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Executives

Shelley Hickman – Director, Global Communications

Tim Sullivan – President and CEO

Craig Mackus – CFO and Secretary

Analysts

Seth Weber – RBC Capital Markets

Barry Bannister – Stifel Nicolaus

Robert Wertheimer – Morgan Stanley

Andy Kaplowitz – Barclays Capital

Ann Duignan – JP Morgan

Paul Bodnar – Longbow Research

Tom Brinkmann – BMO Capital Markets

Joe Mondillo – Sidoti & Company

Jason Ho [ph] – Blair Advisors

Chris Weltzer – Robert W. Baird

Schon Williams – BB&T Capital Markets

Jerry Revich – Goldman Sachs

Bucyrus International, Inc. (BUCY) Q1 2010 Earnings Call Transcript April 23, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Bucyrus International Incorporated earnings conference call. My name is Regina and I will be your operator today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Shelley Hickman, Director of Global Communications. Ms. Hickman, you may proceed.

Shelley Hickman

Thank you, Regina. Good morning and thank you for joining us for Bucyrus International Incorporated first quarter 2010 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.

Now I will turn the conference over to Tim.

Tim Sullivan

Good morning, everyone, and thank you for joining us for our quarter-one 2010 call. I’m going to turn the call over to Craig to give you a highlight and summary of our financials for the first quarter. I’ll talk about some market information and then we will open up to Q&A. So Craig, if you would?

Craig Mackus

Thank you, Tim. Before we begin, I’d like to advise everyone that our financial results for the first quarter of 2010 includes the net assets and results of operations of Terex since February 19, the date of acquisition, as well as a preliminary purchase accounting adjustments and acquisition cost incurred related to the Terex acquisition. As a result, our financial results for the first quarter of 2010 are not necessarily compared to the results of the first quarter of 2009 or as of December 31, 2009 and may not be indicative of future results.

Sales for the first quarter of 2010, which include $92 million for Terex, were $608 million, an increase of $2 million compared to the first quarter of 2009. Original Equipment sales, which include $35 million for Terex, declined by $60 million or 18%, primarily due to a decrease in electric mining shovel sales and higher longwall system sales to the Czech Republic in 2009. The lower original equipment sales in 2010 was a result of the lower amount of new orders in 2009 compared with 2008.

Aftermarket parts and service sales, which include $57 million for Terex, increased by $62 million or 22%. Gross margin was 30% for the quarter of 2010 after adjusting for amortization of Terex purchase accounting adjustments compared to 28% for the first quarter of 2009. The first quarter of 2010 reflects lower gross margins in the Terex business compared with historical Bucyrus, and manufacturing absorption losses due to reduced activity.

This was offset by improved original equipment gross margins in part due to bringing subcontract work back into our manufacturing facilities. There is $33 million remaining inventory purchase accounting adjustment, $16 million will be expensed in each of the second and third quarters, with the remaining $1 million being expensed in the fourth quarter.

Operating earnings for the first quarter of 2010, which include Terex earnings of $8 million before amortization of purchase accounting adjustments, were $66 million, a decrease of $29 million compared to the first quarter of 2009. This decrease includes $14 million of amortization of purchase accounting adjustments, $11 million of expense acquisition cost related to the Terex acquisition, and the $2 million loss for the sale of assets.

Lower underground mining sales in the first quarter of 2010 negatively impacted operating earnings compared to the first quarter of 2009. Interest expense was $11 million for the first quarter of 2010 compared to $7 million for the first quarter of 2009. This increase reflects a new $1 billion secured term loan, which was used to purchase Terex.

The effective tax rate for the first quarter of 2010 was 35.6% compared to 32.5% for the first quarter of 2009. The higher rate in 2010 was primarily due to non-deductible acquisition cost related to the Terex acquisition. The effective tax rate for all of 2010 is expected to approximate 32%.

Net earnings for the first quarter of 2010 were $35 million, a decrease of $22 million from the first quarter of 2009. Fully diluted earnings per share for the first quarter of 2010 were $0.45 per share compared to $0.76 per share for the first quarter of 2009. We provide our earnings bridge in the press release to quantify the effect of Terex. Amortization of purchase accounting adjustments are expected to approximate $25 million, $17 million after-tax, in the second quarter; $23 million, $16 million after-tax in the third quarter; and $7 million, $5 million after-tax for subsequent quarters.

Adjusted EBITDA for the first quarter of 2010 was $120 million, an increase of 11% from $108 million for the first quarter of 2009. Adjusted EBITDA was 20% of sales for the first quarter of 2010 compared to 18% for the first quarter of 2009. Adjusted EBITDA excludes the impact of non-cash stock comp expense, loss on disposal of fixed assets, the inventory fair value of purchase accounting adjustments charged to cost of products sold, and Terex acquisition cost.

March 31, 2010, our backlog was $2.2 billion, $1.5 billion of which is expected to be recognized within the next 12 months. This represents an 18% increase from the December 31, 2009 total backlog of $1.9 billion and 19% increase in the 12-month backlog of $1.3 billion. Backlog on March 31, 2010 includes $302 million for Terex.

New orders for the first quarter of 2010, which include $90 million for Terex, were $640 million, an increase of $195 million or 44% compared to the first quarter of 2009. Original equipment new orders for the first quarter of 2010 were $321 million compared to $194 million for the first quarter of 2009. The increase was in electric mining shovels, walking draglines, and groom and pillar equipment.

Aftermarket parts and service new orders for the first quarter of 2010 were $318 million compared to $251 million for the first quarter of 2009. Aftermarket orders in our service segment for the first quarter of 2010 were reduced by $29 million due to the cancellation of a multi-year maintenance repair contract. There were no other cancellations of orders in our December 31, 2009 backlog during the first quarter of 2010.

Our total debt increased to $1.5 billion at March 31, 2010 compared to $507 million at December 31, 2009, as a result of our new $1 billion term loan. And our cash balance increased to $242 million at March 31, 2010 from $101 million at December 31, 2009. We do not have any borrowings under our revolving credit facility on March 31, 2010.

Non-Terex receivables decreased by $155 million from December 31, 2010, as we had large collections on shovels and longwall orders. Non-Terex inventories were relatively unchanged from December 31, 2009.

I’ll now turn it back to Tim.

Tim Sullivan

Okay, Craig. Thanks. Let me begin just with a statement I think about our financial performance for the quarter. Although obviously it was well below consensus, it was exactly on our plan for the quarter with no surprises. From our standpoint, we performed exactly to our plan that we had set out at the end of last year. Rather than highlight some of those performance numbers, I think I’ll just talk about the market because there probably are several questions about the financials for the quarter with obviously the Terex portion that’s in there this quarter.

The market remains incredibly strong. We are having a very high level of activity right now. Even though some of that activity has not led to bookings in the first quarter, we are experiencing a very high level of quotation and activity for both new machines and aftermarket virtually across the board.

We have had, as I mentioned on our last call, some strong demand in Brazil and in some of our other markets like India. One of the BRIC countries that has been lagging has been Russia. What we are seeing now just in the last month a high level of activity coming from that country now as they recover from the market correction that they went through as the global correction was transparent last year.

Let me speak maybe specifically about certain commodities. One of the markets that has been soft that has come back really strong in the first quarter of 2010 has been Central Appalachia primarily based on the metallurgical coal demand increase that we’ve seen with the steel production improving firstly around the world.

Metallurgical exports have increased 70% in the first quarter year-on-year from the United States market. So you can see that Bucyrus had been a fairly strong rebound in metallurgical coal demand around the world that’s obviously affected the Australian market, but also Central Appalachia in the United States and Western Canada and British Columbia.

Power generation in the United States is recovering slowly. Stockpiles are being reduced very slowly. Stockpiles were down about 1.5% in the first quarter of the year versus 2009, a very slow recovery we expect for the rest of the year with probably some type of normalcy with the thermal coal market in the US not until probably the end of 2010 and into 2011. But if you look at that, it’s really the only lagging commodity market for us, as we look around the world today.

On a macro level from a coal standpoint, there is currently 250 gigawatts of power, coal fire power plants being built that equates to 950 million tons of coal required for the current power plants that are under construction around the world. We mine about 1.1 billion tons in the United States. 950 million tons of coal is equivalent to almost what we mine here in the United States. So we’re very bullish on the worldwide coal seen, and we fully expect that we will get a recovery in our domestic market here in the thermal coal markets, as we move into 2011.

Copper, I think everyone has been seeing the price of copper around the $3.50 per pound level. It’s been as high as $3.70 a pound here in the last month. Even though there was a surplus of approximately 800,000 tons of copper in 2009, we see that the copper demand this year is going to be very robust.

The 26% increase in demand year-on-year in China for copper last year was not enough to overcome the double-digit declines in copper demand in the mature and developed world. So China cannot carry the demand by itself, but we are seeing some recovery in the developed world for copper demand. It will be fairly slow, but towards the end of the year, the projections are that copper will not really – the copper concentrate that’s being produced but not being able to make or bridge the gap for demand.

Global production on copper only increased 2.4% last year, which is very, very small. Cash cost now are about $0.99 a pound for copper around the world. So obviously the gap between cash cost at $0.99 and copper being sold at $3.50 a pound provides for tremendous opportunity for producing customers and obviously creates the opportunity for them to expand their production and purchase our equipment.

Iron ore remains in high demand, commensurate with the metallurgical coal demand for manufacturing steel. We’ve had a significant shift in how iron ore is purchased. These are always done on annual contracts, and the large cruisers now have reverted to more of a – I’ll call it a spot or periodic pricing type of approach with their customers. But demand is very, very high in iron ore right now, and we are seeing a lot of activity in that area. So really across the board, with the exception again of domestic thermal coal in the United States market, we’ve got virtually all markets recovering and/or recovered with a significantly high level of demand we see, as we progress to 2010 for our sweep of machinery.

Let me talk briefly about the integration. It’s going extremely well. I can tell you that as anticipated, we’ve inherited over 2,000 very good, solid mining machinery people. Culturally, the companies have melted together very quickly. The integration is moving quickly. We’ve already restructured. We’ve already assimilated, and we’ve got our heads down and we are moving forward.

I think the other very gratifying results of our initial integration is we are very confident now that we’ve inherited a very good suite of machinery. The products are good. They are accepted in the marketplace, I think, coupled with our footprint of over 100 locations around the world now to service our complete suite of machinery.

We fully expect that we will get some very good traction with the new Terex products that we’ve inherited. All the products have been re-branded Bucyrus, and our people are quite excited about our opportunities in the marketplace with the new products that we have with the Terex acquisition. We had no surprises. I think, again, we are moving at a very quick pace. And I think I would even argue that we are well ahead of schedule as to where we expect it to be from an integration standpoint.

We had projected synergies of approximately $100 million with the Terex acquisition. We estimated that about 15% or $15 million of those synergies would be achieved in 2010. We fully expect that that will happen. And we hope to get ahead of that a bit towards the end of the year if we can. About 60% of those synergies will be achieved in 2011.

And again, we hope to accelerate those and we hope to beat that target if we can. We mentioned when we announced the acquisition that the deal will be accretive. We fully expect that it will be. We do anticipate though that accretion would be flat in 2010 and improve as we move through into 2011.

Let me finish before I turn over to questions with our revised guidance then for the year. Our guidance now we are projecting to be revenue or sales of approximately $3.650 billion to $3.750 billion in sales that includes approximately $1 billion worth of Terex revenue that we will achieve between now and the end of the year.

We’ve adjusted EBITDA. We have raised that $655 million to $680 million, and that includes approximately $130 million worth of adjusted EBITDA that we will get from the Terex products. I think, again, because of everything that we have in the financials and probably several questions regarding the financials and perhaps the market, let’s open it up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question today comes from the line of Seth Weber with RBC Capital Markets.

Seth Weber – RBC Capital Markets

Hey, good morning, everybody. Couple questions. I’m wondering if you can address I guess the – two questions – the weakness in the underground margins for the core Bucyrus business and also the Terex numbers relative to what we saw last year or through the nine months of last year. It seemed like there were doing about $100 million of revenue a month and margins were about 12%. The numbers that you printed for the first six weeks of ownership here were below that. Can you touch on those things?

Tim Sullivan

Let me talk about the market. I guess – and where we see that gets work itself through, the first quarter obviously had a lot to do with timing as far as the underground segment. And I think you are all used to how things kind of flow through quarters with us. I don’t really particularly care for the term loan fee, but that’s exactly what it is. That’s a timing issue. In many respects, in a lot of calls, OE and aftermarket flows through the quarter. So it was what we anticipated based on the backlog that we saw going into the first quarter. So that was not a surprise to us that we did have a bit of a fall-off and some of the underground segment there.

As far as the Terex guidance, it’s pretty much in line with what we are projecting. I think when we announced the deal back in December, we expected something around $1.1 billion in revenue for the year and something in the range of $140 million to $150 million in EBITDA, and effectively that’s what our guidance is for the rest of the year. We see that that’s probably well in line with our expectations when we announced the deal back in December. As always, we hope to beat those numbers, but it’s pretty much in line with what we thought we have.

Seth Weber – RBC Capital Markets

Okay. Do you think that underground margins should come back – I mean, just based on what you have in the backlog than you think underground margins will be down then from – I guess they were about 10% in the quarter, I mean, back to something more in the mid-double digits – mid-teens, sorry.

Craig Mackus

This is Craig, Seth. They were negatively impacted by some absorption losses in the quarter. Most absorption losses I alluded to was on the underground side and was primarily because of the decreased manufacturing and sales activity in the longwall. So as that recovers, that should help the margins. And it’s also important that we improve the amount of aftermarket sales we have on the underground, as we go forward for the rest of the year. So we think the aftermarket sales volume will go up, which are higher margins, and as a manufacturing activity increases, we will be able to reducing the amount of absorption losses we have.

Seth Weber – RBC Capital Markets

Okay. Is there anything that’s structurally changed with the Terex distribution that may have played a role in the quarter or that’s business as usual on the distribution side?

Tim Sullivan

Well, I won’t say it’s business as usual because we are evaluating all the distribution that Terex did have. I think it was pretty much business as usual for the first quarter. It will not be business as usual as we move forward. We are going through a full evaluation of all the distributors and agents that have been contracted by Terex. And there will be significant changes as we move forward. I think it’s no secret. We prefer to deal directly with our customers. And so there will be markets where we will affect that as we move through 2010 and beyond.

Seth Weber – RBC Capital Markets

Okay. Could you just remind us how much of that business goes through the caterpillar channel?

Tim Sullivan

It’s not as significant as you might think.

Craig Mackus

I don’t think we’ve really given that number or right now. It’s not – but you’re right. It’s not as significant as you might think. But I think we prefer not to give it out.

Seth Weber – RBC Capital Markets

Okay. Thanks very much, guys.

Operator

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Barry Bannister – Stifel Nicolaus

Yes, hi. I noticed the inventories almost doubled in the first quarter. And I’m trying to get a handle on what level of inventory turns you would target for the year and what sort of production and absorption we would expect if you have to adjust production to bring down inventories.

Craig Mackus

(inaudible) The inventory for the base business without Terex actually was flat from the end of the year. I think it was actually technically up $13 million. So our turns continue to be around 2.7, 2.8 for the core business. The difference between the end of the year and our new number is obviously is all Terex’s inventory. And those turns are well below 2 right now. So that is something that’s an opportunity for us to evaluate as we go forward to see if there is excess inventory or whether the inventory is in the right locations. And part of the evaluation process will be going to get the turns up on the Terex side of business.

Tim Sullivan

And I think just to let you know, we think we can effectively run this business with turns 3.5 to 4.0, and that’s our goal. And as far as how it’s going to affect our plant capacities and absorption, we think we are in for a pretty strong year as far as filling the plants. I think we had a bit of a fall-off in Q1 with our underground as far as absorption. But we will be I think in a very good position to fill the plants up, as we roll through the year.

Barry Bannister – Stifel Nicolaus

I guess I’m a little lost. But if Terex had excessive inventories going into the merger and was essentially over-earning because they were over-producing, then if you adjust their production to bring down their inventories, it would tend to cause their margins to fall below the 12% run rate they enjoyed in the first nine months of last year, right?

Tim Sullivan

Yes, but the Terex situation is a little bit different. They have a lot more purchase content for their machines as well. So as far as the amount or the value that goes through the plants versus what is actually purchased and put on the shelf, it’s a little bit different than what you would see with our core business. So it’s not as dramatic as what you might think.

Barry Bannister – Stifel Nicolaus

And then lastly, we heard nothing but news about steel cost rising and input cost rising. You tend to be cost-plus in your model, but can you talk about your pricing power, the competitive environment, and what you think steel might do to your margins on the surface side particularly as we go through next year?

Tim Sullivan

Yes, steel prices are going up. There is no question about that. Obviously with iron ore and met coal prices going up, it’s going to roll back through us. And I feel pretty confident with where we are as a company with our plan for the year. As you know, we don’t put anything in backlog until we have as much cost certainty as possible. Part of the lag and part of the delay that you are seeing in some of our increase in backlog and bookings in Q1 was to ensure that we have cost certainty on some of the LOIs that we have out there right now. And so as usual, we will be very careful to make sure that we have as much certainty on steel costs and anything that goes into our backlog to protect margins as we move forward. So again, a conservative booking and backlog approach to make sure we’ve got ourselves covered on steel cost.

Barry Bannister – Stifel Nicolaus

Okay, thanks.

Operator

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

Robert Wertheimer – Morgan Stanley

Hey, good morning, everybody. I wanted to ask about the underground side, and I’m travelling. So I’m not (inaudible) model them a bit in precise. But I think that your backlog on the underground side has been more or less kind of stable for the last three quarters. So I’m trying to understand would the flow be of the order in production process, to understand why 1Q revenues were so much lower and whether the current level of backlog indicates higher quarterly revenues going forward or whether you need to get those better [ph]. Thanks.

Tim Sullivan

So I think what Craig touched on previously, I think our aftermarket bookings and flow-through in Q1 was a little bit off, which is just a timing kind of issue. But as far as backlog on the underground side, we see – we see maintaining some – the normal, I’ll call it the normal relativity to the full backlog versus surface. So there might have been just a bit of an anomaly in the first quarter. But we see no change in the relationship between underground backlog and service versus our total backlog as we move through the year.

Craig Mackus

Rob, actually our inventory backlog for underground actually went up 11% from the end of the year. And that was partially due to the lower sales, I’ll admit, but they did have somewhat decent bookings for the quarter. So backlog did go up almost $80 million, $90 million. But they made to 16 million to 907 million. So, almost $100 million.

Robert Wertheimer – Morgan Stanley

Exactly. And (inaudible) I guess what I’m trying to understand and I don’t quite get it is, what caused lower sales at the backlog there? You got a production issue or is it just slotting and you didn’t slot the right things in, or –? Maybe I just don’t understand it.

Craig Mackus

We were slotting in when the schedule of the deliveries are, when the customer requirements are. As you might recall, we have about $200 million in orders from OE that we shifted from 2009 into 2010. And on the underground side, a significant portion of that will be later in the year, not so much in the first part of the year. So that will see that benefit later on. But on the surface side, some of the delays were impacting us actually as revenue in the first quarter, so they were not impacted as much. So it’s more of a slotting issue as to when the schedule requirements were.

Robert Wertheimer – Morgan Stanley

So you’re holding slots for the OE side and you didn’t get enough aftermarket in there to keep the revenues up? Is that –?

Craig Mackus

Yes, obviously we’re holding on it. They were the orders in the quarter that we could fill up the production capacity, and the aftermarket orders weren’t enough to overcome the shortfall in the OE side.

Robert Wertheimer – Morgan Stanley

Okay. I’m sorry to take so long. But are you – you're not cutting any cost in the underground side (inaudible) all the revenue, and are you seeing underground orders – Tim, I think you just said this, but underground activity is just as strong as surface, right?

Tim Sullivan

Yes. Yes, we see that it’s going to – it will be fine as we move through the year.

Craig Mackus

We haven’t done anything dramatic in the first quarter. We’ve had some cost reductions commensurate with the manufacturing activity, but we’ve not made any structural changes on the underground manufacturing capacity.

Robert Wertheimer – Morgan Stanley

I’ll get back in line. Thank you.

Operator

Your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

Andy Kaplowitz – Barclays Capital

Good morning, guys.

Tim Sullivan

Hi, Andy.

Andy Kaplowitz – Barclays Capital

So Tim, you kind of alluded to getting more cost certainty before you booked your LOIs, but I guess just your opinion – the last couple quarters you sort of leveled off in terms of your new awards. While we – amiss [ph] I have expected a pickup. So is there anything else going on here besides just getting more cost certainty? Are the customers just sort of dragging their seat a little bit to just sign on the dotted line?

Tim Sullivan

I think what happened is we rode through the second half of 2009, we got several or even beyond LOIs are called contracts. But they have provisions in them that the customer has the opportunity to withdraw the contract pending Board approval or pending certain type of things that could happen. And we don’t put that in backlog. We don’t actually even effectively deal with those. So there has been some caution, I think, as people rolled through the very significant market correction that we had. I think there was a lot of caution towards the latter part of last year. And we see that we are going to have a lot of that caution go up the window here, as we move through Q2 and into Q3, because the demand is there on the machinery. So we’ve just – as you know, we are extremely conservative before we put anything in our backlog.

Andy Kaplowitz – Barclays Capital

That’s helpful, Tim. And then this maintenance contract that was cancelled, my instinct is to just to get serve a one-off specific incident, but maybe you could give us a little more color around it if possible?

Tim Sullivan

Yes, it’s pretty unusual in Mexico. It was a new mine. And I think they just stopped that they could effectively do their maintenance themselves not sooner than what they had originally anticipated. Usually the maintenance repair contracts on new mines last for five years, but they were able to ramp up their own capability faster than what they thought. And it was a good, mutual separation, but not typical necessarily to have something like that taken over the backlog. But it was understood, and we will put the customer on it. So it’s a one-off situation, pretty unusual that they didn’t get the full five years.

Andy Kaplowitz – Barclays Capital

Got it. But you don’t think it’s a pattern as we are all more cost conscious these days. Some of these guys are going to pull in their maintenance instead of giving them to you guys?

Tim Sullivan

Yes. I mean, I think they are cost conscious. But what’s interesting is the maintenance repair contracts as far as a tool by mining companies to outsource maintenance has really kind of fallen out of oak. We really don’t have that many anymore. More and more mining companies over the last couple of years have decided to take on their own maintenance. So they are pretty few and far between now. And I don’t see that that will continue except for when we have a Greenfield mine site where they want our assistance initially.

Andy Kaplowitz – Barclays Capital

But you wouldn’t expect any more negative impact from these kind of things going forward?

Tim Sullivan

I don’t think so, no. But like I said, we have very few of them left.

Andy Kaplowitz – Barclays Capital

Understood. I’ll get back in queue. Thank you.

Operator

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

Ann Duignan – JP Morgan

Hi, good morning, guys. It’s Ann Duignan.

Tim Sullivan

Hi, Ann.

Ann Duignan – JP Morgan

Can you talk a little bit about – I think initially it’s that you would need to see orders pick up by early Q2 in order to make your (inaudible) revenues for the year. We are here in the middle of April now. Have orders picked up in April, or how you’re feeling – are we postponing an inevitable reduction in outlook for 2010 by quarter or should we not worry about that?

Tim Sullivan

I don’t think you need to worry. The good news, I think, is that we’ve never had a reduced guidance. And you are correct though. We are going to have to increase the booking level here in Q2 to make sure we get guidance, and we fully expect to do that.

Ann Duignan – JP Morgan

And have you had any new orders in April to date?

Tim Sullivan

Yes. And we plan to kind of roll those out when we get clearance from our customers that we can announce those.

Ann Duignan – JP Morgan

Okay. And then on kind of the same note, could you talk about – I think you said in your release you had two orders for electric shovels. When we met with Joy a little while ago, they know that they had seven back then, a month-and-a-half ago. Could you talk a little bit about what the differences are out there in the marketplace that you are seeing? Is it just you are playing catch-up? Is it a different mix that you can – maybe you can just give us some color on what you are seeing out there.

Tim Sullivan

There is no catch-up. I think we actually booked six shovels in the first quarter. We will get our share. Joy will get their share. There is plenty of activity out there I think for both of us at the levels of production that I think we’ve planned for certain and I’m sure they have planned as well. I think it’s going to be a fairly normal year as far as market shares for both companies and demand for both companies. So there is no catch-up. We are pretty well where we want to be on market share, I think, there as well.

Ann Duignan – JP Morgan

Okay. And just finally, surface margins, if I extract Terex, looks to me like they come in at about 19%. That’s a bit lower than what you’ve been delivering the last couple of quarters. Is that absorption also or is there anything else going on that we should take note of as we forecast going forward?

Craig Mackus

Ann, this is Craig. It’s just primarily absorption. We had extremely high margins in the third and fourth quarters. And we had cautioned people that on a consolidated basis, we should be looking at around 30% gross margins instead of the 32% or 33%. So we expect that there would be a little bit of a decline in the high margins we had. So this is pretty much in line with the guidance we gave than it is. It’s a little bit less absorption issue in the surface side than it was in the underground, but that certainly had some impact. But we did have a plus against that, whereas when comparing to the first quarter of 2009, we do have more subcontract work being brought in-house.

So when you compare first quarter to first quarter, they had a positive impact. That’s not so much the phenomena if you go, let’s say, from the fourth quarter to the first quarter. Most of the subcontract work had already been shifted by the end of last year. When you compare quarter-over-quarter, we get a benefit. So it’s a little bit out on the subcontract side as a positive, absorption is a lot, but the rest is just primarily the mix of the orders for the OE and the underground – I mean, the OE and the aftermarket and the (inaudible) margins we earned from our customers.

Ann Duignan – JP Morgan

So for margins for both businesses, should we look at those trending upward as we go through the year as volume picks up a little bit and you get some of that absorption back?

Tim Sullivan

No, I think they will probably be consistent with what we were able to achieve in the first quarter.

Ann Duignan – JP Morgan

Okay. That’s very helpful. Thanks. I appreciate it. I’ll get back in the line.

Operator

Your next question comes from the line of Paul Bodnar with Longbow Research.

Paul Bodnar – Longbow Research

Hi, good morning, guys.

Tim Sullivan

Hi.

Paul Bodnar – Longbow Research

I just wanted to see as we update also – I mean, you’ve talked before about China and the automated pile systems going there, I just wanted see if anything was new in those regards?

Tim Sullivan

Yes, there is still a lot of activity with that. And that’s probably some of the activity you’re going to see here in Q2, Q3. I think as you know, we are really the only supplier that does have automated pile systems underground. And that is something that the Chinese have to buy from us. And so that is a nice segment that we’re going to see some activity this year.

Paul Bodnar – Longbow Research

Okay. And then also – I mean, there is some new EPO requires coming on Central Appalachia and obviously some (inaudible) probably getting more involved in that region. I mean, what sort of impact are they going to have to have to your sales? And I know that historically for Bucyrus that wasn’t a big area, but I don’t know with the Terex acquisition if your exposure in Central Appalachia increased. Can you comment a little bit on it as well?

Tim Sullivan

Well, I think, as you know, Central Appalachia is not our best market. But I think one thing that you will see as we move through Q2 is we are seeing a lot more interest in our fully automated pile systems for some of the applications in Appalachia, which is new for us. People in that sector have been reluctant to go fully automated underground. But I think we’re starting to see some new activity in that respect. So we will see. We will see if that plays out based on what’s happening on that sector right now.

Paul Bodnar – Longbow Research

Okay. Thanks a lot.

Operator

Your next question comes from the line of Charles Brady with BMO Capital Markets. Mr. Brady, your line is open.

Tom Brinkmann – BMO Capital Markets

Sorry about that. Good morning. This is actually Tom Brinkmann standing in for Charlie Brady. Saw your financials on the Terex Mining Group from 2008, 2007, 2006. And across the three years, I noticed that the net income was about $188 million and cash flow from operations is about $46 million. So just curious what we should expect going forward in terms of the sort of cash generation of the business, ratio of cash flow to net income. And is that just a function of the inventories you already talked about or are there other things going on there?

Craig Mackus

I think it’s primarily on the inventory side. I mean, if you – I mean, they were a carve-out of the parent company. So they didn’t have necessarily all the corporate expenses like interest expense, and they were faster [ph] on a corporate basis. So if you look at just the EBITDA or the operating earnings, I’d focus on that, and the depreciation has been pretty modest up until now. We’ve been at $10 million a year. So the CapEx spending hasn’t been very robust. I think we’ve been increasing that capital, the spending on R&D as we go forward a little bit. So – but that’s all kind of built into the guidance that we gave in terms of what the operating earnings are.

So from an earnings standpoint, you can take the EBITDA, add back a little bit for depreciation, and there are really not a lot to subtract from that other than maybe some CapEx spending, as we go forward. So the thing we got to concentrate on is basically on the inventory side. That’s the big nugget out there that we need to attack pretty aggressively. The rest of the balance sheet items are pretty benign from a working capital standpoint.

Tom Brinkmann – BMO Capital Markets

Speaking of that, what you touched on there, can you give us some feel for what you expect on consolidated capital expenditures for 2010?

Tim Sullivan

It’s going to be about the same as what we had in 2009. We are estimating CapEx to be somewhere between $60 million and $70 million for the year.

Tom Brinkmann – BMO Capital Markets

Okay. And then as far as the geographic penetration goes, I know that Indonesia and Western Australia were the areas that you’re sort of picking up, thanks to the Terex acquisition. Is there any opportunity there for cross-selling your electric mining equipment, because I’m just curious if most of the mines area are specific to Terex’s products or if they can be electrified mines? How that works for you?

Tim Sullivan

Indonesia, no. Western Australia, possibly. I think Western Australia has got almost all diesel – diesel-powered equipment. That kind of converted when they went to contractors several years ago. And even the large mining companies are starting to mine themselves. Again, some of those mining operations have gone with diesel-powered equipment. I think there is a possibility in Western Australia that we might see more electrification of some of the mines. They used to all be electrified. That went away about 15 to 20 years ago. But I think in the near-term, three to five years, we see its base is going to be mostly all diesel-powered equipment in both of those markets, Western Australia and Indonesia.

Tom Brinkmann – BMO Capital Markets

Okay. That’s all I had. Thank you.

Operator

Your next question comes from the line of Joe Mondillo with Sidoti & Company.

Joe Mondillo – Sidoti & Company

Good morning, guys.

Craig Mackus

Good morning.

Joe Mondillo – Sidoti & Company

Craig, I was wondering if you could comment on what your plan is with the debt, if you could talk about cash flow, how far you think you will get that debt down by I guess the end of this year. And then also if you could give me what you expect what the D&A will be for this year.

Craig Mackus

As you saw in the press release, we did have a significant amount of cash provided by operating activities for the quarter, almost $190 million. So that’s one of the reasons. And that’s primarily due to the reduction of the receivables that we had talked about. We talked about at the end of the year our receivables were up due to some intentional allowance of customer delayed payments into the month of January. As we suggested, all those collections came in in January. So we were able to reduce receivables by $155 million. So, significant amount of cash generation.

I think for the next couple of quarters, we will not pay down debt. We will just continue to accumulate cash and see what the market looks like and what opportunities we might have with the Terex business and with our existing business. And we’ve borrowed the $1 billion that we will probably – and those are all pretty much as we have planned it. So we didn’t want to accumulate some cash for a while and see how it works out and then make a determination later on in the year, how much of debt we’re going to pay down at that time.

Joe Mondillo – Sidoti & Company

Okay. And then D&A? D&A, what do you expect for the year?

Craig Mackus

If you just take the first quarter, you can sort of annualize what we had in the first quarter for D&A. That’s on the table.

Joe Mondillo – Sidoti & Company

Even with –

Craig Mackus

(inaudible) $13 million and amortization was about $18 million for the quarter.

Joe Mondillo – Sidoti & Company

Okay. So even with Terex six weeks, we can just analyze that?

Craig Mackus

Right. For the amortization, I gave you the new numbers for what they would look like going forward for Terex. So they will be up a couple million dollars on an amortization basis from what we ran in the first quarter.

Joe Mondillo – Sidoti & Company

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Jason Ho [ph] with Blair Advisors.

Jason Ho – Blair Advisors

Thank you for taking my question. And I want to talk a little bit more about the receivables balance and what you attribute. I know you just mentioned briefly the decrease in receivables, but if you could give us a little more color on what you attribute the receivables decrease from Q4 to Q1 to?

Tim Sullivan

Those were just the terms that we agreed with our customers in terms of when they would be able to make payments. As you know, we had almost no cancellations in 2009, and part of that was a result of us allowing our customers to move some other CapEx spending from 2009 into 2010. So when we negotiated some revision in some of the terms, we allowed them to move their payments into January. So these are all big multi-nationals that have lots of our equipment and that we were able to accommodate the request to move some moneys over. So it’s all part of our plan. We had specific customers that we had dealt with to do that.

Jason Ho – Blair Advisors

Thanks. And then just as follow-up to that, can you give us the unbilled receivables balance at the end of Q1?

Craig Mackus

I think it’s pretty much flat. I don’t have the number with [ph] me, but it’s flat with what the end of the year number was. So I think if you look at the10-K, the number in there will be pretty much the same as end of March.

Jason Ho – Blair Advisors

Okay. So no improvement, no decrease on –?

Craig Mackus

That’s right.

Jason Ho – Blair Advisors

Thank you.

Operator

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

Chris Weltzer – Robert W. Baird

Good morning, guys.

Tim Sullivan

Good morning.

Chris Weltzer – Robert W. Baird

I’m wondering if you could just give a little more clarity when you said the Terex acquisition neutral on an accretion basis in 2010. What charges are you including and excluding when you are coming up with that neutral forecast?

Craig Mackus

I think there was a table in the press release, but basically we looked at what the Terex net earnings are going to be. And then we included the incremental interest expense that we have to carry related to the acquisition. And we included the purchase accounting adjustments, but not including the inventory fair value adjustments. So they are basically amortization of the intangible assets and the depreciation of the fixed assets, and then put a tax rate on those. So if you look at that kind of calculation, you get just a slightly negative number for the 40-day period that we owned and that’s a penny or two negative accretion.

Chris Weltzer – Robert W. Baird

I’m sorry, I thought there was a comment – maybe I misheard, I thought that the deal was expected to be neutral for the entire year for 2010.

Craig Mackus

Are you asking about the quarter?

Chris Weltzer – Robert W. Baird

The year, the year.

Craig Mackus

For the year, for the year. That’s how you do the exact same calculation for the year as we did it for the quarter.

Chris Weltzer – Robert W. Baird

So I would exclude inventory write-off, but include amortization costs?

Craig Mackus

That’s correct.

Chris Weltzer – Robert W. Baird

And exclude acquisition cost?

Craig Mackus

That’s correct.

Chris Weltzer – Robert W. Baird

Okay. Thank you. That’s very helpful. And then I was just a little confused on the EBITDA guidance implied for Terex. If I’m doing my math right, it looks like you are expecting something close to flat on a pro forma revenue basis for the Terex business?

Craig Mackus

Yes, that’s correct. Yes.

Chris Weltzer – Robert W. Baird

And then rough numbers – I think they did about $150 million of EBITDA in ’09, which is my – obviously you’ve only owned it for a portion of the year, but take that $150 million and also add $15 million of synergies to it. And $130 million just seems like they are implying a little bit lower EBITDA margins for that business in 2010?

Craig Mackus

It’s possible, yes. I think – the $130 million really did not contemplate the moneys or the savings that Tim was alluding to. There would be potential upside if we can achieve the base of $130 million. That would be true.

Chris Weltzer – Robert W. Baird

Okay. So the $130 million is more – does not necessarily include the $15 million of expected synergies?

Craig Mackus

That’s correct.

Chris Weltzer – Robert W. Baird

Okay, that’s very helpful. And then if you could just give us a little bit of help because we are just dealing with this tough period, what’s the sort of normal – what sort of an aftermarket versus OE split should we be assuming for Terex for the year?

Tim Sullivan

If you look at pro forma basis for the last year, it was almost 50/50. And that’s probably about what we’re going to achieve this year.

Chris Weltzer – Robert W. Baird

Really? Okay.

Tim Sullivan

Yes. It was ironically almost 50/50 when we ran the pro forma last year.

Chris Weltzer – Robert W. Baird

Pro forma for total company or for just the Terex business?

Tim Sullivan

Both the companies, with Terex.

Chris Weltzer – Robert W. Baird

With Terex.

Tim Sullivan

With Terex.

Chris Weltzer – Robert W. Baird

Got it. Okay. Thank you very much, guys.

Operator

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

Schon Williams – BB&T Capital Markets

Hi, good morning. A quick question – we’ve seen some comments recently, Chinese talking about I guess punishing the metal guys for the new pricing system, talking about banning some types of iron ore imports from Australia. It sounds like that’s more just kind of political posturing. But are you seeing anything differently from your customers?

Tim Sullivan

No. I think that’s nice. You can’t really pay too much attention to that. They need iron ore. They are contracting iron ore, and pricing is up significantly year-on-year. And our customers are actually quite pleased with the outcomes on the negotiations.

Schon Williams – BB&T Capital Markets

Okay. And then just to circle back on copper, it sounds like a number of the miners are still a little resident [ph]. I mean, there were some mixed commentary out of the copper conference two weeks ago. I mean, are we seeing those guys – I mean, have we actually seen a shift just within the last month or two? I mean, have those guys started to get a little bit more positive in terms of actually ordering equipment or is it still kind of similar to what we are looking at the end of the year? Things started to shift. I’m trying to find if we’ve seen any shift in the last couple of weeks or months.

Tim Sullivan

I think there is certainly a positive feeling amongst the producers, but that’s why I gave the numbers that I did. People – a little – if you look at what happened last year, even with the large increase in demand out of China, there is still a great deal of copper that has to go (inaudible) world. And with the US economy still kind of struggling along, I think they are being cautious. Having said that, I think everyone realizes that the US economy is recovering albeit very slowly, and they are contemplating now production increases.

Schon Williams – BB&T Capital Markets

Okay. Thanks, guys.

Operator

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Jerry Revich – Goldman Sachs

Thank you. Good morning.

Craig Mackus

Good morning, Jerry.

Jerry Revich – Goldman Sachs

Tim, can you please step us through which regions of commodities you expect to drive your new incremental orders over the next quarter or two? And this India dragline that you booked, I think you have spoken about three potential orders. Can you just give us an update there as well? Thanks.

Tim Sullivan

Yes. We’ve got demand literally across the board right now. Strong demand out of India. New demand out of Russia that we had not seen for a couple of quarters. Australia looks strong. South America, we are even seeing a little bit of activity right now in Africa, which is new. The demand is pretty much across the board. I think as we’ve talked about before, we are not a big player in Central Appalachia, but there has been some really strong activity in that market here in the last month or two. So it’s really across the board. I think with all the commodity prices firmed, demand moving up, people have positioned themselves and the activity is strong.

Jerry Revich – Goldman Sachs

Thank you. And Craig, the higher inventory picture at Terex, how much of that is due to subscale distribution versus the manufacturing footprint?

Craig Mackus

I think it’s more – it's kind of difficult question to answer because it’s different by every market around the world. So I guess I can’t give you any firm numbers yet, but they tend to be more into distribution than they are in the manufacturing side.

Jerry Revich – Goldman Sachs

And typically when we see the type of inventory cuts that you are talking about for this business, we see pricing move meaningfully higher and lower logistics cost, but at least 5% to 10% of inventory. Is that upside to your synergy guidance for the business or did you have that in mind when you laid out your plan?

Craig Mackus

I think we already had that in mind as part of our synergies. We have done a pretty comprehensive sweep through all of the opportunities., So I think our guidance already would include that effect.

Jerry Revich – Goldman Sachs

And Craig, lastly, can you talk about your facility rationalization opportunities? Do you expect to consolidate some drill production, perhaps move some shove production for the year? Can you say more how you are thinking about those options?

Craig Mackus

Yes. We’re looking at all that right now, Jerry. I think we see that there are some opportunities. Obviously, we’ve got world-class, brand new plant here in Milwaukee, but I want to fully utilize that. Having said that, we’ve seen that a lot of the lean manufacturing initiatives that we are in process at some of the Terex facilities will allow them to continue with their product lines and maybe even pick up some more as well. So it’s a working process. We’ll probably have a lot more certainty on that, as we move through Q2 and probably be able to advise precisely what we think we want to do maybe on the next call.

Jerry Revich – Goldman Sachs

Okay. Thank you very much.

Operator

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

Robert Wertheimer – Morgan Stanley

Hi. Thanks for the follow-up. It’s just on inventory, if I heard right, you gave the step-up of inventory cost for the next two, three quarters. Did that mean you expect to be done with most of the legacy Terex inventory, at least just cycle through it anyway by the end of the year? And does that mean that you haven’t had any sale inventory and we think much on the receivables to look to –?

Tim Sullivan

That is correct that we will be done by the end of the year. So that will be flushed through this year financials that will not be an impediment or drag in 2011. So basically we’re looking at over the turns of inventory from Terex, which is pretty low. So it will be moved out this year.

Operator

Ladies and gentlemen, this concludes our question-and-answer session of the call. I would now like to turn the call over to Tim Sullivan for closing remarks.

Tim Sullivan

Well, thanks for joining us today. I guess we ran through a lot of questions and there were a lot of issues with obviously the accounting as it was set out for the first quarter. Craig must have done a pretty nice job explaining it in the release because we didn’t have that many questions with regards to how we accounted for things. Very pleased where the market is at right now. We are satisfied with the quarter. It was exactly on our plan. And we will stick with the guidance we have for the year, and we are looking forward to a very strong 2010. And we’re very excited about the new product lines that we picked up with Terex. We will try to get press releases out, as we move through the quarter. Those are depending on approval from our customers. But we will try to keep you advised as we move through the quarter and how we are booking into our backlog.

Thanks again for joining us, and we will talk to you again in a quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes our presentation, and you may now disconnect. Have a wonderful weekend.

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Source: Bucyrus International, Inc. Q1 2010 Earnings Call Transcript
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