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Bucyrus International, Inc. (NASDAQ:BUCY)

Q2 2010 Earnings Call Transcript

July 23, 2010 9:00 am ET

Executives

Shelley Hickman – Director, Global Communications

Tim Sullivan – President and CEO

Craig Mackus – CFO and Secretary

Analysts

Robert Wertheimer – Morgan Stanley

Andrew Kaplowitz – Barclays Capital

Jerry Revich – Goldman Sachs

Charles Brady – BMO Capital

Steve Barger – KeyBanc

Schon Williams – BB&T Capital Markets

Ben Elias – Sterne, Agee

Jason Ho [ph] – Blair Advisors [ph]

Ann Duignan – JP Morgan

Paul Bodnar – Longbow Research

Seth Weber – RBC Capital Markets

Chris Weltzer – Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Bucyrus International Incorporated earnings conference call. My name is Glen and I will be your operator for today. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) I would now like to turn the conference over to your host, Shelley Hickman, Director of Global Communications, with Tim Sullivan, President and CEO, and Craig Mackus, CFO. Please proceed.

Shelley Hickman

Thank you, Glen. Good morning and thank you for joining us for Bucyrus International Incorporated second quarter 2010 earnings release teleconference. In a few moments I’ll turn the conference over to Mr. Tim Sullivan, President and CEO, 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’ll turn the call over to Tim.

Tim Sullivan

Good morning, everyone. And as usual, thank you for joining us on this call. We’re struggling here a little bit in Milwaukee this morning. We’ve got two months of rain in one hour yesterday and it is continuing to rain here. So we’re going to make the call quick so we can start building her ark. I’d also like to begin the call today by thanking all of the analysts that attended our session in Pennsylvania on Tuesday. I realize it is a little bit difficult out of your schedules, especially with earnings this week to do that. And hopefully, you found it informational and beneficial to everyone.

I think in summary, very pleased with the quarter. I think all things being equal, we were exactly on our plan and in many respects exceeded it in several areas. I’ll have Craig go through the numbers. As usual, I’ll give a little bit of color to the operating performance, give you some feedback on where we see the market to be and then obviously our projections for the remaining of the year. Craig?

Craig Mackus

Okay. Thanks, Tim. Before we begin, I would like to advise everyone that our financial results for 2010 include the net assets and results of operations of Terex since February 19th, the date of acquisition, as well as the preliminary acquisition accounting adjustments and acquisition costs incurred related to the Terex acquisition. As a result, our financial results for the quarter and six months ended June 30, 2010 are not necessarily comparative to the results of the same period last year or as of December 31, 2009 and may not be indicative of future results.

Sales for the second quarter of 2010, which included $277 million for Terex, were $869 million, an increase of $144 million or 20% compared to the same quarter of 2009. Original equipment sales, which include $133 million for Terex, increased by $69 million or 19% compared to the second quarter of 2009. And aftermarket sales, which included $144 million for Terex, increased by $76 million or 21% compared to the second quarter of 2009.

Sales for the first six months of 2010, which included $369 million for Terex, were $1.5 billion, an increase of $146 million or 11% compared to the first six months of 2009. Original equipment sales, which included $169 million for Terex, were relatively flat compared to the first six months of 2009. And aftermarket sales, which included $200 million for Terex, increased by $137 million or 22% compared to the first six months of 2009.

Non-Terex surface mining original equipment sales for the second quarter and the first six months of 2010 were relatively flat compared to 2009. And underground mining original equipment was down 30% compared to the second quarter of last year and 37% compared to the first six months of 2009. The decrease of underground mining was in all product lines, with the largest change being longwall systems in the Czech Republic.

Non-Terex aftermarket sales were down primarily in the United States and the Eastern European markets and reflects lower mining activity primarily in the United States. Sales were reduced by $12 million for the second quarter of 2010 due to the strengthening of the US dollar.

Gross margins after adjusting for amortization of Terex acquisition accounting adjustments was 30% for the second quarter and first quarter of 2010 compared to 28% for the same period last year. Gross margin in 2010 has been negatively impacted by lower gross margins on the Terex business compared with historical Bucyrus.

This was offset by lower absorption losses at our underground mining manufacturing locations and improved original equipment gross margins in part due to productivity efficiencies and bringing subcontract work back into our manufacturing facilities. There were $17 million of remaining inventory acquisition accounting adjustments remaining. $16 million will be expensed in the third quarter with the remaining $1 million being expensed in the fourth quarter.

Operating earnings for the second quarter of 2010 were $128 million, which included $42 million for Terex before amortization of preliminary acquisition adjustments, compared to $129 million for the second quarter of last year and were $194 million for the first six months of 2010, which included $51 million for Terex before amortization of preliminary acquisition adjustments compared to $223 million for the first six months of 2009.

Operating earnings for the second quarter and six months of 2010 were reduced by amortization of preliminary purchase accounting adjustments and acquisition costs related to the acquisition of Terex Mining of $26 million and $52 million respectively. Lower underground mining sales in 2010 have negatively impacted operating earnings compared to last year.

Interest expense was $19 million and $30 million for the quarter and six months ended June 30, 2010 respectively compared to $7 million and $14 million for the same period last year. The increase reflects a new $1 billion secured term loan, which was used to purchase Terex.

Effective tax rate for the first six months of 2010 were 33.4% compared to 32.6% for the first six months 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 2010 is expected to approximate 32.5%.

Net earnings for the second quarter and the first six months of 2010 were $73 million and $108 million respectively compared to $82 million and $139 million for the same period of last year. Net earnings were reduced by amortization of acquisition accounting adjustments related to the acquisition of Terex of $17 million and $24 million for the second quarter and first six months of 2010 respectively.

Fully diluted net earnings per share for the second quarter and first six months of 2010 were $0.89 and $1.35 respectively compared to $1.08 and $1.84 for the same period of last year. Amortization of Terex acquisition accounting adjustments are expected to approximate $23 million, $16 million after-tax in the third quarter, and $7 million, $5 after-tax for subsequent quarters.

Adjusted EBITDA for the second quarter of 2010 was $175 million, an increase of 20% from $146 million for the second quarter of 2009, and for the first six months of 2010 were $288 million, an increase of 14% from $254 million for the first six months of 2009. Adjusted EBITDA was 20% of sales for the quarter and six months ended June 30, 2010 compared to 20% for the second quarter of 2009 and 19% for the first six months of 2009. Adjusted EBITDA excludes the impact of non-cash compensation expense, gain and loss on disposal of fixed assets, the inventory fair value acquisition accounting adjustments charged to cost of products sold, and Terex acquisition cost.

On June 30, 2010, our total backlog was $2.4 billion, $1.6 billion of which is expected to be recognized within the next 12 months. This represents a 30% increase from December 31, 2009 total backlog of $1.9 billion and a 27% increase from the 12-month backlog of $1.3 billion. Backlog at June 30, 2010 includes $337 million for Terex.

New orders for the second quarter of 2010, which includes $312 million for Terex, were $1.1 billion, an increase of $728 million or 198% compared to the second quarter of 2009. Original equipment new orders for the second quarter of 2010, which included $162 million for Terex, were $609 million compared to $56 million for the second quarter of 2009. In addition to Terex, the increase was in electric mining shovels and longwall equipment.

Aftermarket new orders for the second quarter of 2010, which included 150 million for Terex, were $486 million compared to $311 million for the quarter of 2009. Excluding Terex, aftermarket new orders increased 8% compared to the second quarter of 2009. New orders for the first six months of 2010, which included $403 million for Terex, were $1.7 billion, an increase of $923 million or 114% compared to the first quarter of 2009.

Original equipment new orders for the first six months of 2010, which included $191 million for Terex, were $931 million compared to $250 million for the same period last year. In addition to Terex, the increase was in electric mining shovels and all underground mining product lines. Aftermarket new orders for the first six months of 2010, which included $212 million for Terex, were $804 million compared to $563 million for the first six months of 2009. Excluding Terex, aftermarket new orders increased 5% compared to the first six months of 2009.

Aftermarket new orders for the first six months of 2010 were reduced by $29 million due to the cancelation of a multi-year maintenance and repair contract. Total new orders were negatively impacted by approximately $87 million and $101 million for the second quarter and first six months of 2010 respectively due to the effects of the stronger US dollar on orders and beginning of period backlog denominated in foreign currencies.

Our total debt at June 30 remains at $1.5 billion, an increase from $507 million at December 31, 2009, was a result of our new $1 billion term loan. Our cash balance increased to $279 million at June 30 from $242 million at March 31 and $101 million at December 31, 2009. We did not have any borrowings under our revolving credit facility at June 30, 2010.

Non-Terex receivables decreased by $139 million from December 31, 2009, as we had large collections on shovels and longwall orders. Non-Terex inventories increased $34 million from December 31, 2009. Net cash provided by operating activities for the first six months of 2010 were $265.6 million compared to $6.2 million for 2009.

I’ll now turn it back to Tim.

Tim Sullivan

Okay, Craig. Let me talk a little bit about the quarter performance starting with revenue. I think we were probably a little bit below some of your estimates on revenue. But as I said when we started the call, sales continued to track right to our plan for the year. A lot of it obviously is the timing of how we see these orders moving from backlog through to shipments. But we are right on our plan at mid-year, as we had laid it out back in the first part of the year, which would mean obviously that we have a fairly large back-end loaded plan as it pertains to revenue.

Very satisfied with the gross margin for the quarter, 30.2% versus 28.3% last year. I think that just demonstrates that our guidance we are doing a very good job managing material costs and obviously the overall production costs and efficiencies that we are getting through our plants right now. So, very pleased with that. As you know, on the last call, I did raise some concern that with some of the volatility that we had in the marketplace this year with raw material costs that I was curious if we were going to be able to maintain the level that we’ve reached last year. So far, so good, as we move through 2010.

Again, also particularly gratified with our EBITDA margin, approximately 20% on sales. As I think you know, we were very pleased with the fact that we were able to get the underground segment of our business up to that level after we achieved that goal with surface. And with the Terex acquisition, we felt that that number also would be under some difficulty to maintain with the lower EBITDA margins that have been traditional with the Terex product. So again, a good performance by our people achieving the 20% EBITDA margin on sales.

Bookings, 198%, almost 200% over last year for the quarter and 71% for the first quarter of 2010. A lot of that has to do with what we talked about in the last quarterly call. Some of the LOIs that we’ve had in place for a while moving to bookings. I can tell you though that the bookings for the quarter were somewhat disappointing due to the fact that we were not able to bring the Reliance order into backlog. It is not in backlog. It will be approximately a $300 million booking if we can get the US Exim Bank to finish their process that started back in November. And I think many of you have been watching the news releases and some of the noise around that whole situation.

I’m cautiously optimistic that we might be able to put that booking in backlog here in Q3. If we do, that could relate to approximately $70 million to $90 million worth of shipments or revenue in the fourth quarter of this year. We have been cautious to talk about that particular because it is fairly substantial and it does have some significance to both our backlog bookings and shipments. So we’ll keep our fingers crossed and hopefully our government will do the right thing for us.

A couple of other very good things that came out of our bookings in the quarter is – I think this is exactly why we felt that the Terex acquisition would be good for our company. We are able to use our market position with some of the large multinational companies. And where Terex had not been successful in selling product previously, we have. We are very gratified by the fact we were able to place trucks and hydraulic excavators with Vale in Brazil this quarter, which is basically a major breakthrough for the Terex brand, obviously now the Bucyrus brand.

So I think as we move through with our strong relationships with the large multinationals, the big five; BHP Billiton, Rio Tinto, Vale, Anglo and Xstrata. We hope to use the leverage of our $40 billion of installed base of machinery to move us into opportunities with our new products in our portfolio.

The backlog increased to $2.4 billion in the quarter. We’ve seen some good stabilization in the aftermarket with one exception. Aftermarket still remains a bit soft in the US market although it’s not horribly down from where it has been in the past. It is a little bit soft, and that’s just a function of the fact that we have some lower than normal utilization, or I should say, utilization of our machinery in some of the US thermal coal mines. I’ll talk a little bit more about that in just a minute.

We continue to spend on research and development. And again, I think on Tuesday many of you saw the fruits of our efforts there with a fully automated underground power system, which we are pretty excited about now introducing the first system into the US market, a very high level of interest by many customers that have been through our facilities in Houston, Pennsylvania, this week. And we have other things that we are working on and we will be rolling out to the market even as early as the fourth quarter of this year. So we continue to push R&D to the full extent possible.

One other, I think, interesting thing about where we are at and it’s something I should mention so everyone starts to understand this as well as we do, the timing between quotation and orders is different for our three mining segments. And we’re still getting used to the speed at which we book-to-bill on the new Terex product line.

If you look at our three segments, surface, traditional surface, underground, and I’ll call the Terex brand that we plan to roll into our surface numbers at the end of the year, but as we hold them out there now, surface has a very long lead-time versus underground, which is about half of what the lead-times typically are for large surface equipment, and Terex is incredibly rapid. And the speed from quotation to order is pretty quick, and we are getting used to that as a management team and make sure that we can manage that as we move forward, particularly in the area of material costs and maintenance of margin.

The market in general, the quoting activity remains very high. Many of the markets that had softened a little bit as a result of the market correction from last year have recovered nicely. We are seeing a lot of activity now in quotations in Eastern Europe and Russia. China remains very active.

India has become very active, as the Indian government continues to privatize their power sector and coal mine in mine mouth power plants. We are seeing new activity in other markets as well where that phenomenon has also been accretive in the developing world. Brazil has been active, as has Australia. So in general, we’ve got a lot of activity coming from the developing world, again, with the only exception of softness really being in the domestic thermal market.

Steel has obviously driven a lot of the iron ore and coking coal demand here or in the recent past. Steel production, we are seeing some softening to some extent. We see that the Chinese are dialing back a little bit on steel production. It’s amazing to note that China last year, because of the fall-off in the developed world on steel production and steel demand, was almost half of the demand last year for steel. It’s starting to show the prominence that we are seeing with China as an evolving and developing market in a very rapid sense.

Having said that, iron ore pricing remains firm. As we all know, it’s no longer on an annual contract basis, but it’s priced quarterly. I’ve talked to some of the iron ore producers here in the past quarter about that change from annual contracts to quarterly contracts, and they actually prefer it and they are working very effectively with that as they are with the coking coal pricing as well. Coking coal price remains firm. We think that may come off a little bit if steel demand does get down a little bit here as we move through the second half of the year. But obviously iron ore and coking coal are both strong commodities.

Copper remains above $3 a pound. I think there has been some concern that that may drop down with maybe increases in inventory. But I think the real issue of copper is the fact that if all the commodities we have out there, maybe with the exception of coking coal, the copper yields are significantly down versus previous years, which means that it bodes well for certainly machinery demand, but it also means that these companies are really hard-pressed to get copper out of the ground to meet the current demand, let alone any increases that are coming up.

We are seeing a lot more activity on Greenfield activity on copper, as the traditional mine yields continue to drop. New mines we see will be coming on as early as late this year or next year in copper, primarily in Peru, and that will hopefully relieve some of the current bottleneck. But in the meantime, we plan to sell several more machines into the Brownfield copper sites in South America and other countries.

The only, I think, softness again that we see is in the thermal pricing here in the US market. I think some of you have seen some positive indications that the market could be firming up a little bit. Inventories are down slightly. There is an increase in demand. We are pleased to see that we are having a very hot, humid summertime here in the United States, which obviously is requiring a lot more demand for thermal coal.

Having said that, looking at some of the macroeconomics in the US market, it is still anticipated to be a very choppy and slow recovery. There is still a lot of unemployment in the male population, which is the backbone of a lot of our manufacturing jobs in this country. One in five males in that category are currently unemployed, which means really that I think we are in for a little bit longer, slower, choppier recovery. Until we get really some traction with our overall economic situation in the United States, I really don’t see a significant rebound in other thermal coal market in the United States, and that could be next year at this time or could even be beyond next year at this time.

Having said that, our domestic coal producers of thermal coal are very disciplined. They have reduced production. They have pulled production off the market to make sure that pricing does remain relatively firm. And that bodes well, I think, for their financial viability as well as the long-term health of the thermal coal market in the United States.

Speaking of cash for just a moment, we are going to increase our CapEx forecast slightly for the year. We were talking around the $60 million to $65 million level. We are probably going to raise that somewhere between $70 million to $80 million. That’s really a function of the fact that we want to put a little bit more money into the Terex requirements after this acquisition. We think it is appropriate and proper, and obviously it’s a very small increase over our projected cash. Having said that, our plan is to have around $280 million in cash on the balance sheet as we move through the year, which obviously is a healthy cash position for us on the balance sheet.

The integration of Terex is going well. I think, as I mentioned earlier, we are adjusting ourselves to the speed of book-to-bill. And I feel confident that we will be able to manage that business very effectively. The rationalization of a lot of the administrative functions is moving along at the pace we expected. And I think that all-in-all, I think the integration process if going exceptionally well based on, again, our experience that we were able to achieve what the DBT acquisition of three years ago. We are using those same disciplines as we move through the Terex acquisition in immigration process.

Having all that said and considering I think in many respects a very good quarter with a strong market as we move toward the second half of the year, we will maintain guidance for the year, which as you I think are aware we estimated sales to be approximately between $3.65 billion and $3.75 billion. And we will maintain our guidance also on adjusted EBITDA of $655 million to $680 million.

And maybe to give you a little bit more comfort in that guidance, as you look at where we are with our current backlog, what our requirements are to meet that type of revenue for the rest of the year, we really only need to book an additional $854 million between now and the end of the year to be able to achieve that guidance with our current backlog. So book-to-bill between now and the end of the year is absolutely doable. But I think with some of the noise that we have around the Reliance deal and some of the other LOIs that we need to bring to contract, we will maintain guidance. We will not increase guidance at this point in time.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Robert Wertheimer. Please proceed, sir.

Robert Wertheimer – Morgan Stanley

Hi, good morning, everyone. I have a couple questions on margins. The first would be your surface equipment margin was pretty extraordinary. The mix wasn’t all that different from what it has been and it was very high. I’m talking to the legacy ex Terex, not just [ph] Terex in a minute. So, is there any one-off reason that was so strong? And a corollary is, your sort of guidance back half implied margin is lower. I know you have more underground mix there. But nonetheless, that back half mix looks – the back half margin guidance looks lower. And so again, is there anything one-off in the margins this quarter?

Tim Sullivan

No. I think what we mentioned in the first quarter is that we were not sure exactly where some of the material costs were going. As we came into this fiscal year, steel prices had jumped fairly quickly. And I think we reacted in kind with our machine pricing, our parts pricing to make sure that we’re protected downstream. I think that steel prices have actually leveled off at some instances in some of the steel that we do buy going down a little bit. So that stabilized, and I think that’s again helped with our overall gross margin in the second quarter. How that flexes through Q3 and Q4 is yet to be seen. But that’s really the reaction of us anticipating a steel increase and putting into our pricing.

Robert Wertheimer – Morgan Stanley

Okay. Second question, your Terex margin – former legacy Terex, but pardon, was 12.1, I think, if you adjust for the inventory step-up. That’s pretty good. I mean, I think they are like 10.2 and 13.5, sort of at peak. So that’s really pretty good. Have you gotten a lot of those costs out already so it’s proceeding according to plan? But I don’t know if that’s a lot amount already, or is that margin going to push high or when you get them out?

Tim Sullivan

Well, we want to obviously get that margin up to where we are traditionally at right now with our surface and underground. But it’s kind of the same phenomena I just talked about. I think, again, the book-to-bill on the Terex product is very quick. We closed back in February. So we jumped on that quickly. And I think that again is starting to move through to the revenue line and obviously the margins for that business as well.

Craig Mackus

And I think the mix would help a little bit also. There is a significant amount of aftermarket business from Terex for the quarter that helped the margin percent. So one of our goals was to improve the market penetration for aftermarket and we started making some minerals [ph] already second quarter in that regard. So that will help drive margins up.

Robert Wertheimer – Morgan Stanley

Great. If I can ask one last one, on the cross-selling the trucks, that’s great. I wasn’t sure you’d be able to sell the truck that quickly and that aggressively. What was that conversation like? There is a lot of viable suppliers of trucks. So it’s not as though miners, I would assume, need to keep some incremental supplier in the market. It can be a cost for them to have mixed fleet. So what was the conversation like? And was it sold strictly on your serviceability or price or the desire to diversify?

Tim Sullivan

All the above. I think our relationship with the big five is obviously enhanced with the fact now that we’ve got the largest portfolio of mining machinery for them. And I think with that, I think they want to support us. I think they want to make sure that they have that diversity, but they are willing to give us that business and give us a shot, which is again very pleasing and gratifying from our standpoint. And with the leverage of the installed base that we have, we have opportunities to make sure that as our volume with these customers increases, we are also able to pass on discounts. So it’s all the above. And I think we are out of the blocks well with a lot of our traditional customers and we expect that to continue.

Robert Wertheimer – Morgan Stanley

I’ll stop there. Thank you.

Operator

Your next question comes from the line of Andrew Kaplowitz. Please proceed, sir.

Andrew Kaplowitz – Barclays Capital

Good morning, guys.

Craig Mackus

Good morning, Andy.

Tim Sullivan

Good morning.

Andrew Kaplowitz – Barclays Capital

So Tim, if you go to the aftermarket business in the US and underground in particular, last year your results were better than this year. So I guess I’m just wondering sort of what has gone weaker this year. Is it just that people – these customers are continuing to take production offline? And then just a follow-up to it is, you actually had very good aftermarket bookings in that particular segment in the quarter. So maybe have we turned the corner globally anyway?

Tim Sullivan

Yes, globally, I think that’s right. I think the aftermarket has definitely stabilized outside of the United States. I’m still very cautious about the United States. We have still some fairly significant low utilization rates in some of our equipment in the thermal mines. So I think we will remain cautious on the domestic front. But I think overall, with $40 billion of installed base out there right now, the opportunities should be steady and fast.

Andrew Kaplowitz – Barclays Capital

Okay, great. And if I look at the services bookings in the quarter excluding the Terex business, they are up a little bit from the quarter before. And again, we should focus on quarter-to-quarter , but at the same time, I’m just wondering about sort of the big five contribution. I would guess they had more of a contribution in the quarter, but it wasn’t a huge step-up. So should we see like a continued step-up from here or how should we look at it?

Tim Sullivan

Yes, I think that’s possible. I think based on where we are in the marketplace, that should continue, yes.

Andrew Kaplowitz – Barclays Capital

Okay. That’s an easy answer, and I’m going to get back in queue. Thank you.

Operator

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

Jerry Revich – Goldman Sachs

Good morning.

Tim Sullivan

Good morning, Jerry.

Jerry Revich – Goldman Sachs

Craig, Tim, now that you have about six months of experience with Terex mining business, can you step us through your facility optimization plan there? Clearly you are ramping up CapEx. Perhaps talk about if you are shifting any products around? Thank you.

Tim Sullivan

Yes. The bad news is I think because of the spike in activity, it may slow down some of our rationalization. I think we still plan to move the large hydraulic excavator, the RH400 here to Milwaukee. And I think that we can do. Some of the other rationalization that we have planned, we may have to slow down a little bit just for the fact that the Terex demand is quite strong right now. We still plan to do some of that, but we will be judicious. We won’t force it if the plants are busy, which they are. And if they remain strong and busy, we will rationalize and increase the efficiencies whenever the opportunity presents itself.

Jerry Revich – Goldman Sachs

And the Terex Mining aftermarket business is clearly off to a very strong start, as, Craig, you alluded to in answering a prior question. Can you talk about what initiatives you have already implemented? It sounds like we are still in the early stages there, but I’m wondering if you could give us some more color on what’s been done already. Thank you.

Tim Sullivan

Very early stages, but I think you remember when we did the DBT acquisition three years ago, we took the DBT aftermarket team and embedded them in with our aftermarket team here in Milwaukee. We actually moved the individuals from Germany to here in Milwaukee to cross-pollinate and make sure that the disciplines that we had put in place back five, six years ago we can impart into the DBT aftermarket business, which proved to be very successful. We’ve done the same thing with the Terex individuals. They have been embedded in with our DBT – previous DBT and previous Bucyrus aftermarket individuals. So we are off to a good start. Got a long way to go before we are happy with what we have set up. We’ve got a lot of initiatives in the aftermarket area, which should improve it and I think help us even further. But again, I think keeping with what I mentioned before, we are following the same game plan as we did with DBT, and it seems to be working.

Jerry Revich – Goldman Sachs

And we’ve heard that you’ve sent a number of termination notices to prior Terex Mining distributors. Can you talk about what proportion of that distribution footprint you rationalized already and in-sourced, if you will?

Tim Sullivan

About a third of it. And quite frankly, the third that we did terminate were not that active anyway. I think obviously we’ve kept the good ones and we’ll continue to work with them and continue to look to see what opportunities we might have in the future with that market strategy as well.

Jerry Revich – Goldman Sachs

And last one, if I may, you’ve mentioned on prior calls that LOIs related to the Australia business were in the works, considering there were still in the negotiation stages. Now that they have hammered out some sort of agreement, are you expecting bookings in the near-term in terms of the LOI conversions? Thank you.

Tim Sullivan

Yes. Some of those LOIs, we were able to get those in Q2. We have others. And it depends on the product. It depends on what it is. But yes, we expect that several of the LOIs that have been held. And you mentioned the Australia market, but there are some other markets as well where we are holding LOIs. We fully expect and hope to get those to contract between now and the end of the year.

Jerry Revich – Goldman Sachs

Thank you very much.

Operator

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

Charles Brady – BMO Capital

Thanks. Good morning.

Craig Mackus

Hi, Charles.

Charles Brady – BMO Capital

Craig, with respect to the R&D commentary, you guys are ramping that up, in terms of dollar amount, looking at the Q2 level, is that a level you see sustainable going forward? Are you ramping it up from where we were at Q2?

Craig Mackus

I think we’re going to continue to ramp it up modestly. We will be adding additional engineers, quite a few on the Terex side. So a lot of the R&D increase on adding more capacity on the Terex side. But it’s going to go up, but not a huge amount, but maybe a couple of million dollars on an annualized basis.

Tim Sullivan

Yes. Let me comment on that too. I think that there is – people look at that R&D number, and what we talked about R&D is it’s a big deal for the company, but the numbers are fairly modest. Well, how we do with R&D is – or how we manage R&D is a bit unique. We partner with our key suppliers on R&D. And basically their contribution gets amortized in over several machines as we move forward. So the number that used to that we actually expand is R&D, actually is in real terms larger and it really is then, from a supplier standpoint, we tend to amortize it over several machines over several years as we move forward. So that’s just a side comment because that’s come up a couple times here just recently.

Charles Brady – BMO Capital

Thanks. And the book-to-bill among the three segments, can you just give us a little more granularity on the timing? What is the difference between those three businesses?

Tim Sullivan

Well, I think if you look at – let me just break down the $854 million that I gave you. Okay? If you look at what we see between now and the end of the year, we are looking at something like $339 million for Terex, $329 million for surface, and $186 million for underground between now and the end of the year as far as book-to-bill to meet plan, I think, or to get to our guidance number. So you can see that we’ve got quite a bit of strength right now with the Terex product line, which we think that will continue as we move through the year.

Charles Brady – BMO Capital

Thanks. It’s pretty helpful. And Tim, just in regard to the automated plough that you had on display here this week, which is pretty impressive, you mentioned you had some – some of your key customers coming through that plant this week. Some color on sort of what kind of reception you’ve got and kind of the feedback you got from those people going through the plant. Thanks.

Tim Sullivan

Well, I can tell you we didn’t book anything, unfortunately. But it was all very positive. I think mining companies, in general, tend to be very conservative. But I think most – everyone that I have met and talked to on Wednesday and Thursday, we were very impressed they all have applications for that technology. And I think what’s going to happen is that system will get up and running in September – early September the latest we’ll be installing it here in the next three or four weeks. And I think it takes a while for people to change mine plans and to start to apply that type of technology. So I think we’re having heavy dose of optimism, I think, as far as potential for that system. But in all honesty, I think we’re probably looking at getting booking traction somewhere in something like 2011 for more systems.

Charles Brady – BMO Capital

Thanks very much. I’ll hop back in the queue.

Operator

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

Steve Barger – KeyBanc

Hi, good morning. Your original Terex EBITDA guidance was for $130 million over the first 12 months. As you look forward to – you talked about increased aftermarket, faster book-to-bill. Has that changed your thinking in your thinking in your plan as to what that contributes, again what looks like some slower domestic underground right now?

Tim Sullivan

It’s gone – as you know, we’re putting plan together. It’s a bit of give and take. You’re going to win some, lose some, and have some things that don’t pan out as you expect. But I think in general, we are pretty confident that we could get some early and good traction with the Terex product. So, no real change there. I think that was baked into what we thought looking to this year.

Steve Barger – KeyBanc

Okay. And if you gave this, I’m sorry if I missed it, your next 12-month order number in backlog is $1.6 billion. What percentage of that do you expect to ship in the second half of ’10?

Tim Sullivan

A large portion of about $1.3 billion.

Steve Barger – KeyBanc

Yes. So really front loaded. Okay.

Tim Sullivan

Really front loaded. It’s interesting we had a back end loaded plan from our internal plan. But the backlog is really heavily front end loaded in the 12-month projection.

Steve Barger – KeyBanc

Okay. And I guess – so, as you look out to where orders have been trending so far in July and from levels of interest that you’ve seen, do you expect that the order rate is going to pick up in the back half for the first half of ’11?

Tim Sullivan

Yes. I think we obviously had a pretty soft first quarter, and we’re billing kind of ahead of (inaudible) as we are moving through ’10. Again, pluses and minuses across the board in a lot of different markets. But yes, I think we are pretty positive about the strength in the marketplace right now. A lot of activity, and I think that will continue.

Steve Barger – KeyBanc

Okay. Last question, on a recent TV interview, you said there were maybe four more orders out there like that Indian deal. Can you provide any more comment on that?

Tim Sullivan

Yes. They are still there. And quite frankly, we need to get the Reliance deal across the finish line with the Exim Bank. And then we’d really need to regroup one way or the other with them and determine that they are going to be a lot more open to these types of applications or not, because if they are not, we are going to have to look at alternatives to deal with these customer requirements. The fact that this will be a 11-month process to get this thing approved is completely unacceptable. So if they are open for suggestions and help, we’re here to help. If they are not, we’re going to have to figure out how else to do it.

Steve Barger – KeyBanc

All right. Thanks.

Operator

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

Schon Williams – BB&T Capital Markets

Hi, good morning.

Tim Sullivan

Good morning.

Schon Williams – BB&T Capital Markets

Yes, just a quick question, Craig. I guess on the CapEx guidance, does that include the new building? And can you give us an update on how that process is going to move? Is there any disruption there?

Craig Mackus

No. It does include it. That’s one of the reasons we increased the guidance. This is – we had run out of room here for employees in the soft market campus. So we bought a facility nearby. And we have already moved about 100 people into that new location. So that’s progressing as we had planned. But our guidance was increased primarily to accommodate that purchase.

Schon Williams – BB&T Capital Markets

Okay. Thanks. That’s all I had, guys.

Operator

Your next question comes from Ben Elias with Sterne, Agee. Please proceed, sir.

Ben Elias – Sterne, Agee

Thank you. Good morning. I just want to follow up on the truck – the talk about truck. That was in the Freeport-McMoran conference call. And Mr. Ed [ph] said something interesting. He is looking to increase his Cat truck fleet, buying from the used market. And what he did say was that the industry is changing its truck fleet situation from manufacturer to another. I was hoping you could elaborate and shed some light on that.

Tim Sullivan

Yes. We liked that comment. Obviously, we are the new kid on the block in trucks. And we are seeing the same sentiment, I think, throughout the large producers out there today. And we think that’s going to be a good market opportunity for us.

Ben Elias – Sterne, Agee

So the shift is from Cat to others or is it really you’ve captured some of that share with the Terex trucks and with what’s happened at Vale?

Tim Sullivan

Well, there is a technological difference between what we provide and what Cat provides. Cat has had a very high market share in excess of 70% market share on trucks, which is a very high market share. They run predominantly mechanical-drive trucks. We’ve run predominantly electric-drive trucks. And there is a differentiator there even though Cat is shifting their technology to electric wheel. We believe it’s going to take a while for them to get that new technology established in the marketplace. So we think there is a spot for us. And we think that we can grow the traditional Unit Rig Terex truck market share to good truck. And I think what the right supports, we can be very competitive.

Ben Elias – Sterne, Agee

Thank you.

Operator

Your next question comes from Jason Ho [ph] with Blair Advisors [ph]. Please proceed, sir.

Jason Ho – Blair Advisors

Thank you for taking my question. I have kind of a multi-part question here. First part, if you could just give me the balance of unbilled receivables at the end of the quarter? And then also if you could break out what the warranty accrual is from the liabilities to customers on uncompleted contracts? Second part is, we saw – I saw your new risk disclosure about the Reliance on export-import financing. And I’m just wondering what percentage of backlog in guidance is contingent on import-export bank financing. And –

Tim Sullivan

I’ll start with the first one. The initial order would be approximately $300 million, but there is options for follow-on machines from the initial order.

Craig Mackus

And the progress sales would be about $325 million for the quarter, down from the end of the year. So that’s come down somewhat. And we don’t break out our actual warranty receive number. It’s part of another number on the balance sheet, but we don’t – I don’t want to (inaudible) right now. It does get disclosed in our 10-Q eventually I realize. But right now, we’re not to give it out.

Jason Ho – Blair Advisors

Just a follow-up on what you said, Tim, did you say that it was $300 million in backlog for – that's contingent on import-export financing?

Tim Sullivan

There is nothing in backlog. If the Exim Bank does approve the application, then we would book $300 million for Reliance.

Jason Ho – Blair Advisors

And is that part of your guidance?

Tim Sullivan

Part of it is part of the guidance. As I said, I think that about $70 million to $90 million could flow through the fourth quarter if we are able to get that finalized here within the next 60 days.

Jason Ho – Blair Advisors

Is there any other orders other than the Reliance one that are contingent on financing that are in backlog or guidance?

Tim Sullivan

No, we don’t put anything in backlog. And we’re very cautious about guidance. We have a third-party issue like Exim Bank in the process.

Jason Ho – Blair Advisors

One more question. Did you say unbilled was $325 million, Craig?

Craig Mackus

Yes, it is.

Jason Ho – Blair Advisors

Okay, thank you.

Operator

Your next question comes from Ann Duignan with JP Morgan. Please proceed, ma’am.

Ann Duignan – JP Morgan

Hi, good morning, guys.

Tim Sullivan

Good morning, Ann.

Ann Duignan – JP Morgan

I just want to take a step back on the trucks comment. You mentioned that you have been able to pass on discounts because of volume. Should we be concerned that you are buying this market share or using pricing to penetrate these markets?

Tim Sullivan

No. I think that obviously most – any market where volume is involved, whether we are buying steel or we are selling parts or we are selling machinery, certain levels of volume can create certain opportunities for discounting, which is what we’ve done for years with all of our customers.

Ann Duignan – JP Morgan

Okay. And just – maybe I missed it in the press, but exactly how many trucks has Vale ordered?

Tim Sullivan

15.

Ann Duignan – JP Morgan

15, okay. Thank you. And then on the acquisition integration, you’ve mentioned on the last call that you anticipated the acquisition to be at neutral to accretion this year. Can you update us now just given that you may be delaying some of the integration activities versus holding your outlook for EBITDA at constant?

Craig Mackus

We think that’s still true. We made significant headway in the second quarter compared to the 40-day period in the first quarter. If you look at what we were in the quarter, if you exclude the inventory adjustment and some of the – the $1.7 million of additional fees we continue to have related to the acquisition, we were only a couple of pennies negative accretion. So we think that will continue to improve so that by the end of the year we’ll be back to that position that we had given to you originally. So we expect – hope we’ll continue to see improvement in the third and fourth quarter, as some of our initiatives start to take hold. We’ve had – as you know, we’ve talked about between $93 million and $100 million worth of synergy savings to be achieved over a three-year period. We’re working on all of those initiatives right now, and some are in various stages of completion. So we will see that ramp up over the next 12 to 18 months, as we continue to work on those.

Ann Duignan – JP Morgan

Okay. And it’s funny because first time I’ve ever heard anybody saying negative accretion. Isn’t that dilution?

Craig Mackus

Yes, it is.

Ann Duignan – JP Morgan

I like your terminology. Okay. I’ll get back in line. Most of my questions have been answered. Thanks.

Operator

Next question comes from the line of Paul Bodnar. Please proceed.

Paul Bodnar – Longbow Research

Hi, good morning. Just quickly, what makes your backlogs going at big five and I guess how to break down between them and countries, if you could give any detail on it?

Tim Sullivan

I couldn’t give you detail over the call here because I don’t think we really track it exactly in these numbers that I’ve got in front of me. But obviously the big five are really a major force in the marketplace and they are a good customer base for us. I can’t give you that number because I don’t have it.

Paul Bodnar – Longbow Research

Okay. Just obviously on China in penetrating our market further, I mean, obviously this new automated system can help there. But any kind of new information and how far you are into that market or any kind of market share gains (inaudible) kind of pretty flat?

Tim Sullivan

I’ve kind of done a record. I think that that market is not necessarily going to be a good market for us as we move forward. I think the Chinese will continue to buy a western equipment and western technology that they have not had the opportunity to copy yet – or knock off is probably a more negative term. Where that has not occurred, we’re going to have opportunities. And I think we see that that market is going to be maybe $300 million to $400 million a year over the next three to five years for us maximum because of that phenomenon.

Paul Bodnar – Longbow Research

And will there be a lot of surface in there too, as they start to expand (inaudible) with your shovels or maybe dragline or something or –?

Tim Sullivan

Yes, it’s going to be – as you know, the western regions of China will be a lot more surface. We did get some trucks out of the China market this quarter. So it would be a mix. And I think it could shift more towards surface versus underground opportunities. But keep in mind that Chinese are also developing surface equipment as well. So it’s going to be a challenge no matter what.

Paul Bodnar – Longbow Research

Yes. And just last – what percent of the Terex sales did you go with the – through the Cat network on the hydraulic shovels versus direct, I mean, if you just kind of shift over time, but do you have anything on the quarter?

Tim Sullivan

We don’t have it for the quarter, but I think historically that kind of flowed anywhere between, say, 30% and 40%.

Paul Bodnar – Longbow Research

Okay. Thanks a lot.

Tim Sullivan

And just probably if I go back and look at the quarter, I would guess that it is probably consistent with this past quarter.

Craig Mackus

But just the hydraulic excavators.

Tim Sullivan

Yes, just the hydraulic excavators. That’s all they handle.

Paul Bodnar – Longbow Research

Okay. Thanks, guys.

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, everybody.

Craig Mackus

Hi.

Seth Weber – RBC Capital Markets

Just, Tim, going back to your comment about pulling some of the outsourcing in-house, I mean, could you give us a sense for what area that might show up more directly and whether it is surface or underground? And is that a function of your using available Terex capacity to do that or can you just give us some sense of how that’s going to work?

Tim Sullivan

No, right now it’s going to be mostly surface. It’s interesting DBT historically did a lot of stuff in-house versus outsourcing. Terex did a lot of outsourcing and they were in the process of in-sourcing more over the last couple of years. We will tend to – we will continue to do that and accelerate. So the in-sourcing is going to be predominantly on the surface side and probably like a 60/40 – 60% Terex versus our traditional surface equipment.

Seth Weber – RBC Capital Markets

Okay. Relative to your $3.7 billion guidance for this year for revenue, I mean, can you give us a sense for how high that number could go with your existing capacity today?

Tim Sullivan

Haven’t run that, haven’t modeled that. Ironically enough, I think I might have mentioned that to the group this past week on Tuesday. We’re looking to model that as we move to the next couple of weeks because we’re trying to really determine what the mix might be as we move through 2011 and ’12. We don’t want to get bottlenecked in any particular product line. And so we’ll be doing that in the near future itself.

Seth Weber – RBC Capital Markets

Okay. Last question, with terminating a third of the distribution channel, I mean, are you – does that mean you’re going to need to spend money to add service centers or how do you kind of compensate for that?

Tim Sullivan

As we progress through ’11 and ’12, clearly we’re going to be doing that. That typically is not a tremendous amount of money the way we plan to do it, and I can roll some of that strategy out as we move through the – towards the fourth quarter. It is going to take some capital, but it is not going to be a large amount of capital necessarily to bridge those holes, so to speak, in the market.

Seth Weber – RBC Capital Markets

Okay. All right. Thanks very much, guys.

Operator

Your next question comes from the line of Chris Weltzer. This is also the last question. Thank you. Please proceed, sir.

Chris Weltzer – Robert W. Baird

Good morning, guys.

Tim Sullivan

Hi, Chris.

Chris Weltzer – Robert W. Baird

Just wanted to clear if any confusion, do you know what the $15.8 million inventory write-up and the $1.7 million of acquisition costs are on an after-tax basis?

Craig Mackus

Yes. You can just use the effective rate of around 32.5% to 33.0%. So (inaudible) of that to get it on an after-tax basis.

Chris Weltzer – Robert W. Baird

Got it, okay. Just to know if any of that was –

Craig Mackus

There is a table in the 10-Q that kind of shows those numbers and you can use that tax rate for that amount.

Chris Weltzer – Robert W. Baird

Okay. Just wanted to make sure none of it was non-deductible or anything like that. Also wanted to clarify, this $854 million of bookings number, am I understanding that correctly, that’s the amount you need to book in the next quarter or next two quarters in order to meet your guidance?

Tim Sullivan

Two quarters, book-to-bill.

Chris Weltzer – Robert W. Baird

Do you mean absolute orders or –? I’m not understanding the book-to-bill.

Craig Mackus

Those are the orders that we need to book in either the third or fourth quarter in order for us to hit our guidance for the year.

Chris Weltzer – Robert W. Baird

But not a forecast for booking per se? I mean, you did –

Craig Mackus

No, no, no. No.

Tim Sullivan

I was just trying to give you some help on where the gap is.

Craig Mackus

And obviously, some of that – on the OE side, we’d want to add earlier rather than later, if you book it even towards the end of the year, we’ll – a little bit of pressure to our target. So we’re optimistic that – hopeful that this will be earlier in the quarter – in the third quarter rather than towards the end of the fourth quarter.

Chris Weltzer – Robert W. Baird

Got it. And then historically, do you guys have a strategic supply agreement with Vale to supply shovel product? Obviously, you’ve expanded your product portfolio. Are there initiatives underway to perhaps try to work in new products into that agreement or otherwise expand strategic agreements with customers in a similar fashion?

Tim Sullivan

All the above. I think we are working with all of our customers strategically as to how we can work with them on our portfolio of products. Every relationship, every customer is different. I think suffice it to say though there is a lot of interest to have those discussions with our customer base, which should bode well for our Terex offering.

Chris Weltzer – Robert W. Baird

Got it. All right. Thank you, guys.

Operator

There are no more questions at this time. I’d now like to turn the call back over to Shelley Hickman.

Tim Sullivan

I’ll take that. Thanks. Well, I just want to summarize again I guess the fact that we are at a good position here I think with the company. Integration is going well. The market is strong. We are right on track where we want to be. And I think the fact that we’re able to reiterate the guidance that we established back in the first part of the year – the first quarter of this year is gratifying. As usual, we know that there is some noise around some of the purchase accounting on some of the numbers that have been published. If you have any questions, feel free to call us. Other than that, let’s hope we get some good news from the US Exim Bank this quarter, and we’ll be talking to you again in October. Thanks for joining us today.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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