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Bucyrus International Inc. (NASDAQ:BUCY)

Q3 2010 Earnings Call

October 22, 2010 9:00 AM ET

Executives

Shelley Hickman – Director, Global Communications

Tim Sullivan – President and CEO

Craig Mackus – Chief Financial Officer

Analysts

Andy Kaplowitz – Barclays Capital

Steve Volkmann – Jefferies & Company

Seth Weber – RBC Capital Markets

Robert Wertheimer – Morgan Stanley

Jerry Revich – Goldman Sachs

Charlie Brady – BMO Capital Markets

Ann Duignan – J.P. Morgan

C Schon Williams – BB&T Capital

Robert McCarthy – Robert W. Baird

Ben Elias – Sterne, Agee

Joel Tiss – Buckingham Research

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2010 Bucyrus International Incorporated Earnings Conference Call. My name is Alicia, and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of the call. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Shelley Hickman, Director, Global Communications. Please proceed.

Shelley Hickman

Thank you, Alicia. Good morning. And thank you for joining us for Bucyrus International Incorporated third quarter 2010 earnings release teleconference. In a few moments, I’ll turn the teleconference over to Mr. Tim Sullivan, President and CEO of Bucyrus; and Mr. Craig Mackus, Bucyrus’ CFO.

As we begin, I would 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.

Tim, now I’ll turn the conference over to you.

Tim Sullivan

Good morning, everyone, and as usual, thanks for joining us on our quarterly call. I want to have Craig go ahead and give you a summary of where our financials were for the quarter.

Craig Mackus

Okay. Thanks, Tim. Now, as I have stated in the last two quarters, I’d like to advise everyone that our financial results for 2010 include the net assets and results of operations of Terex since February 19th date of acquisition, as well as preliminary acquisition accounting adjustments and acquisition costs related to Terex acquisition.

As a result, our financial results for the quarter and nine months ended September 30, 2010 are not necessarily comparative to the results for same periods last year or as of December 31, 2009, and may not be indicative of future results.

Sales for the third quarter of 2010, which include a $247 million for Terex, a $937 million, an increase of $261 million or 39% compared to the third quarter of 2009. Original equipment sales which include $115 million for Terex increased $137 million or 41% compared to the third quarter of 2009 and after market sales, which included $132 million for Terex increased $124 million or 36% compared to the third quarter of 2009.

Sales for the first nine months of 2010, which included $616 million for Terex were $2.4 billion, an increase of $407 million or 20% compared to the first nine months of 2009. Original equipment sales which included $284 million for Terex increased $146 million or 14% compared to the first nine months of 2009 and after market sales, which include $332 million for Terex increased $261 million or 27% compared to the first nine months of 2009.

Non-Terex surface mining original equipment sales for the third quarter in the first nine months of 2010 increased 24% and 4%, respectively, compared to the same periods last year. The increases were primarily in the electric mining shovel product line.

Underground mining original equipment sales decreased 3% compared to the third quarter last year and 25% compared to the first nine months of 2009. The quarterly decrease was in the room and pillar product line, partially offset by an increase in longwall product line. The year-to-date decrease was across all product lines with the largest change being longwall systems in the Czech Republic.

Non-Terex after market sales for the third quarter of 2010 compared to the third quarter last year decreased 19% in the surface segment with the largest decreases being in the Canadian, United States and African markets, but increased 20% in the underground segment, primarily in the Eastern European and Chinese markets.

Non-Terex after market sales for the first nine months of 2010 compared to the first nine months last year decreased 10% in the surface mining segment, with the largest decreases being in the United States, Chilean, Canadian and African markets, partially offset by an increase in the Brazilian market and decreased 3% in the underground segment, primarily in the United States market offset by an increase in the Chinese market.

The decrease in United States markets were primarily due to a major dragline repair and rebuild project, and a dragline move in 2009 for a total of $40 million that has not been repeated in 2010, and lower longwall face extension orders in 2010.

Gross margin after adjusting for amortization of Terex acquisition accounting adjustments was 29% for the third quarter and 30% for the first nine months of 2010 compared to 33% and 30% for the same periods last year.

The reduced gross margins for the third quarter of 2010 compared to the third quarter last year was primarily due to lower gross margins on the Terex business compared with historical Bucyrus and the mix of products sold.

This was partially offset by lower absorption losses at our manufacturing locations in 2010. There is $0.9 million of remaining inventory acquisition adjustment, which will be expensed in the fourth quarter. A total of $38 million has been charged through September.

Raw material price increases have not had a significant impact on margins.

Operating earnings for the third quarter of 2010 were $133 million compared to $137 million for the third quarter last year and were $327 million for the first nine months of 2010, compared to $360 million for the first nine months of 2009.

Operating earnings for the third quarter and first nine months of 2010 were reduced by amortization of preliminary acquisition accounting adjustments and acquisition costs related to the acquisition of Terex mining of $23 million and $74 million, respectively.

Operating earnings for the third quarter 2010 were reduced by $2.4 million of severance and Terex acquisition costs. Lower underground mining equipment sales for the first nine months of 2010 have negatively impacted operating earnings compared to the first nine months last year.

Interest expense of $21 million and $51 million for the quarter and nine months ended September 30, 2010, respectively, compared to $7 million and $20 million for the same periods last year. The increase reflects the new $1 billion secured term loan, which was used to purchase Terex.

The effective tax rate for the first nine months of 2010 was 32.4%, compared to 31.4% for the first nine months of 2009. The higher rate in 2010 was primarily due to non-deductible acquisition costs related to the Terex acquisition. The effective tax rate for 2010 is expected to be between 32.5% and 33%.

Net earnings for the third quarter and first nine months of 2010 were $78 million and $186 million, respectively, compared to $92 million and $231 million for the same periods last year. Net earnings were reduced by amortization of acquisition accounting adjustments related to the Terex acquisition of $15 million and $39 million for the third quarter and first nine months of 2010, respectively. Amortization of Terex acquisition accounting adjustments is expected to approximate $7 million or $5 million after-tax in future quarters.

Adjusted EBITDA for the third quarter 2010 was $177 million, an increase of 12% from $158 million for the third quarter of 2009 and for the first nine months of 2010 were $464 million, an increase of 13% from $412 million for the first nine months of 2009.

Adjusted EBITDA was 19% of sales for the quarter and nine months ended September 30, 2010 compared to 23% for the third quarter of 2009 and 21% for the first nine months of 2010. Adjusted EBITDA excludes the impact of non-cash stock compensation expense, gain or loss on disposal of fixed assets, inventory fair value acquisition, accounting adjustment charged to cost of products sold and Terex acquisition costs.

At September 30, 2010, our total backlog was $2.5 billion, $1.9 billion of which is expected to be recognized within the next 12 months. This represents a 35% increase from the December 31, 2009 total backlog of $1.9 million and a 49% increase from the 12 months backlog of $1.3 billion. Backlog at September 30, 2009 includes $540 million for Terex.

New orders for the third quarter of 2010, which included $449 million for Terex were $1 billion, an increase of $397 million or 63% compared to the third quarter of 2009.

Original equipment new orders for the third quarter of 2010, which included $314 million for Terex were $581 million, compared to $315 million for the third quarter 2009. There was an increase in new orders for electric mining shovels and a decrease in new orders for longwall equipment for the third quarter 2010, compared to the third quarter last year.

After market new orders for the third quarter 2010, which included $135 million for Terex were $444 million, compared to $312 million for the third quarter of 2009, excluding Terex after market new orders were relatively flat, compared to the third quarter of 2009.

New orders for the first nine months of 2010, which included $852 million for Terex were $2.8 billion, an increase of $1.3 billion or 92%, compared to the first nine months of 2009. Original equipment new orders for the first nine months of 2010, which included $504 million for Terex were $1.5 billion, compared to $565 million for the same period last year. In addition to Terex, the increase was in electric mining shovels and all underground mining product lines.

After-market new orders for the first nine months of 2010, which included $348 million for Terex were $1.2 million, compared to $875 million for the first nine months of 2009. Excluding Terex after market new orders increased 3%, compared to the first nine months of 2009.

Total new orders were positively impacted by $162 million and $61 million for the third quarter and first nine months of 2010, respectively, due to the effect of the weaker U.S. dollar on orders and beginning of period backlog denominated in foreign currencies.

Our cash balance increased to $353 million at September 30th from $279 million at June 30th and $101 million at December 31, 2009. Net cash provided by operation activities was $76 million for the third quarter and $341 million for the first nine months of 2010.

Non-Terex receivables decreased $68 million from December 31, 2009, as we had large collections on shovel and longwall equipment orders. Total receivables increased approximately $51 million from June 30th due to the effect of exchange rates.

Non-Terex inventories increased $99 million from December 31, 2009 and total inventories increased approximately $66 million from June 30th due to the effective exchange rates. Our total debt at September 30th remains at $1.5 billion. We did not have any borrowings under our revolving credit facility at December 31, 2010.

Now, I’ll turn it back to Tim.

Tim Sullivan

Okay. Excuse me. Obviously, we were satisfied this quarter with another strong booking performance with bookings above $1 billion for the quarter. Backlog now increased to over $2.5 billion, which again is a good indication of good strong shipments to follow.

One of the challenges we did have on the quarter and I think, you’ve seen that with the financial results, is we were challenged on the revenue side on our traditional surface products. That was a direct result of the stock that we’ve gone through here over the last 12 months with the Reliance order for India and the U.S. Exim financing. Very pleased to learn of the final vote yesterday by U.S. Exim Bank approving the loan application by our customer Reliance.

And how does that particularly affect the revenue in the third quarter? Well, we had a lot of starts and stops with those machines. When we got the order from the customer last November, particularly for the shovels and the draglines initially, those units were slotted in production schedule for this year. Obviously with the fallout with the Exim Bank financing, we had to reschedule and reschedule and reschedule. That created a very huge challenge for our Milwaukee product unit and it really created a bit of a shortfall for us in the quarter.

Now with certainty around the financing, certainty around the order, we can lock those slots finally in our production schedule, which will now be in 2011, which is effectively one year later than we originally anticipated. We obviously will get some progress payments for some of that equipment in the fourth quarter but it was really a challenge for our guys and I think they did exceptional job based on all the starts and stops that we did have.

The challenge, obviously, the not going challenge that we’ve got from a shipping standpoint is that all of our plants are going to have to perform at the higher levels during the fourth quarter to make sure that we are into our guidance. We’ve met our guidance for the last six years since we’ve been a public company and we fully intend to hit our guidance again this year, which means that we do have a big challenge ahead of us here for the fourth quarter.

Having said that, looking at the numbers and looking at what we need to do to make sure we get into our guidance range on revenue, we do need additional $250 million worth of bookings on a book to bill basis for the quarter, which we think is entirely doable. But our people will be challenged and I think they are up to that challenge to move us into our range in guidance on revenue.

Quoting activity remains high, I think from a marketing standpoint, there’s an interesting phenomenon that’s happening out there, most of the quoting activity, the real strong quoting activity and you’re seeing it in some of the booking numbers is in the Terex products, hydraulic excavators, diesel hydraulic drills and trucks.

Primarily that’s the phenomena of the large mining companies, the big five sticking with contractors in many of their locations, particularly in Australia. Australia is still challenged by bottlenecks reports in the railways but more importantly, they are also challenged with manpower requirements. And what happens when there are bottlenecks on manpower and some of those producing countries are traditional customers rather than buying what I would refer to as traditional equipment, they continue to run with contractors and have overburden removal and ore extraction from contractors, both in eastern and western Australia, contractors traditionally buy hydraulic excavators and trucks versus more traditional type equipment.

So we do see CapEx spending up for the big five in 2011 and we’ve had meetings here the last two weeks with some of our customers and we’re pretty excited about the fact that there’s going to be a lot of money spent on CapEx in 2011. But in the mean time, there seems to be an unusually high level of activity with the traditional Terex products, which is fine. We’re happy to have that.

I think one of the things that we’re particularly gratified about too in Q2, Q3, was the acceptance of our acquisition of the Terex products and the rebranding and the fact that now we’re traditional customers, but new customers are really gravitating towards our equipment and you’ve seen that with the bookings.

A lot of the bookings for the Terex products came towards the end of the quarter this quarter, which also did affect to some extent the revenue for the quarter, but very gratified by the acceptance of our acquisition of those products.

Emerging markets remain strong. Obviously we all saw what happened in China this week and what effect that had on the market. I think the Chinese continue to move towards a control of their economy and as we all know, with any ramping up and hyper growth type activity that you see with markets like China, you’re going to see corrections and some clean-off period as you move through the growth period.

I was reminded by one of our investors several years ago that you go back to the U.S. industrial revolution it was not a smooth path. There was a lot of corrections along the way and I think we expect to see some of that out of countries like China that have had a lot of hyper growth here. And we may see that with the other developing and emerging markets as well, it’s never a smooth path, there is always things that need to be corrected along the way.

I think one positive also that came out of this week though in China was that the Chinese and their reaction to some of the concerns by the U.S. government in particular about the currency situation and some of the balance of trade issues. In a meeting with a very high level government official this week, there is discussion now to potentially loosen some of their strategic labeling of the coal mining market.

In other words, I think everyone is aware of the fact that the coal industry is a protected industry by the Chinese government. It’s classified as a strategically critical industry. Obviously the coal industry provides the bulk of the power generation in the country.

With that, they have labeled it as such, which means that our -- the traditional customers that buy coal mining machinery in China are obligated as a first choice to buy Chinese equipment. We are able to compete in the market only for the more high-tech type equipment that the Chinese do not have at their disposal.

If there is a loosening of that classification for the coal mining market, there could be potential other opportunities for us in that market. As we move forward, we’ll see, but I think it’s interesting to see that there has been some discussions or has been some movement to maybe loosen the protection on a very vital industry for that government.

If you look at our acquisition of Terex and the integration process, I think it’s gone exceedingly well. As you know, we move quickly initially. I think it’s moving very, very well to the point that we’re ramping up employment in all three locations where we are manufacturing Terex products in anticipation of increased booking levels that we’re seeing and the increased booking levels that we plan to see as we move in to 2011 and obviously, we will be discussing that on our next call as far as what we see 2011 to be from a guidance standpoint.

Speaking of guidance, I did mention, I think, that we will be within our range on revenue. The guidance that we gave in February is being maintained, that’s 3,650,000,000 to 3,750,000,000. Again, we feel we will be in that range. Got a lot of work ahead of us in the quarter but we’re off to a good start. And I feel confident that now with some certainty around our slotting for the quarter, our people will hunker down and really do what’s necessary to get shipments out this quarter.

And I would also like to reiterate our guidance on EBITDA. We gave you $655 million to $680 million in February. And we are maintaining that guidance as well for the year. With that, I’ll turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andy Kaplowitz from Barclays Capital. Please proceed.

Andy Kaplowitz – Barclays Capital

Hey, guys.

Tim Sullivan

Good morning.

Craig Mackus

Good morning.

Andy Kaplowitz – Barclays Capital

So, Tim, you talk about the inefficiencies in sales and 3Q on the surface. Did it also affect margins in the quarter, Tim?

Tim Sullivan

No, not really. I think it was really strictly related to our revenue number, which was obviously the shipments.

Andy Kaplowitz – Barclays Capital

Okay. That’s helpful. And then just thinking about CapEx for 2011, it appears to us that, you know, CapEx growth should be in the double digits. You know, you talked about this phenomenon of contractors ordering hydraulic shovels. Do you think as we roll over into 2011 that it will go toward your legacy business? Like, how long do we have to wait for your legacy surface mining business to pick up?

Tim Sullivan

I think we’ll be fine. I just don’t think it’s going to be at significantly higher levels than what we’ve seen in ‘10. I think we thought that might be the case. We’re going to see more of those legacy-type bookings, I think, in my opinion towards around the middle part of ‘11. I think we’re going to get out of the chute pretty quickly with probably more on the Terex product lines.

Having said that, you know, we have a lot of quotation activity on longwalls and electric mining shovels here in this quarter already. So, you know, it’s going to be interesting to see how things do play out in the first half of 2011. As far as CapEx, you know, for ourselves, we’re running around $44 million at the end of September. And we’re going to be ramping up some of that CapEx in 2011 to better serve some of the Terex products that are being sold right now.

Andy Kaplowitz – Barclays Capital

That’s helpful. Do you think that some of this, you know, this delay as we go into booking the legacy business has to do with the transition from Brownfield to Greenfield expansion? Is it just that it takes time for these Greenfield expansions, for these customers to order the larger equipment?

Tim Sullivan

Yeah. Partially but there’s also some of the things that we’re looking at are Brownfield. For instance, in Australia and in the Bowen Basin, as mines keep going deeper, they will begin to look at longwalls for the longer-term. So those are Brownfield mines. There are a couple of new mines in Australia coming on stream, but we’re looking at some pretty good booking activity, we think, with some of our Brownfield customers in the Bowen Basin.

Andy Kaplowitz – Barclays Capital

That’s helpful. Thank you, Tim.

Operator

Your next question comes from the line of Steve Volkmann from Jefferies & Company. Please proceed.

Steve Volkmann – Jefferies & Company

Hi. Good morning, guys.

Tim Sullivan

Good morning.

Steve Volkmann – Jefferies & Company

Just to make sure I understand this right. I guess this revenue timing issue was that that you were holding slots open that ultimately you didn’t get the work done or were you actually doing some work that you weren’t able to bill for?

Craig Mackus

No. It was really all related to reliance. We kept trying to move slots around in anticipation of the Exim bank financing being approved. We slotted originally when we got the order back in November, which is typical for us. And then when they file their Exim bank application, we had really no idea that it was going to take literally almost 12 months to have that approved.

So we kept moving the reliance slots around on the schedule to the point that eventually we had to take them out of the third quarter and move them out into Q4, Q1 and that’s effectively what’s created the hole in Q3.

Steve Volkmann – Jefferies & Company

Okay. I got that. So next question is, I guess, I was a little surprised sequentially it looked like the Terex margin was actually down slightly. And I may have my math wrong, but can you just, sort of, bring us up to speed on the cost savings and the margin opportunity of Terex and how that’s going to play out. And I guess with some focus on timing if you can?

Tim Sullivan

Yeah. You know, I think -- we think we can improve the margins in the Terex product line commensurate with what we’ve been able to do underground and our historical heritage surface equipment but it’s going to take us a while. Part of it’s going to be in the plants. We’re actually going to spend some money in some of the plants to make sure we can improve some of our cost basis in the three man plants that we drill.

We actually just spent some money in our Denison drill plant. We were there yesterday and it looks very, very good. So, you know, it’s going to be a steady climb, just like we did with the underground. Quarter-over-quarter, we hope to improve margins.

Steve Volkmann – Jefferies & Company

Okay. So should we start to see that in the third -- sorry, the fourth quarter and then sort of as we March into 2011?

Tim Sullivan

Yeah. We hope to. I mean, that’s our goal. So as we move quarter-to-quarter, we hope to improve that, that margin position.

Steve Volkmann – Jefferies & Company

Okay. Great. Thanks very much.

Operator

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

Seth Weber – RBC Capital Markets

Hey, good morning, guys. Couple questions. Going back to the margin question, I mean, can you characterize what the pricing environment is like? I mean, have there been any concessions, you know, as you guys have maybe started to bundle equipment together or is the -- has the environment gotten any more competitive either on the, you know, on the truck business or the shovel business?

Tim Sullivan

The answer to that is yeah and yeah. I think, you know, when we group equipment together, which we’re happy to do and quite frankly, that’s the whole purpose of the Terex acquisition. There is some of this kind that’s done to gather all that equipment together from the OE side, obviously, the capital upfront and we expect to obviously reap the benefits of that with the downstream aftermarket.

You know, we’re kind of the new player in the market. Certainly, on trucks and we’ve been doing well on trucks out of the blocks. And the traditional players are certainly going to, you know, compete. So we’ll see how it all plays out. I think there’s room for everybody in this market. And I think over time that, that hopefully may temper, be tempered somewhat.

Seth Weber – RBC Capital Markets

Okay. Do you – I mean do you think it’s on -- so the surface margin that you guys put up in the second quarter for the legacy business, is that you think answers -- you’re not going to revisit that kind of number again?

Craig Mackus

Seth, this is Craig. We actually were in that weight of 23%, 24% for the legacy business, which is a very good number for us. Our plan is to try and maintain that number as we go forward. As you recall in the second quarter, we’ve been a little higher than that. So our intent would be to try to maintain those margins as we go forward in 2011 based on the demand that we’re seeing for the products.

Seth Weber – RBC Capital Markets

Okay. And then just on the aftermarket -- weakness in the aftermarket, I mean, you cited the tough comparable with, I guess, the dragline activity in the year ago. Should we expect the aftermarket business to start to grow again here on, you know, just on an organic basis?

Tim Sullivan

Well, yeah. I think we can do, first and foremost, a better job on aftermarket with the Terex products. That’s going to be a pickup. As you know, when you do a couple of dragline moves, those are big dollars, as Craig alluded to in his comments and we just have to make sure we highlight those. We have to highlight any maintenance repair contracts that come in because those are the types of things that do have fairly major impact on a quarterly basis for aftermarket.

But overall, organically, we think we can do a much better job on aftermarket. With some of the new products. And we think there’s still a lot of opportunities out there for some of these dragline overhauls.

Seth Weber – RBC Capital Markets

Okay. And then just lastly, Craig, did you say there was a severance cost charge in the quarter of 2.4 million?

Craig Mackus

There was acquisition expenses related to Terex of approximately half a million and the difference would be some severance expenses that we’ve actually rationalized three facilities around the world to try and have more efficient manufacturing operations. So we had some severance related to those three closures.

Seth Weber – RBC Capital Markets

Okay. But that’s not a specific call charge, expense that gets split out anywhere, right?

Craig Mackus

No, no, let me explain, just part of selling, general and admin expense.

Seth Weber – RBC Capital Markets

Okay. Great. Thanks very much, guys.

Tim Sullivan

Okay.

Operator

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

Robert Wertheimer – Morgan Stanley

Yeah. Good morning, everybody. My first question is just on the order flow. Without trying to be insulting, I wonder if there’s a little bit of where you may have missed on the older OE side of the surface because you were focused on Terex. I mean, did you reassign sales people that you changed incentives so that they’re more focused on Terex than selling the other product by chance?

Tim Sullivan

No, not at all. I think if anything, those guys are still focused on both our legacy underground and surface products. And I think our market shares have been maintained in those products. So -- no, I think we’re fine across the board.

Robert Wertheimer – Morgan Stanley

Okay. Second question is just on the timing. I mean, I understand that there were some big CapEx announcements this year and maybe that money was slow to get spent and maybe as you point out, some of it got spent on lower as contracting or whatever. I’m a little confused as to why it might take all the way to a middle part of next year to get going. I mean, are mines really still that hesitant? Is it just that flow to crank those dollars through the system or what?

Tim Sullivan

No. I think they are going to spend the money. I’m just was trying to give some color as to where some of that money was going to be spent. I think that it’s going to be spent more with some of the contractors out there, which will be our customers versus the big five. You know, they will spend the CapEx, but it’s going to go in a couple of different areas that aren’t directly to us, but indirectly come to us.

And I also think that, you know, we’ll see how it plays out. I think they are right now trying to get those things lined up, that’s what they have told us in the last two weeks. They want to make sure they get those contracts in place and then they will be talking to us about the capital they expect to spend with us.

Robert Wertheimer – Morgan Stanley

Okay. My last one, just real quick. Do you see a bifurcation next year in demand between underground and surface? Are you more confident in surface than underground? Are you seeing solid quoting in both? Thanks.

Tim Sullivan

Solid quoting in both. I think, particularly, I think we’re going to see probably a little bit of above average longwall activity next year. As I mentioned, I think that, you know, we’re looking at some of the mines in Queensland that are looking at going longwall that have traditionally not had longwalls installed in those mines. So I think across the board, we’re looking at some pretty strong both underground and surface activity next year.

Robert Wertheimer – Morgan Stanley

Thank you.

Operator

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

Jerry Revich – Goldman Sachs

Hi. Good morning.

Tim Sullivan

Good morning.

Craig Mackus

Good morning.

Jerry Revich – Goldman Sachs

Craig, looking at the guidance that you have for sales and EBITDA and seeing what that implies for the fourth quarter, I guess, if you’re seeking numbers that both sales and EBITDA you would get to 15% margins. You’ve been running closer to 19% year-to-date. Can you just talk about whether you expect an adverse mix impact in the fourth quarter or is that just a situation where your profit execution has been better than you had expected year-to-date?

Craig Mackus

I think it’s a combination. We’ve given a range for the sales and a range for the earnings. So if you take -- we may be in the low range of sales and the higher range of earnings. So it’s a little difficult to predict exactly what the margin percent is going to be in the quarter. But fundamentally, nothing is really changing from how we have been running the last couple quarters.

Anything in our plan is to ramp up Terex as EBITDA margins over our three-year period to get them from where we started up 13%, getting them up to 20%, over that period. So as we good forward, we hope to see some incremental improvement in the Terex numbers going forward.

Jerry Revich – Goldman Sachs

And, Craig, on that point, considering how strong orders have been in that part of the business. Can you give us an update on facility optimization timing? Are we still thinking about moving the RH400 in second quarter drills in the first quarter? Is that still on track or is that pushed out because of strong shipments?

Tim Sullivan

No. Those are still on tract, as a matter of fact, the Denison team is here this week already working on the transition of the large drills to Denison and we’ve got our team on the ground from Milwaukee and adopt to move the RH400. So those are all still on track and exactly what we plan to do.

Jerry Revich – Goldman Sachs

And to recognize that you don’t have a ton of visibility around your legacy surface orders for a couple of quarters, sounds like based on your comments, but overall, can you discuss directionally where you expect order trends for your overall business to be 2011 versus ‘10 and are we off base as we think of total planning company’s CapEx budgets up 15%, so even if your mix of that changes a bit, your orders should still be pretty good position year-on-year? Thanks.

Craig Mackus

Yeah. No. We’re still bullish on ‘11 and ‘12 for sure. I think, it just, I think, everyone needs to be cognizant of the fact that when these people announce what their CapEx budgets are, those aren’t all going to surface or underground equipment.

But a good portion does, so just want to make sure that we understand that and that there’s a little bit different dynamic there, where we’ll get some of that CapEx indirectly as well.

Jerry Revich – Goldman Sachs

And, Tim, can you step us through which regions contributed to most of your new equipment orders this quarter. If you could touch on each segment, that would be helpful?

Tim Sullivan

Well, it was pretty much across the board. I think there wasn’t any particular region that was unusually large. I think we had some reasonably good activity in Russia, Eastern Europe, Australia, South America both Chile and Peru, had some activity in Brazil, Southern Africa we had some activity this quarter. It was no real large group of equipment to any particular sector. Actually had a little bit of activity in China, so across the board this quarter.

Jerry Revich – Goldman Sachs

And Tim, lastly, it’s good to hear your comments about the Chinese competitive environment, can you talk about how that changes, how you’re potentially thinking about deploying CapEx in that region, if at all?

Tim Sullivan

Yeah. I think, we’re actually expanding our [Longfong] operation as we speak. And we’re also looking at some other opportunities there for us with some of our smaller equipment, you know. We’ve had some good success with our underground diesel equipment. We’re looking to do some expansion there locally with that as well. So we’re going to be very interested to see how this plays out with what the Chinese really planned to do with their policies on the coal industry. But we do have facilities there and we do manufacture there and we will continue to do that on a judicious basis.

Jerry Revich – Goldman Sachs

Thank you.

Operator

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

Charlie Brady – BMO Capital Markets

Thanks. Good morning, guys.

Craig Mackus

Good morning.

Charlie Brady – BMO Capital Markets

Just to clarify with the reliance order that obviously was not in Q3 bookings and will hit in Q4?

Tim Sullivan

That’s definitely Q4.

Charlie Brady – BMO Capital Markets

And is it -- can you quantify, is it 300 million or 400 million? There’s been a few numbers that are thrown out there.

Tim Sullivan

It’s 310.

Charlie Brady – BMO Capital Markets

Okay.

Tim Sullivan

To be precise.

Craig Mackus

Yeah. There’s a press release of by Exim that shows a higher number, but that would include other companies besides ours that were part of that project.

Charlie Brady – BMO Capital Markets

Okay. Thanks for that.

Craig Mackus

Our portion of it is 310 of that 900 million in the announcement.

Tim Sullivan

And that 900, I think included kind of an open line where there’s still to be determined exactly what they are going to use it for.

Charlie Brady – BMO Capital Markets

Okay. And just back on the Chinese comments, I mean, it certainly sounds as though your view on the Chinese market seems to me to be a bit more positive than you’ve been historically. Have you really -- have you had a rethink on your China policy and what the opportunity is there? It sounds like it.

Tim Sullivan

Well, I hope we’re good listeners. Let’s put it that way. And I think over the last three or four years, the Chinese said we don’t want to buy your equipment. If they are saying now that, well, maybe we’re willing to do some more and maybe because of government pressure from the U.S. government, the protectionism they have had in the industry, that they are willing to loosen it up a little bit. We obviously will react to that. And in some respects, we’ve already reacted to it by expanding our [Longfong] operations.

So we’re going to listen and we’re going to -- the good news about I think the Chinese is that when they say something, they effectively do it. I mean, they don’t say something and then give you a head fake and do something different. So we try to be good listeners and if they do what they say they are going to do and we fully expect they will, clearly we’ll react to that and modify our strategy accordingly.

Charlie Brady – BMO Capital Markets

Within the Australian market, are you seeing any commentary or pickup from your customers for gold mining? It seems there’s a lot more activity to get more gold gone -- and some of the Australian companies that kind of ramp up operations or expansion there.

Tim Sullivan

Yeah. They have and most of that gold is mined with smaller equipment and that’s what I would consider to be a new market for us. We have larger legacy-type equipment in some of the larger gold mines, but there’s a lot of gold mines down near -- in the Southwestern part of Australia, which is really a Terex opportunity. So we’re looking very, very carefully at that to see how we can participate there.

Charlie Brady – BMO Capital Markets

Thank you.

Operator

Your next question comes from the line of Ann Duignan from J.P. Morgan. Please proceed.

Ann Duignan – J.P. Morgan

Hi, good morning, guys. Ann Duignan.

Tim Sullivan

Good morning. Hi, Ann.

Ann Duignan – J.P. Morgan

Good morning. Sorry, to be the dead horse. But I think you had said last quarter that if the Reliance order, they can get approved by the end of Q3 that it will cost you something like 70 to 90 million in revenue. Should we, for modeling standpoint, put about 70 to 90 million in revenue in Q4 and then the remainder in 2011? Is that the right way to think about it?

Tim Sullivan

We’ve lost part of that obviously because Europe came so late. I think what are we looking at, Craig --

Craig Mackus

About 50 million now in the fourth quarter.

Tim Sullivan

Right.

Craig Mackus

50 of our book to bill would be the Reliance order. The rest we had to -- really haven’t started on the draglines yet. We hope to start by now. That won’t be probably till 2011 that we would start on those. We’re down to about 50 right now.

Ann Duignan – J.P. Morgan

Okay. That’s very helpful. And then could you talk a little bit since the Terex business is doing so well, can you talk about your Q4 interim and stage 3 B engine strategies and what happens next year to both of that business that doesn’t become more competitively disadvantaged versus some of the competitors?

Tim Sullivan

I don’t think -- I think we’re probably in the same boat as our competitors. Obviously, we’re having discussions with all three suppliers of engines to us, CAT, [CAMINS] and MTU. We use all three suppliers or excavators, diesel, drills and trucks. And really since we don’t manufacture engines, we rely on them to do what they are going to do with the tier 4. But I think they are all kind of running at about the same pace. I think one or two of the suppliers may be slightly ahead of their competition, but I think they are all kind of at the same place on tier 4.

Ann Duignan – J.P. Morgan

And have you issued price increase notices to compensate for the increase in the cost of the engine?

Tim Sullivan

Where we have, or where we’ve perceived there might be cost increases, those will be baked into our pricing, yeah.

Ann Duignan – J.P. Morgan

Okay. So we shouldn’t see any negative impact on margins for Terex as a result of that?

Tim Sullivan

No, no. We’re pretty good about keeping pace with our cost increases.

Ann Duignan – J.P. Morgan

Okay. Thank you. I’ll get back in line. Just one final just quick follow-up, if I back out currency, your legacy business orders were down roughly 27% sequentially. I know you’ve talked about Australia and what’s going on in that region. Is there anything else going on that we should be aware of that -- caused that significant to deep line and currency adjusted orders ex-Terex?

Tim Sullivan

Not really, no.

Ann Duignan – J.P. Morgan

So it’s just sit tight and wait and the orders will reaccelerate?

Craig Mackus

As I said, the timing that Tim was alluding to earlier is that there’s quoting activity out there, but the customers still haven’t placed the orders yet. So lets to wait for the timing as to when they think its right for them.

Ann Duignan – J.P. Morgan

Okay. Thank you. I’ll get back in line. Thanks, guys.

Operator

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

C Schon Williams – BB&T Capital

Hi, guys. It’s Schon Williams with BB&T. Looks like a number of your customers had some production issues in the third quarter, there were rains in Australia, the miners in the U.S. talking about some productivity issues, given the regulatory environment. Did any of that affect maybe aftermarket orders in the quarter?

Tim Sullivan

Not really. I think, if anything, when we have disruptions like that, people -- aftermarket because they got a window of opportunity to repair their machines, so there’s no unusual activity either way on aftermarket during this period.

C Schon Williams – BB&T Capital

Okay. Thanks. And I wanted to maybe step back a little bit and talk about the industry a little bit. We’ve seen a lot of talk of consolidation by the miners. It looks like Massey may be on the auction block here. Can you talk about what consolidation means for your business? Is that like good, bad, neutral? What’s your take there?

Tim Sullivan

We view consolidation as positive, particularly because of the portfolio machines that we have right now. As the producers get larger, they like to have large suppliers that can keep pace with their demands. So from our viewpoint, I think consolidation is fine. It’s positive for us.

C Schon Williams – BB&T Capital

Okay. And then last question, on the balance sheet, it looks like long-term debt, ticked up a little bit in the quarter. Can you just talk about what your thoughts are in terms of paying down some of the Terex debt and kind of uses of cash going forward?

Craig Mackus

The debt would have increased a little bit because of the exchange rates. We have part of our long-term debt denominated in Euros. Part of it is in Aussie dollars, so those currency that stronger that gives little bit higher balance on our balance sheet at the end of September. Right now as you know, our cash is up to $350 million. We’ll probably continue to monitor that for another quarter or two and decide whether we want to start paying down some of the debtor consider, continue to consider our alternatives.

Our CapEx spendings going to increase, but not enough to make significant difference in our decisions. So we’ll just accumulate the cash and see what opportunities present itself in the next couple quarters. And at that point in time, we’ll decide about paying down some of the debt.

C Schon Williams – BB&T Capital

What about the dividend policy? Has that changed at all? I mean, dividends -- it’s been fairly, it’s been flat essentially for the last several years. Is there any thought there to changing that?

Tim Sullivan

No. I think, when we came out, we have obviously a very small dividend and most of the investors that on our stock today don’t really pay too much attention to it. We’ve had literally no requests on that. Most of the people are looking for growth, reinvestment of the capital back into the business and that’s what we’re doing.

C Schon Williams – BB&T Capital

All right. Thanks for the update, guys.

Operator

Your next question comes from the line of Robert McCarthy from Robert W. Baird. Please proceed, sir.

Robert McCarthy – Robert W. Baird

Good morning, guys.

Tim Sullivan

Good morning.

Robert McCarthy – Robert W. Baird

Tim, can you talk to your current capacity utilization in the truck business? Terex, of course wasn’t known for pouring capital into that business and I’m wondering how long you can maintain an availability advantage over, say, CAT.

Tim Sullivan

Well, obviously CAT’s a much larger producer of trucks than we are. But I think we can have meaningful market share and that’s going to require once we max out the number of units that we’re capable of building, we’re going to have spend some money. We’re looking at probably getting to that max number next year, which means that we to have to look at spending some capital probably mid next year to determine what we really want to do with that product line.

Robert McCarthy – Robert W. Baird

Can you give us any idea how far above where we are now that cap is?

Tim Sullivan

Well, we think we can probably build up to 150 to 170 trucks a year. And obviously that’s woefully inadequate for what we think we can do as far as placing trucks. The good news is we’ve got plenty of land and plenty of ability to not spend a huge amount of capital to increase that capacity. And we build these trucks in Acuna, Mexico and we’ve got a lot of land and a lot of capability down there. So we’re looking at that very carefully. We really want to get to that high end next year as far as numbers of units if we can and then look at expansion.

Robert McCarthy – Robert W. Baird

Your run rate now is -- I mean, do you mind?

Tim Sullivan

It’s low. I think we’re about half of our capacity for 2010 right now. I think part of that was when we bought the company in February, it was -- the plant was effectively empty. They had not really been out pushing product. That’s changed dramatically here obviously in the last two quarters and we expect it to continue to improve. So we started from zero effectively and I think the guys have done a nice job getting product on the production schedule for the second half of the year and I think part of the other problem, Rob is, there is a different philosophy there. They would make trucks to order only. You can’t do that. You’ve got to anticipate where the market needs are and build and load that plant. And that’s what we do in our other businesses and that’s what we’re going to do on trucks.

Robert McCarthy – Robert W. Baird

Your intelligence is likely much better than theirs, could have been based on your business.

Tim Sullivan

We’ve got a lot more people on the ground, a lot more people in the mining locations. So that’s absolutely correct.

Robert McCarthy – Robert W. Baird

Can you clarify what you meant by, being able to deliver the fourth quarter, assuming 250 million of orders, incremental orders shippable in the quarter? Are we talking about needing to take the current run rate of order activity and add 250 to it? That’s a lot, isn’t it?

Tim Sullivan

Not really. Part of that, we just told you we’ve got 50 already and that’s the book-to-bill on the Reliance order. We’ve got some other things on aftermarket that are just, they happen. I mean, it’s -- we think the 250 -- the 250’s not the issue. I think we feel pretty comfortable about that.

Robert McCarthy – Robert W. Baird

Okay.

Tim Sullivan

The real issue is these guys have got a lot of work to do this quarter, because things, as you know, with our growth pattern, get back end loaded. Well, we’re really back end loaded this year and all the plants are going to have to perform here in the fourth quarter. And I think they are up to it.

Robert McCarthy – Robert W. Baird

Good time to be a Bucyrus employee. I’m sorry. I lost my train of thought. Good luck.

Tim Sullivan

It is a good time to bee a Bucyrus employee.

Robert McCarthy – Robert W. Baird

Yeah. The overtime’s got to be terrific.

Tim Sullivan

They love it.

Robert McCarthy – Robert W. Baird

Yeah.

Operator

Your next question comes from the line of Ben Elias from Sterne, Agee. Please proceed.

Ben Elias – Sterne, Agee

Good morning.

Tim Sullivan

Good morning.

Ben Elias – Sterne, Agee

I have a question regarding your order rates. We’ve seen the order rates improve and if I go back first quarter ‘08, you had almost 1.1 billion in orders. And that was the underground and legacy surface. You’ve hit about, almost hit about 1.1 billion again in the second quarter. You’re at that 1 billion-plus run rate. Legacy’s a bit weak. Terex is kicking in.

If CapEx is up and quotation activity is high and we start trending to 1.2, 1.3 billion in orders a quarter, how are you going to be able to handle that on the capacity side? What sort of investments have you made? What’s your capacity on the shovel side? And how quickly can you convert these incoming orders in the calendar year or within 12 months?

Tim Sullivan

Good question. I think -- every product line, every facility is different. We are expanding our (inaudible) operations. We are expanding our [Longfong] operations because of the fact that we think we’ve got this longwall activity that’s coming up that we need more capacity. Our Milwaukee operation has plenty of capacity. That’s where we’re moving the RH400 here, to loosen up some capacity in endowment for our other hydraulic excavators.

We’re increasing our capacity in Denison by 50%. We’re not increasing our capacity right now in Acuna but as I just mentioned to the last caller, that’s a probability here as we move into 2011. We’re going to need more capacity there. So we’re already reacting to where we think the market’s going to take us and where we have capacity, we’re shifting some things around. So we’re starting -- we’re trying to stay ahead of the game.

Ben Elias – Sterne, Agee

Okay. Thank you. And just one more question. Can you update us on the success you have with your plow, with the meetings you had with customers after the Analyst Day in July?

Tim Sullivan

Yeah. I think that was I think a very successful introduction and I think it opened a lot of eyes to what is out there in the marketplace internationally. The domestic market is very soft right now and having said that I think there is some wait and see type attitude. But we really feel that the plow systems have a place in Central Appalachia and I think if coke and coal prices stay firm and if we get some recovery on steam coal here that we’ll see some nice activity for those systems, particularly in the Eastern U.S.

Ben Elias – Sterne, Agee

Thank you.

Operator

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

Joel Tiss – Buckingham Research

Hey, how’s it going?

Tim Sullivan

Hi, Joel.

Joel Tiss – Buckingham Research

Just two like kind of structural questions. One on the Terex mix, it’s a little bit weaker as you said. And there’s a lot of demand coming in that product line. So when you look at the margins in 2011 and 2012, is there enough improvement coming from the Terex side and from the legacy Bucyrus, as well as incremental volume that the margins can continue to make progress? Can you give us a sense?

Tim Sullivan

Yeah. No. I think we can. Some of that’s going to come from operational improvements. I’m not sure it’s going to come from the pricing side. As we talked about earlier in the call, I think it’s competitive out there right now, but I think we can pick up margin just on some of our plant efficiencies and what we’re doing. We’ve seen it already. I think you’ve seen some of that in this quarter. And I think we’ll continue to see that as we move through ‘11 and ‘12.

Joel Tiss – Buckingham Research

Okay. And then also sort of structural on the industry, the flow of business seems like it ought to be -- you have pretty good visibility right as new mines come on and they are finished and all that. So are we going to see more of the volatility around the quarter to quarter, or do you think it’s -- there’s enough uncertainty out there in the market on capital spending and things like that, that it might be, it might be longer than that? Do you know what I mean? Not the short, choppy, it could be sort of longer, I don’t know, whatever, like dips in business and then surges. Do you know what I’m saying?

Tim Sullivan

Yeah. I think I know what you’re saying. I’m more in the longer term type of mentality on that I think, or mind. It’s interesting, where it’s almost like where one kind of dips, something else picks up the pace. You got enough markets out there that have, there’s enough commodities now that we’re involved in that where one falters or pulls back a little bit, you’ve got someone else picking it up. So I think if you buy into the macro view on where we’re at from the commodity spend, it’s going to be choppy in certain markets, going to be choppy with certain products from time to time. But the overall trend is upward and I think that’s, that’s the good news of the market we’re in right now.

Joel Tiss – Buckingham Research

Right. Exactly. Okay. Thank you so much.

Operator

Ladies and gentlemen, this does conclude the question-and-answer portion of the call. I will now turn the call back over to Tim Sullivan for closing remarks. Please proceed, sir.

Tim Sullivan

Thank you. Well, it was an interesting quarter to say the least. I think the challenge that we did have on the revenue side. I think our guys did a great job working with a new customer, with some real difficult third party type issues.

I would like to thank the members and the staff of the Exim Bank. They really worked through some tough situations and they were with us the whole way, trying to work us through this whole situation on the Sasan project. And I particularly I am grateful for their effort. They put a lot of work into this, to get this across the finish line.

I think we’re looking for a good fourth quarter. We’re hitting it hard and I think that we’ll have some good news come February. Thanks for joining the call again today and as always call us whenever you have any questions and we’ll talk to you again in February.

Operator

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

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