification; your revenue guidance, Mike, can you give us – and you have talked about what the split is there between the OE and the aftermarket in the $3.5 billion number for 2009?

Mike Sutherlin

No, we don't break it down to that level of detail. But I think that you know going into the year we said that the OE percentage would be a little bit higher this year than it was last year. So you can go look at the OE, the aftermarket split last year and you could SKU that a little bit in favor of the OE this year and you could probably get pretty close.

Seth Weber – Bank of America Merrill Lynch

Okay, going back to the first quarter, the surface revenue numbers were a little lighter than what we thought. Can you tell is what your shovel production number was in the quarter? Was there anything in the quarter that was unusually – that caused the revenue number to be unusually low or is this kind of the run rate we should think about for surface revenue?

Mike Sutherlin

First quarter was low because we had some supplier delay, those of the normal thing that you run into. So we had that. There was one shovel in particular that we didn't make the criteria for percentage of completion accounting, so it is going to be built. The inventory is going to pop out as they finish (inaudible) revenue at the time of shipment. So that probably had the biggest impact on the first quarter with not getting that contract signed in time to start the parking on that shovel. Some of the aftermarket it was all this movement around with the cancellations of the rebuilds that affected the aftermarket. We do have as part of the inventory build, we have had in the first quarter, we have temporarily stranded some inventory that was scheduled in to support these rebuild programs and that is going to get reallocated back out to other projects and other demand and that will happen in the second and third quarters. But right now we got some of that stranded there and so we got a little bit of an impact on aftermarket on the surface equipment side.

Seth Weber – Bank of America Merrill Lynch

Okay. So we can generally assume a six shovels quarter, round numbers?

Mike Sutherlin

Yes, right.

Seth Weber – Bank of America Merrill Lynch

Okay. And then on the – in previous calls you have talked about kind of a disconnect between orders that had booked in previous years with pricing and margins. Are we kind of through that at this point, are we on the right side of that equation where you feel like you are – these are – are margins going higher still in the surface business or does this kind of – we are through that – we have worked through those misplaced equipment orders and kind of this is what where it's going to be?

Mike Sutherlin

Our first quarter, we had a slightly lower gross margins, although we had good operating margins. So I think it is a good indicator that we haven’t quite flushed all those orders through our backlog yet and I think when we talked about this late last summer, we were saying that we were looking at probably the second half of 2009 before we got past some of those legacy pricing situations. So I think we're still in that, we're still looking at it that way and would still expect the second half of the year to be a little bit better up on pricing than the first half as we finally get past some of the real – the older part of the backlog. But we are not through with all that yet.

Seth Weber – Bank of America Merrill Lynch

Okay. That is all I had. Thanks very much, guys.

Operator

Your next question comes from Mark Koznarek of Cleveland Research.

Mark Koznarek – Cleveland Research

Good morning. Just wondering if we could discuss a little bit more of the downturn management, because you have said a couple of times that you would expect to rationalize some facilities with that would go, employees presumably and that all doesn't happen for free. And so I'm wondering if you can characterize the amount of restructuring charge that you might contemplate in this worst-case scenario, where we do get to a 75% reduction in OE and 10% in aftermarket?

Mike Sutherlin

I will give you an overview and then I'll let Mike give you a little bit more specifics on that. But we still are putting our plans together and there will be severance costs associated with downsizing the business to a lower revenue level, there is no doubt about that. The severance exposure can be significantly different if we take out the – let me give you a couple of examples. If we take out a facility in the US versus one in the UK, laws and regulations and things would require significantly higher severance expenses for the UK action than the US action. So we're not far enough along to have specifics around facilities and know exactly which facility and what those severance exposures are, but we will have severance costs associated with that and we would – as we get through the plans and we get close to the point where we need to start implementing the plans, we would have all that stuff detailed out what we would expect in terms of cost reductions and the severance costs that would take to enable those reductions to go forward.

Mike, I know you can give a little bit more specifics on that.

Mike Olsen

Yes I think Mark, what reality will happen is that as we monitor the business, there will be actions that will in fact take place in stages. In other words, there won't be a big bang here, if you will, because the challenge that we have is that we have a significant amount of business in front of us for the remainder of the 2009 fiscal year that needs to be executed. As you look at the actions that are to be taken, there is a wide range of those actions all the way from eliminating costs that there really wouldn't be any restructuring associated with where you in fact tear back on some of the material and work that has been outsourced.

As Mike has indicated, we will be very, very careful not to damage those critical relationships that were prepared for the upside but there certainly will be some reduction of some of that outsourcing and there will be very little restructuring costs associated with that. So in fact, the some restructuring charges that will be associated with the downsizing of some facilities, where those charges will be non-cash related and then the other element of the cost will be the severances that Mike relates to and typically, those severance costs would be some fraction of the full-year savings that would be associated with them based on the geographic location as to when those actions take place. So at this particular point in time, there really isn't any one specific calculation that has in fact been completed that would identify those restructuring costs. What you might want to use at least is a little bit of the guided, some of the restructuring that has taken place historically and that might give you some indication as to the nature as to what those costs would relate to as a percentage of the annual savings.

Mark Koznarek – Cleveland Research

Would you guys contemplate absorbing these expenses within the operating results or would you expect to call these out as nonrecurring? You know in other words your goal of maintaining 10% or better margins at the trough, would that hold separate these restructuring and downsizing-related expenses?

Mike Sutherlin

Yes, that would be after we booked off the restructuring costs.

Mark Koznarek – Cleveland Research

So that would be before restructuring?

Mike Olsen

Yes, they would be excluded from that calculation.

Mark Koznarek – Cleveland Research

Okay. And one more follow-up with regard to this; would you expect the employment levels to drop relatively proportional to the revenue decline or is there a different dynamic with regard to staffing plans?

Mike Sutherlin

We grew this business from 2003, we didn’t increase the employment levels nearly as rapidly as we increased revenue levels. We just got a tremendous amount of leverage off the organization. We have field infrastructure around our aftermarket programs and services that are based upon the number of mines and the other things there that say that taking cost out, we will not reduce the headcount in proportion to the reduction in revenue and that is why we would expect higher decremental margins than we could add incremental margins. That is also why we feel that we have to take some facilities out to get the cost reductions to stay ahead of that 10% EBIT threshold. You can do that by just taking headcount out proportionately. We can’t take headcount out proportionally and maintain service levels to customers and the only way you can get the cost out there to take some of the facility overhead cost out and not just a strict headcount percentage reduction.

Seth Weber – Bank of America Merrill Lynch

Great. Thanks very much.

Operator

Your next question comes from Joel Tiss of Buckingham Research.

Joel Tiss – Buckingham Research

You haven't talked very much about pricing and I just wondered sort of in the context of your discussions with the customers, is that a sensitive area of pricing of your product or is it more about them trying to maintain the right partner and all that kind of stuff and just keep their production levels more in line with demand?

Mike Sutherlin

Pricing today is an intense discussion we have with our customers and our customers have seen what has happened to commodity prices and to the extent that those commodity prices drove our cost up, they are asking why don't those commodity prices reduce our cost? And the difference is, they made us work the pricing through backlog and we're just now beginning to benefit from some of that pricing and they expect instantaneous reductions to reflect lower commodity prices. So we have those discussions with them. We are constantly doing that. We put the escalators in our contracts, we felt it was appropriate that we would get higher pricing from the customers through those escalators if the commodity costs improved and we would allow them to benefit from lower pricing if commodity costs reduced and our target was to deliver the machine with the margin that we projected at the time we booked the order, and if we can do that we feel pretty good. We haven't given up any pricing at this point, but as commodity prices reduce and as time goes on, we are continuing to monitor that, but we're not going to just stand on a position and say we're not going to give up any pricing because this is an industry where you only have repeat customers and you never find the right balance and we will do that going forward.

But we have worked hard for the margin improvement and we are not going to just give it up because the commodity prices are down and because of competitive factors. We are going to stick to our guns and keep trying to sell value. We have done a good job of selling value, but at the end, I don't think we can say no reduction in our prices based upon declining commodity prices because that becomes really a hard-nosed position. So we will work that through. What we want to do is retain most of the gains we are realizing through those commodity prices as supplier contracts come up for renewal. And so that is our objective, to keep the vast majority of those but not necessarily, absolutely 100%.

Joel Tiss – Buckingham Research

Very helpful. And just to zero in on China for one second, are you seeing any of the coal mines beyond the third tier and the smaller mines, are you seeing any other bigger major mines shutting their production or slowing it down or are things pretty much still expanding there?

Mike Sutherlin

China just keeps going on right now. Right now we're seeing some – there is the battle between the mining companies and the power generating companies on pricing in China and there are some imports going into China that have leveraged the power generators in those discussions. I expect if I look at the power generating demand curves and others things in China it is not unlike we see in any other country, US, Europe, demand down and so I expect China to return to a net exporter status and keep its production up, but add that to the seaborne-traded coal markets in Southeast Asia.

Joel Tiss – Buckingham Research

Thank you very much.

Operator

Your next question comes from Chris Weltzer of Robert W. Baird.

Chris Weltzer – Robert W. Baird

Good morning guys.

Mike Sutherlin

Hi, Chris.

Chris Weltzer – Robert W. Baird

In addition to the out and out cancellations you saw, can you maybe talk a little bit about how much backlog is maybe shifting in time? And then if there is a way to help us understand how much backlog you have now that extends beyond the next 12 months?

Mike Sutherlin

The backlog that we have shifting is not any different than the normal moves that we have in backlog. We are always moving things back and forth. We will allow sometimes a customer to push back a delivery schedule if we can move somebody else up and take that same slot, so it’s sort of a no harm, no foul in terms of the way we move that around. But right now the activity around delaying deliveries of backlog is not any different than it normally is. What was the second part of your question?

Chris Weltzer – Robert W. Baird

If you can give us, in the past you talked about your shovel backlog extends through mid FY ’11, but with shifting production rates I'm not sure that's the best way –

Mike Sutherlin

We are looking at 2009, obviously we are booked in 2009. We’ve got bookings that cover us through 2010. We don’t see any – that doesn't include any increases in 2010 over 2009. And by the time we get out to the second half of 2010, we start to have some slots out there, not many but we have a few slots in the second half of 2010. But we still have shovels booked into 2011 and 2012. So it's not that there's not other backlog out there, but you get to the back of – the back half – say the back forth of the backlog, you start to see some sporadic delivery slots that are working around the customer’s proposed delivery for that equipment.

Chris Weltzer – Robert W. Baird

I see. And that's assuming current production rates hold steady?

Mike Sutherlin

Right.

Chris Weltzer – Robert W. Baird

Okay. Thank you, guys.

Mike Sutherlin

Yes, thank you.

Operator

Your next question comes from Steve Barger of Keybanc.

Joe Box – Keybanc Capital Markets

Yes, good morning everybody. This is actually Joe Box calling in for Steve.

Mike Sutherlin

Hi, Joe.

Joe Box – Keybanc Capital Markets

My first question relates to the aftermarket parts and service. Are there any market share opportunities from the will-fitters that have maybe picked up some business when you were closer to capacity? And also in a down 5% production scenario, would it be possible to get back to flat aftermarket revenues if you take into account market share gains?

Mike Sutherlin

In a robust market that we have been in, we certainly have lost business to local will-fitters. We see that in some of the larger fabrication repairs, we see it in motor rebuilds. And so there is opportunity to bring those market shares back. I don't think that those are – they are significant but they are not massive numbers, I mean we've done pretty well with customers holding our position with other customers. And so it's not like we've lost a huge chunk of our aftermarket but there is stuff out there to get. I think that the other thing that we are working on through things like our Smart Services initiative is to embed ourselves to where we're working on machine reliability, machine availability. Parts and services are part of those programs through our cost per ton, cost per hour kind of programs that we like to move more in those directions because it gives us a more continual relationship with the customer on those mines and on that equipment. And so there’s number of things as we focus on the aftermarket, we think we can add lot of value in the aftermarket over and above what we’ve been doing as we are now able to focus more attention on the aftermarket. And the customer focus is more attention on things like machine reliability rather than expanding their production. So, I think we will do very well at the aftermarket whether we are able to maintain level revenues with a 5% decline in production, I can't tell you that at this point. But I think we will call back some of the position we have in the aftermarket.

Joe Box – Keybanc Capital Markets

All right. That’s good color, thanks. My last question is more of a housekeeping item. Can you just update us on your incremental pension expense headwind in 2009 and how much you plan to contribute to your plan during the year?

Mike Sutherlin

I think that will be an excellent question for Mike Olsen to take on.

Mike Olsen

Yes. That’s actually a fairly complicated question. As you can well imagine, all of the defined benefit contribution pension plans in the US have come under significant pressure with the performance of the assets in those plans. At this point in time, the expense levels for our pension expense are pretty much fixed based on the valuation of the status of the pension plan as of November 01 of 2008, and our pension expense is relatively flat to down slightly from the 2008 numbers. Relative to contributions, we had disclosed in our Form 10-Q that we are expecting pension contributions in about the $50 million range. At this point in time, we are waiting for our final actuarial valuation that will be completed in April time frame. And that will give us an updated view on that. But our expectations are that for the 2009 fiscal year, our pension contribution will not exceed that $50 million. There could in fact be adjustments to future pension contributions, but for fiscal 2009 the contribution will not exceed that $50 million number.

Joe Box – Keybanc Capital Markets

Great, thanks guys.

Mike Sutherlin

Thank you.

Operator

Your next question comes from Jerry Revich of Goldman Sachs.

Jerry Revich – Goldman Sachs

Good afternoon.

Mike Sutherlin

Hi, Jerry.

Jerry Revich – Goldman Sachs

Could you please step us through the drivers of the strong margin performance in surface mining this quarter, despite the weaker sales and the items moving around related to the shovel and aftermarket orders. What drove the improved year over year margins?

Mike Sutherlin

We have – starting to get some better pricing in there. We’ve got – we've worked really hard on cost control in some of the areas that we have, like our Southwestern area that's heavily focused on copper. We did take cost out as we started to see cancellations and slowdown of those mines, we took cost out. We benefitted somewhat on the expense line. We benefited on the foreign exchange rates. Our overseas costs are lower after FX adjustments, and we just have been very, very diligent about controlling costs. We’ve been very diligent about starting to work the process with suppliers to try to get their prices in line with current market conditions, and we've started to see some good returns on that. As much as we have to work our original equipment through backlog, we do get a quicker return on pricing through our aftermarket, so we are starting to see some improvement in the aftermarket pricing, based upon pricing actions we took earlier in 2008. So, a combination of things, but a lot of it had to do with starting to get some pricing to roll through to the revenue line and really, really good cost control and beginning to work supply chain, a little bit more benefit out of the supply chain.

Jerry Revich – Goldman Sachs

And Mike, you mentioned earlier that you are going to make sure you come out cash flow positive from any customer cancellations. Is there any impact of that in the quarter, any positive benefit in the operating income line?

Mike Sutherlin

Yes, I think we took $3 million or $4 million on the P&H side that went down to operating income from cancellations.

Jerry Revich – Goldman Sachs

Got it. And I am wondering, Mike, you made a point about moving up production to fill the canceled slots. I’m wondering how you are thinking about the puts and the takes, versus leaving it in 2010 where you are going to have less production in 2010, why not leave it there and have a more balanced production between the two years? What are the benefits of accelerating the production?

Mike Sutherlin

Yes, the cancellations were primarily 2010 – second half 2010 cancellations. Like I said, the cancellations won't affect our guidance for 2009. I think that it's because the majority of the OE cancellations that we got, that was back half of 2010. I think one of them was even in 2011. So, we are moving the things around to fill in 2010, it’s not to move from 2010 into 2009.

Jerry Revich – Goldman Sachs

Got it. That’s helpful. Thank you. And on the underground business, the sequential decline in sales was sharper than the normal seasonal pattern sounds like some of that was currency. Any other factors that you point out?

Mike Sutherlin

I don't know, Mike, you've seen any –but when I run the numbers, and we take the normal seasonality in there, the underground business looked pretty good to be honest.

Mike Olsen

Yes. It really was primarily the foreign exchange impact. That impact on the first quarter sales was $52 million for the underground business. And that was well over 10% of their sales. So, that had by far the most significant impact on their sales. Without the impact of that foreign currency translation, the underground growth would have in fact been up 28% over the first quarter of 2008. And then historically, the first quarter for the underground business is the softest quarter, really the management team of the underground business did a good job of getting off to a very, very strong start in the first quarter that mitigated some of that cyclical softness in the first quarter.

Mike Sutherlin

And Jerry, our underground business has a model that has a much more distributed manufacturing base. So, we end up doing a noticeably higher percentage of manufacturing for the underground business in overseas locations compared to the surface business. And in some cases like in South Africa that's a currency that’s seen probably the most dramatic change. And so, the stuff that we manufacture in South Africa gets a higher exposure to foreign exchange and we ended up with a higher exposure to a currency that's had the greatest amount of movement. So –

Jerry Revich – Goldman Sachs

Good. Thank you.

Mike Sutherlin

Thank you.

Operator

Your next question comes from Barry Bannister of Stifel Nicolaus.

Barry Bannister – Stifel Nicolaus

It was asked and answered. Thanks a lot.

Mike Sutherlin

Okay, thank Barry.

Operator

Your next question comes from Thomas Giovine of Giovine Capital Group.

Thomas Giovine – Giovine Capital Group

Let me just first say as a pretty significant shareholder, I really don't appreciate being stuffed so far back in the line so every sell-side analyst can ask their 40th question. Shareholders of capital at risk would appreciate it getting in the queue when we queue in as opposed to being stuffed in the back after every sell-side analysts. So, will you please take that into consideration for the next phone call?

Mike Sutherlin

Sure.

Thomas Giovine – Giovine Capital Group

My question is related to debt pay down. Can you tell me what your capital plan is this year for your excess cash as it relates to debt? And as a part of that, are you considering buying any bonds in the open market given that they're trading at $0.76 on the dollar?

Mike Sutherlin

Well, right now we have a term loan that's got quarterly payment provisions with that that we are continuing to pay down.

Thomas Giovine – Giovine Capital Group

What is the total then for this year?

Mike Sutherlin

On the payment against those loans?

Thomas Giovine – Giovine Capital Group

Mike, can you give the number?

Mike Olsen

Yes, the paydown of the term loan will be approximately $70 million during this fiscal year. A little over $4 million per quarter.

Thomas Giovine – Giovine Capital Group

So, what is the capital plan this year with regard to cash? Will you be more aggressive with debt paydown than that?

Mike Olsen

No. By now we are in cash accumulation mode. We would like to make sure that we have enough cash reserves and borrowing capacity to ensure that we can handle a wide range of market conditions going forward so that we don’t find ourselves short. We are right now favoring the accumulation of cash. Beyond that we haven’t looked at the – the debt terms are reasonably favorable right now, and we continue to pay those on schedule at this points. As the market continues, and if the market continues to stay difficult, we think that there is some opportunities – will be opportunities in some acquisitions and other things that could be done on attractive pricing. We would look at that when the time comes. So at this point, we think it’s too early to commit our cash and we are trying to build some cash balances to give ourselves flexibility.

Thomas Giovine – Giovine Capital Group

Look, you know, I think everyone can appreciate the fact that in this environment people want to hold onto [ph] cash. I guess – and certainly if you can grow your business in a profitable manner, shareholders would like to see that. I would like to the Board to consider looking at tendering for some bonds given that you can buy your asset at a 25% discount right now in the open market.

Mike Sutherlin

Okay, we will look at that.

Thomas Giovine – Giovine Capital Group

Thank you.

Mike Sutherlin

Thank you.

Operator

Your next question comes from Alex Blanton of Ingalls & Snyder.

Alex Blanton – Ingalls & Snyder

Thank you. I really didn't expect to get called on, but thanks for running the call late. You've done a pretty good job of outlining what the prospects look like for 2010 which it would seem from what you said is another sales decline to the point where they're in line with orders by the end of the year. So you're assuming that basically, I guess there's not much of an order pickup any time in 2010, is that correct?

Mike Sutherlin

That’s right. I mean, we are a late cycle (inaudible) and we've got to see economic recovery before we're going to see the recovery in the mining sector, since we're late cycle we – unless somebody's predicting economic recovery to occur soon, I don't see how we can get enough noticeable economic recovery to encourage the reinvestment in mine expansion projects that would drive higher rates of original equipment demand. You roll it out, it’s unlikely that we are going to see that in 2010.

Alex Blanton – Ingalls & Snyder

Well, maybe, if you used the administration's budget things might look a little better. Use their assumptions, but anyway – I'm kidding.

Mike Sutherlin

(inaudible) GDP growth, I don't even expect it at this point.

Alex Blanton – Ingalls & Snyder

I'm kidding. Listen, when – but the last time that this happened, the mining sector declined for 20 years. Because in 2002, Caterpillar said, “Well, we're at a 20 year low here in the demand for mining trucks.” So what does it look like to you this time? Given some economic recovery starting sometime in 2010 and going forward, and factor in what looks like, at the moment, a negative outlook from Washington in terms of stimulating the economy, despite what they are saying, that isn’t what they are doing. They are putting a burden on investors and a burden on job creators. So going forward, when would you expect enough of an economic recovery to generate some significant improvement in your business? I mean, how many years is that?

Mike Sutherlin

I'm not an economist, I wouldn't even venture down that path, but I will give you a couple of data points that are relevant. I think we're starting to see some data out of China that's early but encouraging, we're starting to see iron ore stockpiles at the porch begin to deplete, some steel capacity that's come back on line. We're seeing copper purchases by China, as they start to restock copper. So there's indicators out there that we're starting to see some support levels being established, maybe not sustainable, maybe they are, but encouraging nonetheless. I will say that we have two major differences from the ’80 when the industry went into a long down cycle, and those two major differences are one is customers that are publicly traded and much more inclined to take quick actions to balance supply and demand. And secondly, we enter these conditions with much less excess capacity than they did in the ’80s, and of all the production that's been taken offline, it really amounts to a small percentage of mobile commodity production. When the economy picks back up, I think we'll blow through the capacity levels very quickly, and we'll be back into supply chasing demand. I can’t tell you when that’s going to be, but there is just not a lot of excess capacity that's out there that we have to work our way through, and there's not a lot of excess stockpiles that we have to work our way through. So there's a lot of things out there that suggest that this will be a less protracted recovery for the industry, because we're not going to do the self-inflicted wounds that we did in the 1980s.

Alex Blanton – Ingalls & Snyder

Well, that's a very good rundown. It would seem then that it's – there's a difference in that the developing countries, emerging nations, are a lot larger as a percentage of the total than they were 20 years ago and also growing faster. So this is going to present a different – more positive demand picture? Is that what you’re suggesting than just depending on the US?

Mike Sutherlin

Yes, I think that the emerging markets have high rates of (inaudible). They have the capacity to increase demand, they’ve got the industrialization process that's going on. I think the emerging markets have got to be a key part of the global recovery.

Alex Blanton – Ingalls & Snyder

Okay. All right, thank you.

Mike Sutherlin

Thanks, Alex.

Operator

Your next question comes from Dan Stein [ph] of Robotti.

Dan Stein – Robotti

Given the whole – the comments about what the trough sort of could look, and I think it comes out to roughly $2 a share pretax. And the current share price and buyback authorization and how many shares you bought back, what you spent just a few months ago at double and triple the share prices. I don't know, it just kind of seems that the opportunity today to really buy back some stock, and given the cash flow of the company going forward and its balance sheet today would be a real tremendous opportunity and just kind of seems odd to want to buy it back a few months back at $50 and not at $18. I'm just kind of curious if you could tell us how you're thinking about that.

Mike Sutherlin

Well, good points made, but at this point we would want to see us have sufficient cash flexibility, whether that's cash reserves that we are holding or that’s the borrowing capacity. And I think I said earlier on the call, this will be a different year for us because we will for the first time in several years be depleting advanced payments, and so those will work against our cash flow in 2009, where they worked for our cash flow in most of the last five or six years. We also have some uncertainty around pension funding going-forward. This year we are in pretty good shape, but I think everybody looks at the asset levels and the funding requirements over the next four or five years, there's quite a bit of work to do there, absent market recovery. So there's a lot of things now that we want to make sure that we don’t overcommit our funds too early in this process, we'll make sure that we have adequate reserves. Then as you suggest in terms of share buyback as suggested earlier in terms of bond redemption there's a lot of options out there, when you feel that you’ve got adequate balances. And then you say, how do I best deploy the discretionary cash, then can you make that – make those evaluations. Right now, I don’t think we have an adequate amount of cash reserves built up. And I just want to make sure we have sufficient cushion, sufficient flexibility.

Dan Stein – Robotti

Could you actually speak to that? Because I’m a little confused with the pension accounting? So the gain, the actuarial when you talk about the actuarial gain, so the benefit obligation at October 31 of $843 million is now down to $714 million, and of course plan assets were down by $196 million in the fiscal year. So what was – what drove the $165 million estimate in lowering the net benefit obligation at the end of the year?

Mike Olsen

What drove that was an increase in the interest rate that was used to in fact discount those liabilities. Our interest rate was determined as of October 31, 2008. Since that point in time, those interest rates used by the actuaries to discount those liabilities have, in fact, fallen. In addition to that the assets of the pension plan, not only for our company, but for all of the companies that have defined benefit programs have been adversely affected by the performance of the stock market. So, we certainly could anticipate an increase in that unfunded position, and that's the reason for our conservatism relative to cash requirements.

Dan Stein – Robotti

Okay, thanks.

Mike Sutherlin

Okay, thank you. It looks like we are well beyond our scheduled time. So, if I could use this as an opportunity to thank everyone for joining us on the call and again thank you for your interest in Joy Global, thanks very much.

Operator

This concludes today’s conference call. You may now disconnect.

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