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Bucyrus International, Inc. (NASDAQ:BUCY)

Q4 2009 Earnings Call Transcript

February 19, 2010 9:00 am ET

Executives

Shelley Hickman -- Director, Global Communications

Tim Sullivan – President and CEO

Craig Mackus -- CFO and Secretary

Analysts

Barry Bannister -- Stifel Nicolaus

Ann Duignan -- JP Morgan

Robert Wertheimer -- Morgan Stanley

Andy Kaplowitz -- Barclays Capital

Seth Weber -- RBC Capital Markets

Joel Tiss -- Buckingham Research Group

Schon Williams -- BB&T Capital Markets

Chris Weltzer -- Robert W. Baird

Charles Brady -- BMO Capital Markets

Eric Valentine [ph] -- Epidos [ph]

Steve Barger -- KeyBanc Capital Markets

Will Gabrielski -- Broadpoint

Operator

Good day, ladies and gentlemen, and welcome to the Q4 Bucyrus International Incorporated earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions).

I would now like to turn the call over to Shelley Hickman, Director, Global Communications. Please proceed, ma’am.

Shelley Hickman

Thank you, Antwain. Good morning and thank you for joining us for Bucyrus International Incorporated Fourth 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, Bucyrus’s Chief Financial Officer.

As we begin I want to remind you that Bucyrus desires to apply the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements in this conference call are subject to factors that could cause actual results to differ from those expressed or implied by those statements.

For a further description I refer you to our filings with the SEC. Any forward-looking statements speak only as of today and there is no obligation to update these statements to reflect future events or circumstances.

At this time I’d like to turn the call over to Mr. Tim Sullivan.

Tim Sullivan

Good morning, everyone and thanks for showing interest and joining us this morning. As customary, we’ll start up with Craig’s summary of the financials.

Craig Mackus

Thanks, Tim. I’ll go through the fourth quarter and the year end numbers. Sales for the fourth quarter of 2009 were $646 million, a decrease of $76 million or 10.5% from $722 million for the fourth quarter of 2008.

Original Equipment sales were $325 million, a decrease of $85 million or 20.8% from $410 million for the fourth quarter of 2008. And aftermarket parts and service sales were $321 million, an increase of $9 million or 2.9% from $312 million for the fourth quarter of 2008.

For the full year 2009, sales were $2.7 billion, an increase of $146 million or 5.8% from $2.5 billion for 2008. Original Equipment sales were $1.4 billion, which approximated 2008. And aftermarket parts and service sales were $1.3 billion, an increase of $151 million or 13.2% from $1.1 billion for 2008.

The decrease on Original Equipment sales for the fourth quarter 2009 compared to the fourth quarter 2008 was primarily due to decreased electric mining shovel sales.

The decrease for the full year 2009 compared to 2008 was primarily due to decreased electric mining shovel sales, offset by increased revenue on walking drag lines and increased sales on longwall and room and pillar equipment.

Increase in aftermarket parts and service sales for the fourth quarter 2009 compared to the same period last year was primarily in our Surface Mining segment, and was in most markets other than the U.S., with the largest increase occurring in the Chilean markets.

The increase for the full year 2009 compared to 2008 was in both segments, with the largest increase occurring in the Chilean market for our Surface Mining segment and in the United States and eastern European markets for our Underground Mining segment. 2009 aftermarket sales in the U.S. for our Surface segment approximated 2008 levels.

Sales for the fourth quarter and full year of 2009 were positively impacted by approximately $54 million and negatively impacted by approximately $47 million respectively due to the value of the U.S. dollar and sales denominated in foreign currencies compared to the same periods in 2008. There has been no change to the approximate $200 million of orders scheduled to ship in 2009 that were moved into 2010.

Gross profit for the fourth quarter 2009 was $206 million or 31.9% of sales compared to $184 million or 25.6% of sales for the fourth quarter of 2008. Gross profit for the full year 2009 was $806 million or 30.4% compared to $683 million or 27.2% of sales for 2008.

Gross profit for the full year of 2008 was decreased by $11 million of purchase accounting adjustments relating to the acquisition of DBT, which decreased 2008 gross margin by 0.4 percentage points.

Increase in gross margin in 2009 was primarily due to improved efficiencies in our manufacturing operations, higher aftermarket sales and raw material cost reductions. The contract work was moved back into certain of our manufacturing facilities, which also favorably impacted gross margin.

Original Equipment sales which have lower gross margins were 50.6% of total sales for the fourth quarter of 2009 compared to 57% for the fourth quarter of 2008 and were 51% of total sales for the full year 2009 compared to 54% for 2008.

Selling, general and admin expenses were 11.5% and 10.2% of sales for the fourth quarter and full year 2009 respectively compared to 8.1% and 9.7% of sales for the same period last year.

The increased spend in the fourth quarter and full year 2009 compared to the same periods in 2008 was primarily due to increases in severance cost, compensation expense and expenses related to acquisitions. The full year 2009 also includes a $3 million loss from the sale of certain assets in Poland.

Operating earnings for the fourth quarter 2009 were $115 million compared to $112 million for the fourth quarter 2008 and were $475 million for the full year of 2009 compared to $383 million for 2008.

Operating earnings were reduced by amortization of purchase accounting adjustments related to the acquisition of DBT of $3 million and $14 million for the fourth quarter and full year 2009 compared to $3 million, and $28 million for the fourth quarter and full year 2008 respectively.

The effective tax rate for the fourth quarter of 2009 was 25.9% compared to 35.5% for the fourth quarter of 2008. Effective rate for the full year of 2009 was 30.1% compared to 33.5% for 2008. The lower rate in 2009 was primarily due to a favorable earning mix and the reversal of approximately $4 million of valuation allowance reserves as a result of the reorganization of operations in England.

Net earnings for the fourth quarter of 2009 were $81 million, an increase of 24% from $66 million for the fourth quarter of 2008. Fully diluted net earnings per share for the fourth quarter of 2009 was $1.07 per share compared to $0.88 per share for the fourth quarter of 2009.

Net earnings for the full year 2009 were $313 million, an increase of 34% from $233 million for 2008. Fully diluted net earnings per share for the full year of 2009 were $4.12 per share compared to $3.10 per share for 2008.

Adjusted EBITDA for the fourth 2009 was $137 million, an increase of 7.4% from $128 million for the fourth quarter of 2008. And for the full year of 2009 were $549 million, an increase of 19.7% from $458 million for 2008.

Adjusted EBITDA was 21.2% of sales for the fourth quarter of 2009 compared to 17.7% for the fourth quarter of 2008 and was 20.7% of sales for the full year 2009 compared to 18.3% for 2008. Adjusted EBITDA excludes the impact of non-cash stock comp expense, gain or loss on sale of fixed assets and the inventory fair value purchase accounting adjustments charged to cost of products sold.

At December 31, our total backlog was $1.9 billion, $1.3 billion of which is expected to be recognized within the next 12 months. This represents a 24.9% and 26.5% decrease from the December 31, 2008 total backlog of $2.5 billion and 12 month backlog of $1.7 billion respectively. Our total backlog at September 30, 2009 was $1.9 billion.

The weakening of the U.S. dollar in 2009 has increased our December 31, 2009 backlog by approximately $93 million, when compared to our backlog calculated using the December 31, 2008 exchange rates.

New orders for the fourth quarter and full year 2009 were $589 million and $2 billion respectively compared to $718 million and $3.6 billion for the same periods last year.

Original Equipment new orders for the fourth quarter and full year 2009 were $290 million and $856 million respectively compared to $475 million and $2.1 billion for the same periods last year.

Capital spending by our customers continues to be negatively impacted by the effects of the current global economic conditions and commodities and credit markets.

Aftermarket sales and service new orders for the fourth quarter and full year of 2009 were $298 million and $1.2 billion respectively compared to $243 million and $1.5 billion for the same periods last year. Aftermarket parts and service new orders were $312 million for each of the second and third quarters of 2009.

The reduction in year-to-date 2009 aftermarket new orders compared to the same periods last year was in most markets with the largest declines being in the United States, Chilean and Australian markets. There was an increase in new orders in certain smaller markets.

Included in aftermarket parts and service new orders for the full year of 2009 were $33 million related to multi-year contracts that will generate revenue in future years compared to $282 million for the full year of 2008.

Total new orders for 2009 were negatively impacted by approximately $56 million due to the effects of the stronger U.S. dollar on order denominated foreign currencies compared to 2008. Cancellation of orders in backlog at December 31, 2008 was not significant in 2009.

At December 31, 2009 our total debt was $507 million compared to $571 million at December 31, 2008. Our cash balance was $101 million at December 31, 2009 compared to $102 million at December 31, 2008.

We contributed $28 million to our United States pension plans in 2009. The unfunded pension liability for our U.S. plans was $14 million at December 31, 2009 compared to $49 million at December 31, 2008.

Receivables have increased $742 million at December 31, 2009 from $636 million at December 31, 2008. The balance at December 31, 2009 includes $83 million related to orders that have been delayed. We expect to collect these receivables in 2010.

The remaining increase on December 31, 2008 was primarily due to an increase from the recognition of sales on long-term contracts in advance of advanced payments from customers, offset by a 16% decrease in trade receivables as a result of good cash collections.

Inventory increased to $627 million at December 31, 2009 from $617 million at December 31, 2008, but decreased from $667 million at September 30, 2009.

Capital expenditures for 2009 were $55 million, which included $13 million related to the expansion and additional renovations of our facilities in South Milwaukee. We expect our capital expenditures for 2010 to be approximately $60 million to $70 million. We continue to closely monitor our capital spending in relation to current economic conditions and business levels. We believe that cash generated from operations and existing credit facilities will be sufficient to fund our cash requirements during 2010.

I’ll now turn it back over to Tim.

Tim Sullivan

Okay. Let me give a little bit of color on some of the financials that Craig provided. Obviously, sales year-over-year increased 6%. We have provided guidance to be flat, primarily, that 6% was based on a nice increase in aftermarket activity as we moved through 2009. Gross margin peaked at about 30% versus 27% in 2008.

There were several things that Craig mentioned, but let me highlight the two biggest things that contributed to that 30% gross margin, and that was obviously the additional mix of aftermarket that we got in 2009 and we had the nice opportunity of reduced raw material costs as we progressed through the year. Obviously, with the economy the way it was raw material prices were down fairly significantly in mid-2009.

Now, I’ll talk a little bit more about that, but raw material costs are starting to move up again. Net earnings increased 34% year-over-year, which obviously was very gratifying.

SG&A was effectively flat. We had some non-reoccurring costs in the year but on a cash basis, our SG&A was effectively flat 2009 to 2008. That possibly could go up a little bit here as we go through '10 as we want to do a few more things, but flat year-over-year.

Backlog effectively $1.9 billion or $2 billion. That was not surprising to us. As all of you know, we are very conservative on what we do put in backlog. Nothing goes into backlog unless we know it’s non-cancelable and we do have some timing on some of the businesses that’s out there right now. So, we’re satisfied with where the backlog is and where we think the order activity is as we move into 2010.

Our EBITDA margin for the quarter and for the year was 20%. We talked about that in the last call. Our goal after we had hit 15% three years ago was to get to 20% EBITDA margin level. We’ve done that. We’re very satisfied that we were able to execute our plans effectively to get to that target.

And that’s a healthy level of margin to make sure that our company can continue to reinvest and do all the things that we need to do to be a very viable and competitive machinery Company in the mining industry.

A couple of things that I would like to highlight as well, we talked last year at this time that we were going to take part of our backlog from 2009 and move into 2010. That plan worked out very effective for our 2009 plan. We had some nice surprise on the aftermarket revenue pick up. But we effectively moved $200 million of our backlog from '09 into '10. That did create some issues for us a little bit in the working capital. We obviously required more working capital by delaying those shipments.

Inventory moved up and the accounts receivable moved up. Those will all flush out now in the first half of 2010. It was the right plan and we’re very pleased that we’re able to maintain those orders in backlog and really flatten out our plan and what we thought would be a fairly turbulent 2009. As it turned out, it was not as turbulent for us as it was for others, but it worked out very well and it’s always good when a plan does work the way you hope it will.

Let me talk briefly about the markets. The markets are strong and improving. I mentioned already I think a great deal of order activity pending and again, our backlog might have been a little bit down as to what we would have thought it would have been at the end of the year, but we think that a lot of that activity that could have happened in the fourth quarter from a timing issue could happen now in the first quarter.

I looked at oil and copper this morning. I think oil is right around $78 a barrel. Copper is at $3.27 a pound. A very strong numbers. Coking coal pricing and iron ore pricing are being negotiated right now. But there’s all indications that iron ore and coking coal prices will go up. I would say fairly significantly this year, although yet to be determined.

Steel prices or steel costs are moving up. As we sit here today already toward the end of February we’re seeing steel costs that have increased on some of the steel that we do buy by 14% so it’s moving up fairly rapidly. We are protected on our steel pricing into the third quarter. However, with the coking coal and iron ore pricing moving up, obviously, we’re going to be under some cost pressure.

As we move orders into backlog, as all of you know, we like to have as much certainty on our cost basis as possible. So as we move through 2010, with the volatility of the material costs moving up, we will have to be diligent and make sure that we manage that process as we have in the past.

I think all the markets, in general, are in really good shape with one exception. I think that’s the domestic U.S. market. The U.S. market continues to be challenged. I think coal production both in the western coal mines and the eastern coal mines in 2009 were down.

I think the eastern coal mines were down around 12.5% and the west was down about 7.5% and pricing is challenged right now, but pricing is still okay. I think it’s still above cash cost for most of the coal mining companies in the United States. It’s just that demand is down and I think they’re challenged as far as making sure that they manage their businesses as we move through the year.

I fully expect that we may get a little bit more export activity out of the eastern U.S. as we move through 2010 with demand for coking coal increasing. Exports out of the United States last year were down around 27.5%, which is a huge reduction. And part of the reason why the coal production was down as well. But I think that we should see some recovery in 2010 in that respect.

As we move forward into 2010, Craig mentioned CapEx will be somewhere in the $60 million to $70 million range. We will continue to spend at a little bit higher rate on research and development. We’ve been very satisfied by some of the initiatives that we rolled out in 2009.

We’ve got some more things that we want to roll out in 2010 across all of our products. So the money we’re spending right now on research and development is having the returns that we had hoped and that encourages us to spend a little bit more in that area.

Guidance for 2010, we’re looking at sales to be somewhere between $2,650 billion and $2,750 billion for the full year 2010. EBITDA, somewhere, we think between $525 million and $550 million for 2010. This does not obviously include any numbers that could pertain to the Terex acquisition.

I will state that the Terex acquisition continues along the path that we had hoped and planned and I can also state that the closing is imminent. Part of what we will do as we move forward after the closing of the Terex acquisition has begun to prepare guidance as it pertains to the Terex products.

As all of you I’m sure well understand, until we close, we cannot really spend the amount of time we need to with the Terex management team to dig into their numbers, deep enough to really determine what 2010 may look like.

The run rate though, that we base the acquisition on was approximately $1.1 billion in revenue and $150 million in EBITDA. We will refine that obviously with our discussions with the management team. And on our next call we will give you a new consolidated full guidance with Terex products as part of the mix.

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

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Barry Bannister with Stifel Nicolaus. Please proceed.

Barry Bannister -- Stifel Nicolaus

Hi, guys. Fast fingers. Just a little cleanup on the Terex acquisition. Are we roughly looking at a 6.8% rate on the $1 billion term loan? And would you price the 300 million of shares at the date of the closing?

Craig Mackus

We did a public release on the shares and that was the 10 days when we announced the deal last year. So the average price over a 10-day period so that’s been priced already.

Barry Bannister -- Stifel Nicolaus

Okay. And what about the note?

Craig Mackus

The note we’ll be doing with term debt holders and that is very close to finalization also, which will be announced when we announce the completion of the Terex acquisition. I will say that the 6.8 would be on the very high end.

Barry Bannister -- Stifel Nicolaus

Okay. And then they’ve got $15 million, I understand, of D&A on the $1,100 billion sales of Terex. That seems like a fairly low amount of D&A. It implies a very old fixed plant, so that would be my first question is the CapEx number if you include Terex likely to have to rise. And the second question part of that is with CAT rolling out the 793.5 and 794.5, pretty aggressively, does their having a financing subsidiary put you at somewhat of a competitive disadvantage because they can package financing on the sale.

Tim Sullivan

A couple of things. I think as far as CapEx, historically, Terex has not spent a lot of capital on brick and mortar in their facilities. We have a plan going forward that I don t think will require an inordinate amount of additional capital that’s above, I guess, what I would say, our normal run rate as a percent of revenue.

As far as financing for trucks, I don’t necessarily think that having an internal financial capital company is necessary. I think we’ve been able to, I think, through 2009 work fairly effectively with the U.S. Exim Bank to come up with some good packages on the historical Bucyrus equipment for some of the markets that require financing. I think that would be the same. And that’s mostly where we’re going to be selling trucks anyways is in the developing world and I think we ‘rely on people like U.S. Exim bank.

Barry Bannister -- Stifel Nicolaus

Okay, thanks.

Operator

Your next question comes from the line of Ann Duignan with JP Morgan. Please proceed.

Ann Duignan -- JP Morgan

Hi, good morning, guys, its Ann Duignan.

Craig Mackus

Good morning.

Tim Sullivan

Good morning.

Ann Duignan -- JP Morgan

I just wanted to circle back on your outlook for EBITDA by $525 million to $550 million. Last quarter you seemed very confident that your customers would start ordering products just about now and you had anticipated flat EBITDA year-over-year. Has your confidence waned at all in that? You seem a little bit more hesitant this morning on getting those new orders in the near-term.

Tim Sullivan

Not hesitant on getting those new orders in. I think potentially a little bit conservative on the EBITDA range just with what we’re seeing with the costs on raw materials. That 30% peak that we had on gross margin last year was nice to have. I’m just not sure that we’re going to be able to stay in that level of gross margin as we move through 2010.

We’re going to be real challenged to maintain that level because of the volatility in the raw materials. But I think the activity in the market is there. We’re not hesitant at all about that. I think we want to be a little bit cautious and conservative though, on what we’re going to be able to achieve from a gross margin standpoint.

Ann Duignan -- JP Morgan

Okay, that’s very helpful. And then back to Terex again. Can you talk a little bit about what’s your strategy will be for the aftermarket business, they go through distribution, you are your own distributor. I think there’s a great opportunity there. But could you maybe give us some color on what your strategy might be on their aftermarket business? And then also, on their Tier 4 interim engines, they had laid out a plan for their own business. Can you talk about a little bit if you have done any work on that and what’s your strategy will be for Tier 4 interim and beyond?

Tim Sullivan

Let me address the aftermarket. As we’ve talked about, I think in the past, aftermarket opportunities in our industry are entirely dependent on availability of the spare parts and getting the spare parts to the customer when they need them. If you have the parts in these remote locations at their fingertips you will get the sale. So, it’s really administrative, management type of function. I think we can bring a lot of our expertise to the table to improve the aftermarket opportunities with the Terex products because of that. I think we’ve demonstrated that on the surface side of the Bucyrus products.

We’re very gratified by the fact that we’ve been able to move that same discipline over to our underground parts and you saw what’s happened there where we’ve been able to increase market share on spare parts on the underground side. We expect to do the same thing on Terex. We think we know how to do it and we’re actually excited about the prospect of implementing those management disciplines.

The engines and the Tier 4 and all that sort of thing, Ann, I’ll be honest with you, we’ve not gotten into that in a meaningful way at this point in time. Obviously, that’s something we’ll do. When we get a chance to sit down with the management team from Terex after closing and have a little bit more to say about that I think after we’ve had a chance to really sit down and understand in great detail what they have planned.

Ann Duignan -- JP Morgan

Okay. And overall, just on the aftermarket, I don’t mean to dig deeper on this, but you carry roughly 130 days of inventory. When you merge the two businesses, is there anything significantly different about the truck aftermarket that would result in higher or lower total inventories?

Tim Sullivan

Well, no, I think, in general, machinery is machinery. It’s up to manage it effectively and then make sure that you get your turns up. It’s a little bit different in the sense that obviously, you’ve got different things like engines and things like that that we don’t typically deal with.

Our inventory too is it’s at a much higher level than what we want it to be, because of our strategy for 2009. I think we’ll probably manage that inventory a little bit better as we move through '10. I think the blocking and tackling is going to be fairly similar. The element that you did raise, we’ll have to manage that and that’s to make sure that we effectively deal with that distribution network that’s out there.

Ann Duignan -- JP Morgan

Right. I guess that I was getting at underneath at all. Okay, I’ll get back in line. I’ve taken enough of your time. Thank you. Appreciate it.

Operator

Your next question comes from the line of Robert Wertheimer with Morgan Stanley. Please proceed.

Robert Wertheimer -- Morgan Stanley

Hey, good morning everybody. My first question is on just what the environment feels like. If you look at some of the CapEx announcement from the major miners, it appears as though CapEx could be back to really peak levels in certainly 2011 if not 2010. Is that what it feels like from bidding and quoting activity or did the delays that happened in the industry slow all that down more and your recovery will come after that CapEx surge?

Tim Sullivan

No, I think we’re as bullish as anyone in the market. I think we had that market correction last year that in many respects it was fairly quick. We had quite a bit of quotation activity in the third quarter and fourth quarter and that’s continued into the first quarter, and if anything, it could accelerate as we move through the year. I think that the demand for commodities is up, the pricing is up. And when pricing is up on commodities, people spend money. So now, we’re very bullish on '10, where it’s going to map in compared to, say, 2007 and 2008, hard to say, yes, but demand will be up or I think everyone expects it to be in '10.

Robert Wertheimer -- Morgan Stanley

Okay, great. Just one may be a little bit minor given how volatile some of the numbers are, but the aftermarket orders on the surface side, I can’t tell if there’s any seasonality to that normally and it was just down a little bit from 3Q.

Tim Sullivan

No, I think what we did have is at mid-year, say, Q2, Q3, we had a nice surge. A lot of was going on in the marketplace in '09 because machinery was not being utilized at the levels it was in '07 and '08. I think everyone took a breath and really spend quite a bit of money. That’s where we had the nice kick in revenue last year. There’s no seasonality to it. It all makes sense, it’s all logical, why they would spend money when they had utilization factors down. And they had money, they’re still selling commodities above their cash cost. It was kind of a mid-year phenomenon, it happens that way. It gets a little lumpy. You get it from quarter to quarter, but no seasonality, really.

Robert Wertheimer -- Morgan Stanley

Perfect. And just for clarity, would you do a guidance update/call as the Terex deal closes or just on your normal quarterly call?

Tim Sullivan

No, we’ll probably do it on the normal quarterly call. We’re going to be on the phone with you again here within about 60 days and it’s probably going to take us virtually all of that period of time to make sure that we fully understand what '10s going to look like, sitting down with the Terex management team and understanding it fully.

Robert Wertheimer -- Morgan Stanley

Great, thanks.

Operator

Your next question comes from the line of Andy Kaplowitz with Barclays Capital. Please proceed.

Andy Kaplowitz -- Barclays Capital

Good morning, guys.

Craig Mackus

Good morning, Andrew.

Andy Kaplowitz -- Barclays Capital

Tim, you gave us a good run down of your general end markets, but I’m wondering as we go into 2010, geographically speaking, where do you expect to see the most awards come from? What are the best geographic markets for you in 2010?

Tim Sullivan

Australia, Brazil, India are going to be strong markets for us in '10.

Andy Kaplowitz -- Barclays Capital

Easy answer. Can I ask you about pricing, Tim? Because we went through this correction in 2009, customers are obviously lining up to do more work, but are they pushing back on you on pricing at all? Are they basically accepting pricing has not gone down and may even go up in 2010?

Tim Sullivan

The pricing kind of ebbs and flows with our cost basis. We had a nice pick-up in gross margin that we didn’t really plan or expect in '09 because of the raw material pricing or cost I should say. We’re going to be under pressure this year. And they understand that. What goes around comes around. We sit down with our customers. It’s a perfect circle of cost. If their iron ore and coking coal prices are going up they realize that our pricing for our machinery has to go up as well because it goes straight into the steel that we buy. So it ebbs and flows really with the commodity pricing and they fully understand that.

Andy Kaplowitz -- Barclays Capital

Have you seen any positive change recently in the U.S. coal market? Your peer has cited maybe a little bit of a change because the inventories have come down pretty dramatically here over the last month or two, maybe as we go into the latter part of this year you do see more activity faster than people would have expected.

Tim Sullivan

I think on the thermal side, it’s going to be very slow. It’s going to be a very slow recovery. It’s just a complete function of our economy and as the economy goes, power generation goes. I think there might be a glimmer of hope on the U.S. market is on that export market. It was dramatically off in '09. I got to believe we’ll get a little bit of recovery, especially in the eastern U.S. with some potential kick-ups in coking coal demand. So thermal, steam, coal, no. I think it’s going to be a fairly flat year. I think there’s a shot that some of the coking coal producers might pick up some export contracts and that could kick-up a little bit of activity, but I think it’s still going to be a fairly challenging year for most coal producers in the United States.

Andy Kaplowitz -- Barclays Capital

Okay, that’s helpful. I’ll get back in queue, thank you.

Operator

Your next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed.

Seth Weber -- RBC Capital Markets

Hey, good morning, guys. Can you give us an idea how many shovels you expect to make in 2010 and how that relates to your maximum capacity? And also how much more aftermarket you think you can run through the existing infrastructure? And then as a follow-up to that, if you’ve had a chance to look at the Terex manufacturing footprint, I’m trying to understand how much unused capacity have there as well.

Tim Sullivan

Let me give you the shovel thing. We’re going to be in that 23, 24 shovel range we think this year, which is up a little bit from '09. As far as the aftermarket flow, we’ve got a lot of capacity. As we talked about in some of the previous calls, we are still very satisfied and continuing to determine and understand fully the efficiencies that we built into our South Milwaukee plant. We basically chewed through that aftermarket opportunity that we got in 2009 fairly quickly. Our run rates on our machine tools now, in some respects have been cut in half or more as we’ve improved and brought new machine tools in. So we’ve got capacity here and that will bode well for us.

I think as we look at plant capacities in general and where we might build things in the future. The plant capacities, obviously, the Terex business has been off somewhat in '09, less than their peak. So, their plants are not necessarily running at full capacities right now. There is work going through, I think, virtually, all their plants with the exception of high wall miners in Beckley, which is very, very quiet right now. But we expect that will rebound nicely here in '10, as it relates to the improved market. But, what we will do as we roll through this whole thing, we have a pretty good idea of where the plant capacities are, where the efficiencies are, and we will do some rationalization to make sure that we effectively fill plants that are highly efficient.

Seth Weber -- RBC Capital Markets

Okay. So just to clarify, so for your shovel business, you still think you could do something north of 30, you’re at 23 or 24 this year, is that fair?

Tim Sullivan

Yes.

Seth Weber -- RBC Capital Markets

And on the aftermarket you think there’s maybe 30%, 40% upside to current volumes?

Tim Sullivan

Yes, we could get to that kind of level. The efficiency that’s we’re seeing right now are really very good.

Seth Weber -- RBC Capital Markets

Okay. And then just real quick, just on the steel cost issue, as your pricing contracts, are you using escalators or you’re just going fixed price and you share risk on that?

Tim Sullivan

We don t like using escalation clauses. We like price certainty and cost certainty wherever possible. And I think we explained in the past how we do that. We may have a contract and we don’t put it into backlog because that contract does not become a contract until we lock and load price. In other words, typically, we have a contract where we say, the customer has the contract 12 months prior to shipment we will lock and load on price and the customer has the opportunity then to continue with the contract or not.

We like cost certainty before we put anything in backlog. Escalation clauses that some people put in contracts, we don t like. They lag. They look at history, not what’s coming at you. So we’re pretty careful in how we price our backlog and how we put it into firm orders.

Seth Weber -- RBC Capital Markets

Okay. Actually if I could just squeeze in one clarification, the EBITDA guidance is that an adjusted EBITDA or is that reported?

Craig Mackus

Adjusted.

Seth Weber -- RBC Capital Markets

Okay, thanks very much, guys.

Operator

Your next question comes from the line of Joel Tiss with Buckingham Research Group. Please proceed.

Joel Tiss -- Buckingham Research Group

All right. How’s going?

Tim Sullivan

Good.

Joel Tiss -- Buckingham Research Group

I wonder if you could talk a little bit about what’s going on in China and the visibility you have on the cycle, what your customers are talking about and what’s going to happen when these Chinese guys get back from new year and how tight is supply, all that stuff?

Tim Sullivan

Let me be politically correct, I guess. There’s a fairly strong reaction to some of the things that were stated coming out of China a couple weeks ago. We see no falloff in the demand in China. What is said in the press is sometimes not what happens in reality. We still see that as a very strong market. We see no pull back whatsoever in demand for commodities. It just keeps moving forward. I think people need to be cautious about what is actually said and what actually happens in that country. It’s not always in alignment, if you know what I’m trying to say. And I think we feel pretty strongly about the demand coming out of that market.

Joel Tiss -- Buckingham Research Group

And how does that play into where you think we are in the cycle and some other factors that you can see?

Tim Sullivan

The cycle’s going to continue to be long and strong. Their demand is consistent. It keeps going up. But we’re also seeing a lot of activity now in the demand coming out of India. We always discount India and rightfully so because they’ve struggled as an economy but that economy is starting to move forward at a very rapid pace too. So the two of those in particular. And Brazil. Those three in particular right now are driving great demand for commodities. Russia, I think has got some healing to do before they get back on that brick bandwagon. But China, India, Brazil, it’s just going to be a long and strong commodity demand as far as we’re concerned.

Joel Tiss -- Buckingham Research Group

Okay. And then can you in the same vein just talk a little bit about drag lines, give us an update, what’s going on there, what you’re seeing in the market?

Tim Sullivan

Yes, we had a lot of drag line activity before the market correction and that activity is starting to come back slowly. Those are always big capital purchases and I think we were pretty bullish about drag lines before the market correction. We’re becoming more bullish everyday with what’s happening. We think there’s some pretty solid drag line demand in 2010.

Joel Tiss -- Buckingham Research Group

All right, thank you.

Operator

Your next question comes from the line of Schon Williams with BB&T Capital Markets. Please proceed.

Schon Williams -- BB&T Capital Markets

Hi, good morning.

Craig Mackus

Good morning.

Tim Sullivan

Good morning.

Schon Williams -- BB&T Capital Markets

I just wanted to follow-up on the manufacturing platform that’s going to be coming in the Terex deal. You guys did not mention the Chinese JV in the presentation. I believe that’s a shovel facility that’s over there. Is that going to come with the deal, and if so, would that provide a nice manufacturing base in China or is it more of on the fringe?

Tim Sullivan

It’s a truck facility. But ironically, we have actually subcontracted work to that JV over the years, shovel subcontract. I think it’s something that’s positive. I think right now until the Chinese effectively begin competing with their own truck in that market, I like how we’re positioned versus the competition for the China market on truck business. But I m fairly consistent with my pessimism on being able to compete effectively, once the Chinese get into that business and they are developing a truck right now. So we don’t discount it completely. It’s obviously a positive versus the competition. And we’ll continue to broker and leverage that presence that we have in that marketplace.

Schon Williams -- BB&T Capital Markets

All right, tanks for the update, guys.

Operator

Your next question comes from the line of Chris Weltzer with Robert W. Baird. Please proceed.

Chris Weltzer -- Robert W. Baird

Good morning, guys.

Craig Mackus

Good morning, Chris.

Chris Weltzer -- Robert W. Baird

Can you maybe breakout your revenue outlook? I know it’s roughly flat but how does that breakout between aftermarket and OE?

Craig Mackus

This is Craig. It’s just going to be about the same as it was this year. We had a pretty good year in the aftermarket. We’re looking for just a slight increase in the aftermarket in the upcoming year. If we hit the lower end of our range, it will be pretty much flat in both parts and OE. On the upper end of the range, it’s more skewed towards selling additional OE equipment. So at the $100 million additional revenue that would probably be on the OE side more so than the aftermarket. Aftermarket continues to be pretty consistent and steady for us. So, as business is up or commodity demand is up or down, we seem to be pretty consistent on our aftermarket activity due to our strong installed base so looking that to continue to at a fairly high level, which is where we’ve been at, but the growth will probably be on the OE side.

Chris Weltzer -- Robert W. Baird

Okay, that’s very helpful. And then right now it looks like you’re producing shovels at a rate below the 23 goal for next year. Can you talk about how that production rate plays out through the year? Should we expect a slow ramp up or is it all one step?

Tim Sullivan

No, this will ramp up, obviously, dependent on demand here in the first two quarters. We bring in the raw material in anticipation of a ramp up and as we load the order book -- don t get me wrong, we’ve got backlog already there to ship this year, but we can add as the demand shows us that we need to add a few more shovels in the schedule towards the back end of the year.

Chris Weltzer -- Robert W. Baird

Got it, okay. And then last one, don’t know if you’ve got any more thoughts on this but any more details or estimates of what potential purchase accounting could be with the Terex deal?

Craig Mackus

We do. We’ve actually engaged all the appraisal companies and we’re finishing that now but we really can’t give any guidance related to Terex at this point in time. We will be having the file of pro formas fairly soon after the deal is consummated. So, at some point in time you’ll see that before the end of the next conference call.

Chris Weltzer -- Robert W. Baird

Thank you, guys.

Operator

Your next question comes from the line of Charles Brady with BMO Capital Markets. Please proceed.

Charles Brady -- BMO Capital Markets

Hey, thanks. Good morning, guys.

Tim Sullivan

Hi.

Charles Brady -- BMO Capital Markets

Tim, you guys booked a nice sizable Indian longwall order in Q4, which is I guess, fairly unusual. Can you give us some comments around how long you’ve been working on that and what the opportunity might be for a similar type on the underground side in India going forward?

Tim Sullivan

It was a typical Indian order. I think we worked on it for about 20 years. I think it was about a two year or three year type of process, but now that they’ve got one we think there’s going to be additional activity of longwall in India. They do have underground coal reserves. About 20% of their coal reserves are underground, but yes, we see that they want to exploit their underground; they want to use Western equipment so we think that that’s a good opportunity going forward.

Charles Brady -- BMO Capital Markets

Thanks. Back on the draglines, can you remind us when those draglines run through the revenues, when you stop recognizing revenues on that?

Craig Mackus

We have two of them that were in backlog and the first one we’ll finish around the beginning of the second quarter. The second one will run most of 2010. So you’ll start seeing some declines year-over-year unless we book another new dragline.

Charles Brady -- BMO Capital Markets

Okay, thanks very much.

Operator

Your next question comes from the line of Barry Bannister with Stifel Nicholas. Please proceed.

Barry Bannister -- Stifel Nicolaus

Hi. Has Shen Zhou stepped any closer to ordering a second dragline in Inner Mongolia?

Tim Sullivan

No. Very disappointing. I think that dragline is actually just recently been parked for a couple of weeks because they’ve uncovered so much coal, they can’t get the coal out of the ground fast enough so that the tool has proved itself in spades. It’s a little disappointing that we haven’t gotten more interest for additional draglines yet from. Shen Zhou.

Barry Bannister -- Stifel Nicolaus

Okay. And then when I look at the company and how it’s changed over the years since the IPO, rolling out a profit sharing for all 7,700 people, now you’re going to be dealing with diesel R&D and emissions. I see the company is doing less outsourcing and more metal bending. And you’re looking at signing alliance agreements which sometimes sacrifice pricing, but obtain more regular sales volume visibility.

So when I add it all up, it sounds an awful lot like Bucyrus is becoming more of a large global machinery company, similar to a lot of the other ones that we all cover. And you mentioned the SAP rollout last time but, are there any other changes you contemplate such as division presidents, reorganizing around certain segments or other costs associated in becoming a big machinery company.

Tim Sullivan

That’s a good point, Barry, and we just had a management call this morning with all of our people and we will absolutely resist becoming what you’ve just described. We expect to maintain our small company approach and I expect to run a very flat organization and resist exactly what you just said.

Barry Bannister -- Stifel Nicolaus

Okay, all right. So it’s on the plate. You’re aware of it and all that?

Tim Sullivan

Absolutely.

Barry Bannister -- Stifel Nicolaus

Okay, thanks.

Operator

Your next question comes from the line of Eric Valentine [ph] with Epidos [ph] Please proceed.

Eric Valentine -- Epidos

Thanks, guys for taking the call and solid quarter. Just a couple of quick questions. First, looks like you’ll probably be generating some good free cash flow for the year. Can you just give us an indication of what you might be using that for to pay down debt or dividends or potentially future acquisitions?

Craig Mackus

We mentioned though. We don’t intend on changing the dividend, it’s fairly small. We tend to keep where it is. Our pension plan that we made significant progress towards funding that to where it’s almost fully funded as of the end of 2009. We’re about $12 million, $13 million short. So, we’re in very good shape there. CapEx spending, we’re looking at; we talked about $60 million to $70 million, primarily on the service and aftermarket side to support future growth in those highly profitable areas.

The cash we will generate will probably go towards initially looking at paying down some of the debt that we will take on as a result of the Terex acquisition, so initially we’ll look to delever more than we already will be for at least a little while, then we may leave some cash on the balance sheet and see where the markets will go after that. But nothing too much different from what we’ve been doing so far. Don t plan on any stock buyback or dividend increases. Just the pay down debt and accumulate cash and continue to grow the business.

Eric Valentine -- Epidos

And maybe kind of looking longer-term, clearly, the Terex acquisition helped your business profile and so forth and if you do pay down some debt are you trying to potentially target Bucyrus as an investment grade company down the road?

Tim Sullivan

I think we’ll get there. I think we’ll get there sooner than later.

Eric Valentine -- Epidos

Okay. And then just one last question on the backlog, you guys have a pretty good policy, no cancellations in the backlog, you talked a little bit about that earlier, Tim. What about Terex? What about Terex’s backlog? And then do they have the same kind of policies as you guys or can their backlog, some of it be cancelled?

Tim Sullivan

They don’t. And I think that’s one thing that we’ll work hard to make sure that all backlogs that goes into or all machines that go into backlog in the future will have that same type of discipline and I’m not being critical. I think it’s a lot more difficult on trucks and hydraulic excavators and drills because they’re multiple units versus a dragline or a large electric mining shovel, but we have to build those same disciplines into our backlog as we move forward.

Eric Valentine -- Epidos

Okay, great, thanks, guys. Appreciate it.

Operator

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed.

Steve Barger -- KeyBanc Capital Markets

Hi. I had to jump off for a minute so just let me know if you’ve already covered this, but did you give any more color on some of the orders that were pushed into 1Q in terms of machine type and was that timing issue related to mining companies dealing with planning issues as their CapEx budgets come back online?

Tim Sullivan

It was a mix of both underground and surface that shifted into the first half of this year. And it was two reasons. One reason being they didn’t need it, because their markets had fallen off fairly significantly. And/or, they didn’t have money. On the one, where their markets had fallen off, that was an easier problem to deal with and we moved them into the first half of '10, where they had money issues, I think I mentioned this in the last couple of calls. We went and helped them with financing with U.S. Exim Bank and protected them from that standpoint. Those orders were both in Russia and in Canada, where we went back and helped with some of the financing. And in the second half of your question was what?

Steve Barger -- KeyBanc Capital Markets

Just was some of the timing related to planning issues as the CapEx budgets come back online because we’ve seen a lot of these mines come out and increase those expectations.

Tim Sullivan

Yes, no, I think they’re fine, they’re more than happy to take those machines right now. Some of the markets that had softened on them have come back nicely and obviously the people that needed the machines and had the money are more than happy to take them now.

Steve Barger -- KeyBanc Capital Markets

Right. So reasonably speaking the book-to-bill is probably going to shift back towards more being on the positive side of one as we go into 2010.

Tim Sullivan

Correct.

Steve Barger -- KeyBanc Capital Markets

Okay And one last question. I know this stuff is not in the backlog, but can you talk about the level of LOIs versus some of the prior quarters? Are you seeing more of that firm inquiries come back?

Tim Sullivan

Yes.

Steve Barger -- KeyBanc Capital Markets

Any relative metrics versus where it may have been in 2009?

Tim Sullivan

Yes, we only had really probably the first quarter and a half of last year where things really dried up. And it turned back on. So it’s been fairly consistent. Q3, Q4, Q1. With the only difference being that we had that year end phenomena, where people say, look, here is a contract, but I want the ability to pull it in the first month of January, because I’ve to get board approval type of thing. So there’s a little bit of that that happens at the year end, but it’s fairly consistent with where we were in Q3 and Q4. We had a fairly short window, where things closed down on us last year. So we see that right now out of the blocks in Q1 2010, I guess, the activity is up a little bit over Q4, but Q4 was pretty active.

Steve Barger -- KeyBanc Capital Markets

Okay, great, thanks.

Operator

Your next question comes from the line of Will Gabrielski with Broadpoint. Please proceed.

Will Gabrielski -- Broadpoint

Sure, thank you. Good morning, guys. Most of my questions were asked and answered. I was just wondering if you could provide some color or characterize what you’re seeing in the oil sands market right now versus maybe six months ago and a year ago.

Tim Sullivan

It’s very strong. We’re seeing activity up there right now in the Brownfield sites are moving forward and I think you read about imperial oils Kearl Lake project or I think they just call it Kearl now. So we’ve seen a lot of good activity up there.

Will Gabrielski -- Broadpoint

All right, great, that’s really all I had left, thank you.

Tim Sullivan

All right. Go ahead.

Operator

This concludes the question-and-answer session of today’s conference call. I will now turn the call back over to management for closing remarks.

Tim Sullivan

We’re a little bit over our time so I’ll be brief. We were very gratified and satisfied, I guess, in many respects with the plan that we laid out for 2009 and how it played out. You always love it when you put a plan out there and it works. And we were very satisfied by how everything played out on shifting that backlog from '09 into '10 and obviously, we had a nice year with a nice pick up that we had in aftermarket revenue, and obviously, the gross margin that moved up that helped with the earnings. We think we’re in for a good 2010. The market’s strong. And I think we’re particularly excited about the Terex acquisition and getting that closed and moving forward.

Obviously, we’ll have a very active call in April when we come out with our guidance on a consolidated basis and our plan going forward for the Terex products. Thanks for joining us today and look forward to speaking with you again in about 60 days.

Operator

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

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Source: Bucyrus International, Inc. Q4 2009 Earnings Call Transcript
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