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Executives

Tim Sullivan - President & Chief Executive Officer

Craig Mackus - Chief Financial Officer & Secretary

Shelley Hickman - Director, Global Communications

Analysts

Barry Bannister - Stifel Nicolaus

Andy Kaplowitz - Barclays Capital

Charlie Brady - BMO Capital Markets

Jerry Revich - Goldman Sachs

Chris Weltzer - Robert Baird

Seth Weber - RBC Capital Markets

Steve Barger - KeyBanc Capital Markets

Ann Duignan - JP Morgan

Bucyrus International Inc. (BUCY) Q3 2009 Earnings Call October 23, 2009 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the quarter three 2009 Bucyrus International Incorporated earnings conference call. My name is Jasmine and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I’d now like to turn the presentation over to our host for today’s call to Ms. Shelley Hickman, Global Communications, please proceed.

Shelley Hickman

Thank you, Jasmin. Good morning and thank you for joining us for Bucyrus International Incorporated third quarter 2009 earnings release teleconference. In a few moments I’ll turn the teleconference over to Mr. Tim Sullivan, President and Chief Executive Officer of Bucyrus, and Mr. Craig Mackus, Bucyru’s Chief Financial Officer.

As it is our practice, I will begin today’s teleconference by 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 may be identified by the use of predictive future tense or forward-looking terminologies such as beliefs, anticipates, expects, estimates, intends, may, will or similar terms.

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

Bucyru’s policy on forward-looking statements including a list of factors that could cause actual results to differ materially from those anticipated in forward-looking statements, as well as risk factors relating to Bucyrus, are included in Bucyrus’ 2008 Form 10-K filed with Securities and Exchange Commission on March 2, 2009, and any other cautionary statements described in 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 forgoing 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’ll turn the conference over to Tim.

Tim Sullivan

Good morning everyone and thank you for your continued interest in Bucyrus and taking the time to join us this morning. Obviously we are very gratified by the performance that we were able to report for the third quarter and to give you some more details on that, I’ll turn it over to Craig.

Craig Mackus

Thanks Tim. I will go through the financial results for the quarter and then as usual, Tim will give some color on the results and talk about the market conditions. Sales for the third quarter of 2009 were $675.8 million, an increase of 29.8% or 4.6% from $646 million for the third quarter of 2008.

Original equipment sales were $335.6 million, a decrease of $6 million or 1.8% from $341.6 million for the third quarter of 2008 and aftermarket parts and service sales were $340.2 million, an increase of $35.8 million or 11.8% from $304.4 million for the third quarter of 2008.

For the first nine months of 2009, sales were $2.01 billion, an increase of $222 million or 12.4% from $1.78 billion for the first nine months of 2008. Original equipment sales were $1.03 billion, an increase of $80.2 million or 8.4%, from $950.3 million for the first ten months of 2008 and aftermarket parts and service sales were $975.5 million, an increase of $141.8 million or 17% from $833.7 million for the first nine months of 2008.

The decrease in original equipment sales for the quarter in the first nine months of 2009, compared to the same period last year was primarily due to decreased electric mining shovel sales, offset by increased revenues on Walking Draglines, an increased sales of all of our products used, in underground mining applications.

The increase in after market parts and service sales for the third quarter 2009 compared to the same period last year was primarily in the Chilean, Czech Republic and Chinese markets. The increase for the first nine months of 2009, compared to the same period last year was primarily in the United States, Chilean, Czech Republic and the Chinese markets.

Sales for the third quarter in the first nine months of 2009 were negatively impacted by $17.8 million and $100.8 million respectively due to the effects of a stronger US dollar on sales, denominated in foreign currencies compared to the same period in 2008. There has been no change to the approximate $200 million of orders scheduled to ship in 2009 that we moved to 2010.

Gross profit for the third quarter 2009 was $223.8 million, or 33.1% of sales compared to $182.3 million or 28.2% of sales for the third quarter of 2008. Gross profit for the first nine months of 2009 was $599.3 million or 29.9% of sales compared to $498 million or 27.9% of sales for the first nine months of 2008. Gross profit for the first nine months of 2009 was increased by $1.4 million a purchase accounting adjustments related to the acquisition of DBT compared to an $11.3 million reduction for the first nine months of 2008.

This increased gross profit for the first nine months of 2009 by 0.1% points and decreased gross margin for the first nine months last year by 0.6% points. The increase in gross margin percent for the quarter and nine months ended September 30, 2009 compared to the same period last year was primarily due to the mix of margins on original equipment orders and improved efficiencies in our manufacturing operations.

Original equipment sales which have lower gross margins were 50% of total sales for the third quarter 2009 compared to 53% for the third quarter of 2008 and were 51% of total sales for the first nine months of 2009, compared to 53% for the first nine months of 2008.

Selling, General and Admin expenses were 10.6% and 9.7% of sales for the third quarter and the first nine months of 2009 respectively compared to 10.3% and 10.4% of sales for same period last year. The increased spent in the third quarter 2009 compared to the third quarter 2008 was primarily due to a non-cash loss on a sale of certain assets in Poland severance cost, an increased profit sharing accruals.

Operating expenses for the third quarter 2009 were $136.6 million compared to $103 million for the third quarter of 2008 and were $359.8 million for the first nine months of 2009, compared to $270.2 million for the first nine months of 2008.

Operating earnings were reduced by amortization of purchase accounting adjustments related to the acquisition of DBT, of $3.5 million and $11 million for the third quarter in the first nine months of 2009 respectively compared to $3.1 million and $24.8 million for the third quarter and first nine months of 2008 respectively.

Other expense for the first ten months of 2009 was $5.7 million compared to $2.3 million for the first ten months of 2008. The increase was primarily due to a $3.1 million of losses that were reclassified from accumulative other comprehensive income into earnings, due to the discontinuance of cash flow hedges.

The cash flow hedges were concurrently settled and extended because an originally forecasted transaction did not occur within the original specified time period as a result of a customer requested delay of two orders in our underground mining segment. We anticipate that these losses will be recovered in 2010, when the hedges come due.

The effective tax rate for the third quarter 2009 was 29.6, compared to 33%, for the third quarter of 2008. A lower rate in 2009 was primarily due to earnings mix and certain discrete items. The effective tax rate for the first nine months of 2009 was 31.4 compared to 32.7 for the first nine months of 2008. Net earnings for the third quarter 2009 were $92.1 million, an increase of 44% from $64.2 million for the third quarter of 2008.

Fully diluted earnings per share for the third quarter of 2009 was, $1.21 per share compared to $0.85 per share for the third quarter of 2008.

Net earnings for the first nine months of 2009 were $231.2 million, an increase of 38% from $167.6 for the same period last year. Fully diluted earnings per share for the first nine months of 2009 were $3.05 per share compared to $2.23 per share for the first nine months of 2008.

EBITDA for the third quarter of 2009 was $152.1 million; an increase of 31.4% from $115.8 million for the third quarter of 2008, and for the first nine months of 2009 was $400.3 million, an increase of 28% from $312.7 million for the first nine months of 2008. EBITDA was 22.5% of sales for the third quarter 2009 compared to 17.9% for the third quarter of 2008, and was 20% of sales for the first nine months of 2009 compared to 17.5% for the first nine months of 2008.

EBITDA includes the impact of reductions for non cash stock comp expense, severance expenses, gain or loss on sales of fixed assets and the inventory fair value approach of the accounting adjustments charged across for products sold, these reductions are itemized in the EBITDA reconciliation in our press release.

At September 30th, 2009, our total backlog was $1.94 billon, $130 billion of which is expected to be recognized within the next 12 months. This represents a 22.6% and 23.9% decrease from the December 31st total backlog of $2.5 billion and 12 month backlog of $1.71 billion respectively.

The total backlog at June 30 2009 was $1.98 billion. Weakening of the US dollar in the first nine month of 2009 has increased our September 30 2009 backlog by approximately $98 million, when compared to our backlog calculated using the December 31st 2008 exchange rates.

New orders for the third quarter in nine months 2009 were $627.6 million, and $1.44 billion respectively compared to $979.7 million and $2.85 billion for the same period last year.

Regional equivalent new orders for the third quarter in the first nine month of 2009 were $315.4 million and $565.1 million respectively compared to $659.4 and $1.62 billion for the same period last year. Capital spending by our customers continues to be negatively impacted by the effects of the current global economic conditions on commodities and credit markets.

After market parts and service new orders for the third quarter and nine months of 2009 were $312.2 million, and $875 million respectively compared to $310.3 million and $1.23 billion for the same period last year. After market parts and service new orders for the first and second quarter of the 2009 were $251.4 million and $311.5 million respectively.

Reduction in year-to-date 2009 after market new orders compared to same period last year was in most markets. Included in after market parts and service new orders for the first nine months of 2009 was $23.4 million related to multi year contracts that will generate revenue in future year’s compared to $278.3 million for the first nine months of 2008.

Total new orders for the first nine-month of 2009 were negatively impacted by approximately $74 million due to the effects of the stronger US dollar and orders denominated in foreign currencies referred to the first nine month of 2008. Approximately, $28 million of orders in backlog at December 31st were cancelled during the first nine months of 2009. However, there were no cancellations in the third quarter.

Of September 30, 2009 our total debt was $515.9 million compared to $571 million at December 31, 2008.

Our cash balance was $143.5 million of September 30th 2009, compared to $102.4 million at December 31st, 2008. We have contributed $26.1 million to our United States pension plans during the first nine months of 2009 including $10.4 million in the third quarter.

Receivables have increased slightly to $645.2 million of September 30, 2009 from $636.5 million at December 31, 2008, but has increased from $670 million at June 30th 2009. The $8.7 million increase from December 31st reflects an increase for new recognition of sales and long-term contracts in excess of advanced payments from customers offset by a decrease in trade receivables as a result of strong cash collections.

Inventory increased to $667.2 million at December 31st 2009 from $616.7 million at December 31st 2008, but decreased from $689.7 million at June 30th 2009. The increase from December 31st was primarily due to the build up of work in process and orders that have been delayed per our customer’s request in the effects of the weaker US dollar and inventories valued in foreign currencies. Consolidated inventory during that September 30th 2009 was $3.0 compared to $3.1 at December 31st 2008.

Capital expenditures for the first nine months of 2009 were $34.5 million, which includes $9.6 million related to the expansion and additional renovation of our facilities in South Milwaukee. We expect our capital expenditures for 2009 to be approximately $55 million; continue to closely monitor our capital spending in relation to current economic conditions and business levels. We believe that the cash generated from our operations in existing credit facilities will be sufficient to fund our cash requirements during the remainder of 2009.

I’ll turn it back to Tim to discuss market conditions.

Tim Sullivan

Hey Craig thanks. May be I’ll highlight a few of the operational numbers that Craig gave you, with a little bit more description. Our sales performance was a direct result of a solid high quality backlog, excuse me. We had no cancellations this quarter and we really don’t expect any further cancellations in the future.

As Craig said, total cancellations now, for the entire market correction period are $28 million which is by far an industry low, this has not really been achieved without a lot of creative communication and collaboration with our customer base, as I previously advised, we have effectively moved $200 million, approximately $200 million worth of OE orders, from our 2009 shipping period into 2010. This has temporarily inflated our inventory, and extended our accounts receivable. In our world, this is more than acceptable based on the current market conditions.

We did not plan to shift any further OE orders in the 2010, so the 200 million that we have shifted, excuse me, and will be the maximum. Obviously we are very gratified by the increase in our gross margin this quarter. As most of this is based on a myriad of criteria, not the least of which is lower raw material cost that we experienced over the past two quarters.

We are also particularly pleased that we believe this is also a direct result of the manufacturing efficiencies that we are beginning to reap an earnest from our $200 million investment here in the South Milwaukee facilities and finally the lower costs are also the result of our continued efforts to bring subcontract for back into our main facilities both in the United States and in Europe.

I think primarily due to the unpredictability of our future raw material costs, it’s really uncertain at this time if these margin levels are sustainable. As most of, our cost containment efforts lead the industry and we’ve had another good quarter of cost containment.

I will state though that we will continue to increase our research development as we progress into the fourth quarter and into 2010, we think that’s important for our future growth.

As a footnote, we will be implementing SAP throughout our entire worldwide operations. It is currently fully installed all of our underground operations with the latest version of SAP, but with the previously announced full integration that we talked about in our last call, it’s important that all of our segments are on the same IT format, we plan to complete this within the next 12 months at a cost of approximately $10 million.

Market wise, we believe that the commodity prices have bottomed and have stabilized in almost all instances, increased either slightly or in the case of copper and oil increased significantly. We think that this goes well for not only near term OE business but for continued after market business as we move into fiscal 2010. It’s the emerging brick economies that continue to lead the way to global recovery as the developed world continues to recover slowly.

Most of our new machine activity this year has been in the emerging markets Eastern Europe, Russia, China, India, but we are seeing some new strength in our traditional copper, iron ore, oil sands market as well as new activity at some of our sea-borne and coal producers in places like Australia and other coal exporting countries.

We’ve seen an increase in OE quotation activity over the past quarter and we fully expect that that will continue as we move into the fourth quarter of 2009, and it also looks to be a sustainable into the early part of 2010, just based on our discussions with our customer base around the world.

Our after market bookings remained strong, obviously leveraging off of our $30 billion install base of machinery, which is three times what it was five years ago. There have been no real significant idling of Bucyrus machines during this market correction, and obviously if our machines are operating they are providing us with after market opportunities.

Additionally, some of the relative fall off in new machine activity and products such as, Room and Pillar and Transport products, that’s also contributed after market opportunities, in these particular market’s customers are repairing and rebuilding rather than purchasing new.

I am also very pleased that we continue to maintain a very strong and stable backlog of almost $2 billion and obviously that positions us well for continued good shipments through the fourth quarter and now well into 2010 and in some instances; we are beginning to book into 2011.

Based on our current performance, we will do something here this morning that we don’t normally do, only at the end of Q2 do we readjust guidance, but obviously based on our third quarter performance, I’m sure most of you are curious as to where we think we are going to end up the year with our fourth quarter performance or follow on fourth quarter performance.

We expect our 2009 revenue to now fall somewhere between $2.6 billion and $2.625 billion. So a fairly tight range and we are pretty confident we’ll fall within that range. We will also, and just as a reference our previous guidance was $2.5 billion, up over a $100 million over the previous guidance.

EBITDA will now be somewhere between $515 million and $530 million, which is up from our Q2 guidance of $485 million to $500 million and so that is our new guidance for year end.

With that, let’s turn it over to questions.

Question-And-Answer-Session

Operator

(Operator Instructions) Your first question comes from Barry Bannister - Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Let me ask you a question about 2010, I know it is a little premature but you probably had some board meetings and done some thinking about next year, when I look back at past cycle peaks for Bucyrus and you have a lot of history going back about 70 years, the peaks tend to be more gradual they don’t suddenly plunge they just plateau.

Could you give us a flavor for where you are leaning towards on next year EBITDA and revenues, which look like if they do 2.5, 2.65 they will be flat for two years in a row?

Tim Sullivan

Well as Barry, we give guidance in February, but let me state our strategy which has been fairly consistent from this past February. When we saw this market correction occurring, our full intention for 2009 was to try to level off our revenue nine based on eight and it looks like obviously were effectively going to be able to do that.

Part and parcel to that strategy was also then to move towards that same type of leveling off number for 2010 and by moving some of the backlog that we had in nine into ten achieving now we are guiding to 2.6 billion type number.

We’ve effectively flattened eight to nine, and obviously our strategy would be, and if we can do this would be obviously very pleased that we could flatten nine to 10, and that would be our intention right now on all things, both revenue and EBITDA.

Barry Bannister - Stifel Nicolaus

It would look like a lot of the past chart, that’s great news. The other and last question is, when steel prices declined in the last couple of quarters, because ostensibly there was recession although you and a lot of companies didn’t seem to feel it. Did you capture some of the contingencies that you might have had or benefit from the float down particularly, underground where you might not lock in the plate.

Has steel really helped you on that COGS margin, or was it more margins driven by good after market pricing environment.

Tim Sullivan

Yes, there is a combination of things, we did obviously pickup margin based on raw material cost reductions over the last couple of quarters. What’s interesting though we are really trying to quantify exactly what we’ve been able to achieve efficiency wise, moving some of the sub contract back into our shops and really running a very optimum level at all of our shops. That’s always a little bit complicated to quantify, but we know that that had a big part of it.

Raw materials, the efficiencies in the shop bringing some contract back in, all those things have really contributed to that gross margin jumping in the quarter.

Operator

Your next question comes from Andy Kaplowitz - Barclays Capital.

Andy Kaplowitz - Barclays Capital

Tim, you talked about new words going up in 3Q, but they want up very significantly, sequentially and you gave us a couple of reasons why, but sort of what happened between the quarters, is it just customers decide to get off the cents. Are the levels of OE that you are seeing in 3Q sustainable going forward and can even increase from that?

Tim Sullivan

Yes, if you look at where the new business came from in Q3, I refer to those with our employees as non-traditional markets, and I have to stop labeling them as non-traditional markets, because they are becoming traditional.

I can tell you that none of the new OE business came from the big five, the big five multinationals that we do most of our business with. It was primarily with new customers in Russia, in India and in China and we are also seeing some activity with one of the big five with Valley in Brazil, but untraditional customers have become our traditional customers in this particular market.

The reason we feel pretty strong about continued OE activity is the big five are starting to wake up and look at their needs and with the severe pull back in production beginning last year of this time and basically held through to now, there has been obviously new needs that have come about.

Particularly in oil, sands, copper and iron ore as we’ve talked about in the past, the big five that do mind the preponderance of the copper, their yields are down significantly which means that they need more equipment to get the same amount of ore out of the ground, and quite frankly the lack of the exploration in the low yields has led to the type of copper price that we’re seeing right now, and until more production can hit the market and that’s not going to be immediate, we see that copper pricing will continue to stay where it’s at.

Andy Kaplowitz - Barclays Capital

Tim, the margins also in your underground business spiked up significantly between 2Q and 3Q, and I know you talked about raw materials and efficiencies, but obviously this is higher than we all thought. What’s going on in the underground business that maybe was different in 3Q versus 2Q?

Tim Sullivan

It was primarily those things, nothing other than that. Obviously into the markets pretty competitive right now, so there are a lot of pricing pressures. So it’s really another cost of getting the product out the back door and credit to our guys and both our (Inaudible) and our Houston operations. I think, part of this integration process that we are going through we are cross pollinating a lot of our ideas operationally, and those are having the benefits not only in service side of our business, but now also in our underground business.

Andy Kaplowitz - Barclays Capital

I know you said, we don’t know whether that kind of result is sustainable depends on lot of things, but or we sort of on a new trajectory here with that business over time.

Tim Sullivan

No, I can’t really say that we are, again it’s the raw material supply and the pricing is so volatile right now. I don’t think we can state that’s it’s a new trajectory.

Operator

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

Charlie Brady - BMO Capital Markets

With respect to the R&D expense you talked about continue to ramp that up, so from a dollar standpoint should we expect that to continue above the Q3 level going forward into 2010 as well?

Tim Sullivan

It’s going to creep up slowly, obviously R&D is a function of being able to load in engineering talent which is a slow process, slower than what we would like at sometimes, but you are going to see it kind of creep up to a level that’s probably in the grand scheme of things and the types of dollars that we have on the SG&A line these days, probably not overly significant, but it will continue to ramp up.

Charlie Brady - BMO Capital Markets

Then looking on the mix, the OE after market mix you had a positive shift in the after market year-over-year about 300 basis points. Can you comment to how much due to the shift you think helped the margins?

Tim Sullivan

Not really I think it was more volume based than it was the actual shift. I think we are just beginning to learn the full strength of the leverage of that install base was more of the issue than anything.

Charlie Brady - BMO Capital Markets

Okay and just the final one and I will get back in queue any commentary on sort of the drag line market and how that’s looking and maybe tied in with on the Indian side?

Tim Sullivan

I think I have told at the last quarter and not to talk about the drag anymore. There is dragline activity and we fully expect that in particular in the Indian market that we might finally some movement this quarter and there is dragline activity elsewhere.

Those are big dollars that people are asked to spend though, and as we always talked about every quarter, it really takes our customers a lot of effort of part with that money. Having said that, there is dragline activity, but I will continue to try to downplay that to the best of my ability.

Operator

Your next question comes from Jerry Revich - Goldman Sachs.

Jerry Revich - Goldman Sachs

Tim, can you rank order for us, which commodities and regions where you see the strongest potential for new equipment orders over the next six to 12 months. Sounds like based on your comments here the strongest orders this quarter were out of coal and iron ore, I am wondering where do you see that order mix shifting over the medium term.

Tim Sullivan

Well I think in the next six to 12 months we are going to continue to see activity in India. That market is interesting with the election behind us now, and with the change in government there. I think it’s not just our industry that have seen a real resurgence of urgency to grow that economy, I think if you talk to several sectors they are seeing that the Indian market is really starting to move, which is very encouraging after been in the doldrums for the last five or six years.

Russia remains a good market, and in the next six to 12 months, China is becoming a good market for us primarily, because the Chinese now are starting to go after the thinner scenes, where our plough technology has become very popular. We see that there is going to be some activity in Australia.

We actually had a booking of a longwall in Australia in the third quarter, and that’s the first activity we’ve seen in Australia for a while. We think that will continue probably in the first half of 2010. I think the coal export markets are improving for the Australians as is the iron ore. I talked about copper we are going to see activity in South America I think in this quarter and next, just out of pure necessity they need more machinery to get the same amount of copper production just because the yields have dropped so significantly.

And in oil sands, even though the oil sands producers have put on the shelf and kept on the shelf several of their large Greenfield initiatives, we are seeing expansion in the Brownfield sites up there. One of things that’s happened in the oil sands over the last year, they will tell you, I think if you speak to the producers in the oil sands that this has been actually a good thing for them to have the market correction that we’ve had.

They have been able to get their cost back in line, they’ve been able to grab the controls of what I classify as a runaway train and bring everything back under control. They’ve been able to what they referred to as de-bottleneck their processing operations which will allow more throughput, so without anymore capital expenditure requirements in their processing, they feel they can process more oil sands which means more shovels, more trucks.

So with the exception of the domestic US market, which we don’t see any recovery in the next six to 12 months as far as our business from a new machine business activity we still see after market, but not new machine activity we see glimmers of activity almost everywhere.

Jerry Revich - Goldman Sachs

If we look back at DBT’s historical numbers, for China we see $200 million or so sales before the Chinese shifted their purchase priorities towards local product. Can you tell us if you expect to return to that sales level given the increase focus on getting production up?

Tim Sullivan

No, I don’t think we’ll return to that level. As you correctly stated it’s been labeled as a strategically critical industry which means that they will support their local industry and their local machinery manufacturer’s interference to western companies like ourselves that export to China. However, they continue to buy technology that they have yet to copy. So our activity is primarily been in some of the more high production phases where we have the automation technology, plough phases because again of the automation technology.

So we have got some activity, but we are not holding out any false hope that that’s a sustainable type of level of activity. We think that it’s just nice to have, it’s been great going through this market correction to get that new activity out of the China market, but we discount our opportunities in that markets to a great extend just because of the fact that strategically they will continue to support their local manufacturers.

Jerry Revich - Goldman Sachs

Tim, sounds like you are pretty bullish on the outlook for mining company CapEx for 2010, I am wondering if you could quantify where you see their CapEx budgets going based on the discussions you’ve had with your customers. Is it dynamic of about 10% to 15% or could it be up more than that.

Tim Sullivan

Well it can be up more than that, I think if you just take the only company that’s announced recently, Valley is one had knocked their CapEx for this fiscal year down to below $10 billion., they just announced last week that they plan out to move that CapEx spending up to $21 billion for fiscal 2010. That’s what, that Valley’s let more than doubling of the CapEx spend for 2009.

The other big producers really haven’t said what their CapEx will be next year, however again if you look at the basic needs and look at the basic requirements we feel pretty strong that there is going to be an up tick in CapEx spending by the big five as we move into ’10, just out of pure necessity.

Jerry Revich - Goldman Sachs

Last question, Craig your guidance implies that EBITDA declined to about $120 million in 4Q, from about 150 or so for the past couple of quarters. Is that you just being conservative with some of the moving pieces around the margin side?

Craig Mackus

Well yes, as you go to the year end, there’ll always have year end adjustments, some of you wouldn’t have that extent, but merely it’s showing a little bit lower revenue in the fourth quarter, and the EBITDA getting down to another size it was in the third quarter, but more a year-to-date number, similar to where the gross margins would be at. So right now, based on some of the uncertainties and some of the raw material costs we have forecasted at that level.

Operator

Your next question comes from Barry Banister - Steifel Nicolas.

Barry Bannister - Stifel Nicolaus

Just as a follow up, I noticed that the price of crude oil is at a steep premium now to SunCore’s cash cost. So I’m wondering if you could talk about the oil sands in general, and what’s going on there?

Tim Sullivan

Yes, they are actually as I mentioned I think just a minute ago, with the de-bottlenecking that they have done, they think they can get more process through without any incremental CapEx required in their processing side, of what they refer to as the upgrading of the product.

They are spending money, and they’re going to continue to spend money to ramp up production in their Brownfield site. So we’re actually seeing quite a bit of activity up there right now.

Barry Bannister - Stifel Nicolaus

As far as the old DBT, have you achieved just about all of the margin and cost goals that you had talked about when the executives there were presenting, or do you see more upside on a post integration standpoint?

Tim Sullivan

Well, they’ve come a long way. They obviously have gotten to the targets that we established, which were below 10% SG&A, and again where credit’s due, that management team has been phenomenal. They’ve really taken our lead and our guidance and executed exceptionally well.

In all honesty, I think we’re probably above where we want to be on operating costs. I hate to say that, because there’s always something more than I think we can do with a little bit more focus, but I think in general, we’re pretty satisfied with the level they’ve achieved.

Barry Bannister - Stifel Nicolaus

Then lastly, have you noticed any change in the price discipline dynamic of the industry, particularly since you’re growing in the emerging markets, and some of those countries have companies that albeit not as good as yours, are trying to break into some of the markets?

Tim Sullivan

There’s always a challenge, particularly in markets like Russia and China. What’s interesting I think in Russia, we’ve been able to achieve some lengths of success there, primarily due to the fact that they now have access to hard currency.

The customers that we are selling to are either conglomerates that are also producing natural gas and exporting to Western Europe and/or producing coal for the export market to Asia; to Korea, Japan, and to some extent China. So if they have access to hard currency in any of these developing countries, though by Western equipment.

Having said that, if we have to go up against a local manufacturer, and that particular customer does not have access to hard currency, it makes it almost impossible for us to compete. It’s not really a margin game in those situations, it’s really a matter of do they have access to hard currency, can they pay and can they open the right financial security that we need to take the contract.

Operator

Your next question comes from Chris Weltzer - Robert Baird.

Chris Weltzer - Robert Baird

Just a quick question on your surface OE production rates; it looks like there was a little bit of a step down in the third quarter. Is that a function of just on timing or revenue recognition issues or have we lowered production rates. Then second, is this a good run rate to use going forward, or do you think we need to lower them a little bit more.

Tim Sullivan

No, that was a function of what our strategy was, and that was to shift some of that backlog into ‘10. So we did lower our run rate for the back end of this year, and that will be run rate as we finish the year. We’re still looking at ‘10 to see what that run rate needs to be, but you accurately have assessed it. We did back down and we moved some of that backlog into ‘10. So, I guess the specific answer to your question is, the run rate is good and solid for Q4, stay tuned for our guidance on ‘10.

Chris Weltzer - Robert Baird

Okay, that’s helpful. Previously you’ve been able to quantify how much your production is outsourced versus what you do internally. Given that you brought some more business in, do you think you could update us on that statistic and maybe give us something to compare it to from last year to the end of the year?

Tim Sullivan

Well, when we peaked out, and again it’s hard to state categorically, because there is a lot of moving parts to this -- in other words, when we peak out, it can go as high as 35% of our total product could be outsourced. The reason I hesitate though is the fact that part of that 35% was also based on our ramping up of our capability here in Milwaukee in particular, and to a lesser extent in Germany.

So as we’re ramping up, we had outsourced about 35%. As we’ve hit our stride now in virtually all of our manufacturing facilities, that’s come down to around 10% or less. We will probably maintain that type of level of outsource, just because we don’t want to starve our good subcontractors in the market place. We will meet them again hopefully as the market continues to move and recover. So from 35, the peak down to around 10 presently are the numbers.

Chris Weltzer - Robert Baird

Okay, that’s very helpful; and then if you could just gives us a quick update on the progress with your JV in China, how is construction going, and when do you expect that to be come in a revenue contributor?

Tim Sullivan

Grounds broken, we’re under construction, conservatively we plan to have product being produced by mid summer of 2010, and we will be judicious on how we ramp up that production because obviously that’s capital.

Operator

Your next question comes from Seth Weber - RBC Capital Markets.

Seth Weber - RBC Capital Markets

Tim, going back your answer to the pervious questions, as you push into or I guess away from some of the big top five customers, are you doing anything differently to protect your credit exposure, are you taking bigger deposits or are you betting these guys any more seriously, is there anything differently that’s going on?

Tim Sullivan

Yes, we’ve hit them a lot more seriously. We don’t do business for instance in Russia without LCs, and quite frankly, we require LCs in India, and that’s just a standard practice even with Coal India, which is government owned, but we still demand and we get LCs.

One thing that we have seen with these emerging markets is not only obviously our requirement for LCs before we put a contract in our backlog, but many of them are requiring financing, and we’ve been very successful getting financing through Hermes in Germany, which has been a key to our success in some of these markets. More of a struggle to get our government to support us, but US EXIM Bank is putting together packages for us for some of these countries as well.

So it’s a combination of financing, which is not kind of our normal course of dealing, because of the big five they basically buy out their own internal cash generation. So it’s a matter of financing and LCs.

Seth Weber - RBC Capital Markets

Shifting gears a little bit, going back to the aftermarket business, I mean do you feel like you are capturing a greater share of your product that’s out there now. I think historically it’s been two thirds, 70% something like that, has there been any shift there?

Tim Sullivan

No, and it’s interesting, we don’t see that share has changed, it’s just been the sheer volume of the machinery that’s out there operating.

Seth Weber - RBC Capital Markets

Okay, and then lastly Craig, so it sounds like the business benefited from some recognition on the drive line builds that you guys were doing, can you just give us a sense of where we are in that process, how much longer you guys are going to be according that revenue, and does that accelerate from here or decelerate?

Craig Mackus

As you know we’ve had two draglines that have been going through the financial statements on the percentage of completion basis; one in Australia, one in Canada. They both had quite a bit of revenue in 2009. We’ll see additional revenue in the fourth quarter 2009, but by the summer of next year that would start tapering off.

The one in Canada is due to ship sometime, or go to work actually towards the end of the first quarter. The one in Australia will be later on in the year. So we still see some nice revenue in 2010, but not to the same extent of 2009, mainly because the Canadian dragline will be pretty well completed by the end of this year from a manufacturing standpoint.

Seth Weber - RBC Capital Markets

Okay, and so is there any kind of first pass, what do you think you’re after market OE mix could be for next year?

Craig Mackus

That’s significant compared to this year. I mean a lot depends on what happens on the OE bookings in the fourth quarter and first quarter. Obviously our OE bookings in the third quarter were fairly strong, but it’s probably not going to be enough to move the needle that significantly, it’ll probably be around the same mix that we have been seeing this year; it won’t change dramatically.

Seth Weber - RBC Capital Markets

You think it could approach a 50-50 kind of number.

Operator

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

Steve Barger - KeyBanc Capital Markets

You’ve laid out a number of booking opportunities on the OE in the aftermarket side, and in the quarter we saw your book-to-bill rebound back to almost one. Is it overstating to say that that we may have established a booking floor around plus or minus $600 million per quarter?

Tim Sullivan

We would hope so, but I’m not sure we can say that Steve.

Steve Barger - KeyBanc Capital Markets

I know it’s lumpy and hard to predict, but you don’t see any download variance as you look into 2010 specifically.

Tim Sullivan

I guess the best way I can answer that is, we are seeing similar activity in Q4 as we saw in Q3, and we are cautiously optimistic that that’s going to carry into the first half, at least into 2010.

Steve Barger - KeyBanc Capital Markets

Great, and my last question, kind of a bigger picture. I want to go back to your comment about; you said you have to start calling some of these new markets non-traditional, just because they are emerging. Do you think the activity that you are seeing when you talk about glimmers of activity around the world, is really stimulus driven, or is it more your opinion that the demographic trends from globalization have kind of fundamentally changed the cycle from mining companies for the next decade.

Tim Sullivan

I think there is a fundamental shift in Russia for instance. I think that China has got fundamental growth as well. I think the recent activity has been a direct result of their stimulus package, and they took a hit, when we start buying to the levels that the United States has bought from that market, so their stimulus package has been as we all know very, very successful.

So I think some of the activity we’re seeing in China is a direct result of their stimulus package, but there is a fundamental shift in places like Russia because they become lot more global. That economy was very insular for many years, and we didn’t even talk about it much, but that’s become a very important market for us, and one that we think will continue to be important as we move forward.

Steve Barger - KeyBanc Capital Markets

Okay, I hate to use baseball analogies, but can you frame up where Russia is in that process, and India as well in the context of China, if China is in the sixth inning, as Russia in the first. Just relatively speaking, where are those countries in terms of exploiting their resources and needing to buy equipment?

Tim Sullivan

I think they are very early in the process. India has been in the doldrums because of their political situation over the last five, six years. It’s like someone turning the faucet on in that market. Russia, I think the catalyst behind them becoming less insular was the exploitation of their natural gas, and now they’ve completed their railroads to the eastern ports, which now make them international players as far as coal exportations. So again, they are very early in that whole process though.

So if you look at India, and you look at Russia, and compare those to China, which we all know about, we like our chances in those two markets better just for the fact that we don’t think that we have to put up with an industry that’s been labeled as strategically critical, which means that the customers are forced to buy a locally manufactured machinery. So we like our chances in Russia, we like our chances in India, and they are definitely in their early innings of their growth.

Operator

Your next question comes from Ann Duignan - JP Morgan.

Ann Duignan - JP Morgan

I wanted to just touch on a little bit your thinking for going into 2010. If input cost stayed where they are today, what kind of a headwind that might present versus if the dollar stays where it’s at today, what kind of a tailwind that might present for you? Have you been needling through the headwind tailwind of both of those and what the net impact might be on 2010?

Tim Sullivan

Yes, we are just really starting to model that to kind of get our parameters for where we should put our production levels for ‘10. I think in general terms, we don’t see that the dollar is going to strengthen at all. As a matter of fact, our models are showing that it’s probably going to even weaken a little bit further, who knows really, but we don’t see a lot of movement one way or the other in that.

I think the hard thing for us to really get our hands around, is what’s going to happen to the raw material cost as we move into ‘10. It’s still is just very volatile, very unknown, we are seeing increases in steel production in places like obviously China. It had I think a record month in steel production in the month of September. We are seeing new steel plants being built in India. So is that’s going to help with some of the cost on raw materials going forward, I mean those are all the things we are trying to model.

Ann Duignan - JP Morgan

Okay and then one final follow up, because most of my questions have been answered. You increased your accruals for variable compensation, was that triggered by some metric that you overcame on a performance basis, and in-turn was that something you were planning to do all year or just in Q3?

Tim Sullivan

Yes, we instituted a profit sharing plan for our employees. We’ve had 7,200 employees around the world and we instituted a profit sharing plan that we had on the underground set of our business historically, and now we’ve spread that throughout our entire company. So that’s been known, it’s out there, and obviously as we progress through the year and we know what our year end is going to look like, it’s time for us make those accruals.

Craig Mackus

It’s not a new accrual, it’s just a fine tuning as we progress during the year. Our performance is running a little bit ahead of what we originally envisioned through the first six months.

Ann Duignan - JP Morgan

Yes, good thank you, that’s exactly what I was looking for. Then just finally on the SAP implementation; I always shiver when I hear companies are implementing ERP systems, because they never go smoothly. When was it implemented in the underground business? Has there been a number of years now or have you just gone through the process and now you’re rolling it out for the rest of the business?

Tim Sullivan

SAP was with the DBT operations for a long time. What we did last year, in actually the last half of ‘07 was to upgrade that to the latest version, and it went extremely well. We got a good team, and we basically took that same team that to the upgrades and we moved them now on to the replacement of the bond applications, and some of our service operations.

Where we had combination of underground and surface, for instance in places like South Africa we’ve already converted to SAP. So this is just kind of an ongoing process. I think it’s fairly low risk, fairly low money and with a very experienced team that’s already been doing it for the last 18 months.

Operator

There are no further questions at this time. I would like to turn the call over to Mr. Tim Sullivan for closing remarks; you may proceed.

Tim Sullivan

Well, thanks again for joining us this morning and again, we think we are positioned well, not only to complete 2009, but I think our strategy is playing out to the full extent that we could want it to play out, and that’s building backlog into ten, and then hopefully position ourselves where we can maintain that same type of flat level that we’ve professed to be our strategy from eight to nine, and now we’ll concentrate on ten.

We will be providing you with a full fiscal guidance on our next call in February. Until then, as usual keep an eye on our website, and we are happy to answer any of your questions at any time. Thanks again for joining us.

Operator

Thank you for attending today’s conference. This concludes your presentation. You may now disconnect. Have a great day.

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Source: Bucyrus International Inc. Q3 2009 Earnings Call Transcript
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