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Bucyrus International, Inc. (NASDAQ:BUCY)

Q4 FY07 Earnings call

February 15, 2008, 9:00 AM

Executives

Kent Henschen - Director of Corporate Communications

Timothy W. Sullivan - President, CEO and Director

Craig R. Mackus - CFO and Secretary

Analysts

Terry Darling - Goldman Sachs Research

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Charles Brady - BMO Capital Markets U.S.

Joel Tiss - Lehman Brothers Equity Research

Robert Wertheimer - Morgan Stanley

Robert McCarthy, Jr. - Robert W. Baird & Co.

Seth Weber - Banc of America Securities

Paul Bodnar - Longbow Research

Steve Barger - KeyBanc Capital Markets, Inc.

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2007, Bucyrus International Incorporated Earnings Conference Call. My name is Eric and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We'll facilitate the question-and-answer session at the end of the conference. [Operator instructions]

I would now like to turn your presentation over to your host for today's call, Mr. Kent Henschen, Director, Corporate Communications. Please proceed.

Kent Henschen - Director of Corporate Communications

Thank you Eric. And welcome to Bucyrus' fourth quarter 2007 and year ended December 31, 2007 earnings release teleconference. As Eric mentioned, my name is Kent Henschen, Director of Corporate Communications and in a few minutes I'll turn the call over to Mr. Tim Sullivan, our President and Chief Executive Officer as well as Mr. Craig Mackus, Chief Financial Officer for Bucyrus.

Today I'll begin the conference call by reading our cautionary... our forward-looking statements of cautionary factors. The press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of predictive future tense or forward-looking terminologies, such as, believes, anticipates, expects, estimates, intends, may, will or similar terms.

You are cautioned that any such forward-looking statements are not guarantees of future performance and involves significant risks and uncertainties and that actual results may differ materially from those contained in the forward-looking statements as a result of various factors, some of which are unknown. The factors that could cause actual result to differ materially from those anticipated and such forward-looking statements and could adversely affect Bucyrus' actual results of operation and financial conditions, include without limitation. Disruption of plant operations due to equipment failures, natural disasters or other reasons, the ability to attract and retain skilled labor, production capacity, the ability to purchase component parts of raw materials and key suppliers at acceptable prices and/or on required time schedule.

The cyclical nature of the sale of original equipment due to fluctuations of market prices for coal, copper, oil, iron ore and other minerals. Changes in general economic conditions, interest rates, customers' replacement or repair cycles, consolidation in the mining industry and competitive pressures, the loss of key customers are key members of management, the risks and uncertainties of doing business in foreign countries including emerging markets and foreign currency risks, the ability to continue to offer products containing innovative technology that meets the needs of customers, cost and risk associated with regulatory compliance and changing regulations effecting the mining industry and/or electric utilities. Product liability, environmental and other potential litigation, work stoppages at the company, its customers, suppliers, providers and transportation. The ability to satisfy under-funded pension obligations, the ability to effectively and efficiently integrate the operations of DBT and to realize the expected levels of sales and profit from this acquisition, potential risks, material weaknesses in financial reporting and liabilities of DBT unknown to Bucyrus. Dependence on the commodity price of coal and other conditions in the coal markets, reliance on significant customers. Experience in the underground mining business, which is less than some of Bucyrus' competitors and increased levels of debt and debt service obligations relating to the acquisition of DBT.

The foregoing factors do not constitute an exhaustive list of factors that could cause actual results to differ materially from those anticipated in forward-looking statements and should be read in conjunction with other cautionary statements and risk factors included in Bucyrus' prospectus supplement filed with the Securities and Exchange Commission on May 9, 2007 in connection with the recent public offering of its common stock and Bucyrus' quarterly report on Form 10-Q filed with the Securities Exchange Commission on May 9, 2007. And other cautionary statements described in other reports filled by Bucyrus and with the Securities Exchange Commission. All forward-looking statements are attributable to Bucyrus our expressly qualified in their entirety by the foregoing cautionary statements. Bucyrus undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information future events or otherwise.

Now I turn call over to Tim.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Good morning everyone and as usual thanks for joining us today. I am going to turn the call over to Craig in just a minute, but I thought I'd just start with a little bit of commentary on 2007.

In general, we are very pleased with the accomplishments of the 2007. Far an above great year as far as growth, we achieved some of our strategic goals, we literally doubled the size of our company with the acquisition of DBT and at the end of the year in the fourth quarter our surface side of our business hit our goal of 20% EBITDA which was established a couple of years ago. So all and all we were very pleased by, by what we were able to accomplished in fiscal 2007 and as we move through to the 2008 we see even better things ahead for our company.

With that let me turn over to Craig, he is going to give you some commentary on both the fourth quarter and year end results.

Craig R. Mackus - Chief Financial Officer and Secretary

Thank you Tim. Just before I begin, I'd like to remind everyone that DBT's net assets acquired and DBT's results of operation since the May 4, 2007 date of acquisition and now included in our financial results. Also you should be aware of the non-cash purchase accounting charges which effect reported net earnings. I will address this later.

Our sales for the fourth quarter of 2007 were $548 million, an increase of $342.3 million or 166.5% from $205.6 million for the fourth quarter last year. Original equipment sales were $292.3 million, an increase of $218.2 million or 294.8% from $74 million for the fourth quarter of 2006. And aftermarket parts and service sales were $255.7 million, an increase of $124.1 million or 94.3% from $131.6 million for the fourth quarter of 2006.

For the full year of 2007, sales were $1.6 billion, an increase of $875.3 million or 118.6% from $738.1 million for 2006. Original equipment sales were $846.9 million an increase of $591.2 million or 231.2% from $255.7 million for 2006 and aftermarket parts and service sales were $766.5 million, an increase of $284.2 million or 58.9% from $482.3 million for 2006.

For the fourth quarter and all of 2007, surface mining sales were up in almost every region of the world, compared to 2006. The overall increase in our sales reflects the ongoing global demand for our products and services which continues to be driven by sustained strength in markets for all commodities that are mined by our machines including coal, copper, iron ore and oil sands.

Capacity constraints continue to have an impact on our surface mining sales. The ongoing expansion of our facilities in South Milwaukee is expected to be completed by the end of the first quarter of 2008. Underground mining sales were consistent with our expectations for 2007 at the time of the DBT acquisition. Tim will address the markets in more detail later.

Gross profit for the fourth quarter of 2007 was $136.3 million or 24.9% of sales, compared with $51.1 million or 24.8% of sales for the fourth quarter of 2006. Gross profit for the full year of 2007 was $408.3 million or 25.3% of sales, compared with $186.8 million or 25.3% of sales for 2006. Gross profit for the fourth quarter and the full year 2007 was reduced by $7.1 million and $22.2 million respectively of amortization of purchase accounting adjustments namely inventory and fixed assets. As a result of the acquisition of DBT, which had the effect of reducing the gross profit percentage for the fourth quarter and full year of 2007 by 1.3% and 1.4% respectively. There is approximately $12.1 million of inventory adjustments yet to be expensed fairly evenly over approximately the next 1.5 quarters.

Increase in gross profits were primarily due to the acquisition of DBT and increased surface mining sales as well as an improved gross margin on both surface mining equipment and aftermarket parts and services.

New surface mining machine sales which held lower gross profit percentages were 42% of total service sales for the fourth quarter, compared with 36% for the fourth quarter last year and 43% of total sales for the full year of 2007 compared to 35% for 2006. The cost of training new employees in South Milwaukee and the related effects continue to negatively impact gross profit. The availability of raw materials has not had a significant impact on gross profit or our surface mining manufacturing schedule.

Gross margin underground mining equipment was down for the fourth quarter 2007, partially due to the mix of product, sold and partially as a result of increased manufacturing absorption losses of approximately $3 million due to supply chain problems. Selling, general and administrative expenses for the fourth quarter 2007, was $67 million or 12.2% of sales, compared to $20.9 million or 10.2% of sales for the fourth quarter last year. Selling, general and administrative expenses for the full year of 2007 were $185.6 million or 11.5% of sales, compared with $73 million or 9.9% of sales for 2006.

The increase in selling, general and administrative expenses was primarily due to the acquisition of DBT. Included in the fourth quarter of 2007 was approximately $1 million of increased cost related to the SAP computer software upgrade in their underground mining operations and approximately $3 million or onetime expenses related to the continued integration of DBT. These expenses consist primarily of employee cost such as alignment of salaries and benefits and early retirement. It was also approximately $2.5 million of additional incentive expense in the fourth quarter 2007, related to our surface mining operations due to the strong performance in the fourth quarter.

Operating earnings for the fourth quarter of 2007 were $48.7 million, compared with $26.2 million for the fourth quarter last year and were $173.1 million for the full year 2007, compared with $101.3 million for 2006. Operating earnings for underground business was reduced by $18.3 million and $49.1 million for the fourth quarter and full year 2007 respectively.

Our purchase accounting adjustments related to the acquisition at DBT, the overall increase in consolidated operating margins for the fourth quarter and full year of 2007 was primarily due to the acquisition at DBT and increased gross profit resulting from increased sales volume related to our surface mining operations.

Income tax benefit was $22.6 million for the fourth quarter of 2007, compared to expense of $7 million for the fourth quarter last year and was $10.4 million of expense for the full year of 2007 compared with $26.9 million for 2006. Income taxes for the fourth quarter of 2007 were impacted by significant onetime benefits, related to our underground mining operations. These included a $12.2 million deferred tax benefit, resulting from a reduction in the German statutory tax rate from 39% to 32% and a $14 million foreign tax credit benefit resulting from repatriation of German earnings in the fourth quarter.

Earnings and lower tax jurisdictions resulted in $4.7 million of benefits and various other items resulted in and an additional benefit of $4.7 million. Income tax expense for 2006 was reduced by a net income tax benefit of approximately $3.7 million, related to foreign tax credits. Foreign tax credits from 2006 resulted from the completion of our evaluation of the potential to claim additional foreign tax credits generated in previous tax periods. As of December 31, 2007, we have $7.1 million of federal net tax loss carry forwards which expire in 2009.

Net earnings for the fourth quarter 2007 were $61.9 million, or $1.66 per share, compared with $17.5 million, or $0.56 per share, for the fourth quarter of 2006. Net earnings for the full year 2007 were $136.1 million, or $3.89 per share, compared with $70.3 million or $2.25 per share for 2006. Net earning for the fourth quarter were reduced by $0.1 million in total net of tax of amortization of purchase accounting adjustments related to the acquisition of DBT.

This amount includes $8.9 million for inventory, $12.2 million for intangible assets, $2.8 million credit for fixed assets and $18.2 million of income tax benefits due to the income tax rate change in Germany. Net earnings for the full year 2007 were reduced by $20.6 million net of tax of amortizations of purchase accounting adjustments related to the acquisition of DBT. This amount includes $23.3 million for inventory, $27.4 million for intangible assets, $1.7 million credit for the fixed assets and $28.4 million of income tax benefits.

Depreciation and amortization of future purchase accounting adjustments related to the acquisition of DBT is expected to be as follows. Inventory, approximately $8.9 million in the first quarter of 2008, and approximately $3.2 million in the second quarter of 2008; fixed assets approximately $0.4 million credit per quarter going forward; intangible assets approximately $5.8 million in the first quarter of 2008 and approximately $4.5 million in the second quarter of 2008, and $3.8 million thereafter in subsequent quarters. The trademark amortization which was $6.5 million in the quarter and $12 million year-to-date is now completed.

EBITDA for the fourth quarter of 2007 was $57.4 million, an increase of $123.2 million from $30.2 million for the fourth quarter of 2006. As a percent of sales EBITDA for the fourth quarter was $12.3%, compared with $14.7% for the fourth quarter of 2006. EBITDA for the full year 2007 was $227.8 million, an increase of 96.3% from $116 million for 2006. As a percent of sales, EBITDA for the full year of 2007 was 14.1% compared with 15.7% for 2006.

EBITDA is defined as net earnings before interest income, interest expense, income taxes, depreciation and amortization. The EBITDA includes the impact of the reduction for non-cash stock compensation expense, severance expenses, loses on sale of fixed assets and the inventory fair value purchase accounting adjustment, charged to cost of product sold which we itemize in EBITDA reconciliation in our press release.

As of December 31, 2007, our total backlog was $1.4 billion, $1.1 billion of which was expected to be recognized within the subsequent 12 months. This represents a 61.1% and 90.5% increase from the December 31, 2006 total backlog of $894.7 million and 12 months backlog of $593.8 million respectively. Included in backlog at December 31st was $804.8 million related to our surface mining operations, $579.5 million of which was expected to be recognized within the subsequent 12 months and $636.5 million related to our underground mining operations. $551.9 million of which is expected to be recognized within the subsequent 12 months.

New orders related for our service mining operations for the full year 2007 were $353.4 million and $483.7 million for original equipment and aftermarket parts and services respectively. New orders related to our underground mining operations for the full year 2007 were $634.2 million and $247.8 million for original equipment and aftermarket parts and service respectively.

Included in surface mining and original equipment orders for 2007 was a sale of dragline related equipment for the price in excess of $100 million to be delivered by 2010. Since we recognized revenue on a percentage of completion basis, the impact of this order will be recognized over several years.

Inquiries for machines in all three of our service mining products remained at a high level. Surface mining and aftermarket parts and service, new orders for maintenance repair contracts in 2007 were $50.5 million less than in 2006.

At December 31, 2007, total debt was $536.1 million, compared to $554.7 million at September 30, 2007. Our cash balances have increased to $61.1 million as of December 31, 2007 compared to $40 million at September 30, 2007. Capital expenditures for 2007 were $96.9 million which includes $42.4 million related to our expansion in South Milwaukee. As announced in last night's press release we have declared a dividend of $0.05 per share payable on March 17, 2008 to shareholders of record on February 29, 2008.

And I'll turn it back to Tim to discuss our market conditions.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Thanks Craig. I want to go through a few things. I think you want to talk a little bit about the fourth quarter... excuse me. Talk about some of the market conditions we've got out there. We'll update you on the integration, our expansion and then give you the guidance for 2008.

Now the fourth quarter was obviously a mix bag, if you look at the financial results, very pleased and gratified by the performance of the surface side of our business. As we continue to move forward with good shipping performance and good earnings performance. On the DBT side of the business, the underground side of our business, we went through over several issues, some self inflicted, some just to clean up the operations as we move into 2008.

Let me clarify just a couple of things. Our gross margins were really little bit off in the quarter for the underground segment and that was really a result of the product mix that we shipped in the quarter. And I'd like to clarify one thing that Craig said, the absorption issues that we had in the quarter were primarily due to supply chain but it was not supply chain issues. It was the fact that we did not order raw material in advance of the quarter. In other words, if you go back to fiscal 2007, the order intake level in the underground segment was fairly low and typically what we've done in the past in the surface side of our business is we will order steel in advance, knowing that when the orders come in we can start to move them through the production process and build work in process.

Historically that's not been done at DBT and that's one thing that we plan to do going forward, in other words we will order raw material in advance and try to level out the production load in the plants and again that's a fairly new operational issue with DBT, but it was not a supply chain issue of not being able to get the raw materials, it was a fact that the raw materials were just not ordered in the second and third quarter. I think that's something that we'll, like I said be corrected and it will not be an issue in 2008.

We had some unusually high engineering expense in the quarter, part of that was after we completed the acquisition back in May, we looked at some of the product line offerings and we felt that some of the product lines needed some attention and we wanted to jump on that immediately and get some of that corrected before it rolled into fiscal 2008. So again that was trying to position ourselves for the upcoming year.

We did have some additional expenses in the quarter; Craig mentioned SAP implementation that was a $1 million. We still have five operations that will be done on the first two quarters of 2008, that total expense will be approximately $2 million or about a $1 million per quarter and that's been budgeted and that would be spent and that will now integrate all of our operations, all 50 locations around the world under one format. We are looking forward to that to help manage our business as we move through 2008.

We had around $3 million of salary alignment, benefit alignment we are fully integrating the companies which means that we have to have everyone on a level plain field from a salary benefit standpoint and some of those costs that we took in the fourth quarter we're to make sure that that happens and we also position ourselves for a very aggressive SG&A number on the underground set of our business with some early retirements in the quarter.

I am pleased to say that we believe that we can achieve a 10% SG&A level of expense on our underground segment in 2008 and if you keep in mind the level we are coming from to achieve that type of SG&A performance I am very gratified by the efforts of our underground segment management to realign and get things set up properly, as we move into 2008.

And I have did mention earlier, the surface side had a great quarter, we hit our goal for the first time in the full quarter of 20% EBITDA, as a percent of revenue and we obviously plan to keep that moving forward as we move through 2008 and beyond and we will work hard and we have the... and we think the plan in place to start moving our underground segment towards that 20% EBITDA goal.

As far as the market and what happened in the fourth quarter, it typically as we have talked about in the last couple of years, we see a lot of LOI activity and we see those LOIs move into orders, we did see some significant activity in the underground segment in the fourth quarter. A lot of activity in Eastern Europe, Russia and we're pleased to see that some of those potential sales moved into orders, some of those LOIs will turn into orders here in the first quarter but a fairly robust strong market reaction, and part of that goes back to I think some of the things we talked about in the past, the Russian market now is planning to export their natural gas to Western Europe and they want to increase their coal-fire power generation by 18%, there is an immediate reaction with a lot of new activity for underground mining machinery in Russia in the fourth quarter and that's carried into the first quarter.

Fairly low machine sales or machine booking level for the surface side in the quarter for a lot of LOI activity that we hope will work into contracts here we think in the first and second quarter of this year. And again those LOIs are being placed out there to block in and reserve our shipping spots as people are moving their approval process through their Boards of Directors.

Our prospects for 2008 are very strong. We see no pullback at all in the activity on machines. We... I think, everyone has been reading about where we are, and some of these things there is been some good articles on copper pricing here recently, there is a good article on the Wall Street Journal about the coal surge and I will talk a little bit more about that but we see that we are going to be moving into even a stronger machine booking cycle. Aftermarket bookings remain strong in both segments both underground and surface, we had a particularly good quarter and aftermarket bookings in the fourth quarter on the surface side of the business.

If you look at where we are in the marketplace, quite frankly, we couldn't be more pleased. I think the roadblocks and some of the artificial barriers to increasing productivity of the commodities that we supply machinery to, has helped us a lot. It has helped us through this period of time as we build our plant capacity.

As Craig mentioned, and I think we talked about this in the past that we expect to have the plant in South Milwaukee, fully functional to the new increased production rates for the end of the first quarter. We will continue to spend some money through 2008 on facilities, mostly just refurbishment of some of the older buildings on onsite that have not had any attention of any significance paid to them for some time, but those expenditures for 2008 will really not have any substantive impact on productivity. It's mostly preventive maintenance type things for the older facilities that we have onsite and buildings that have been here for over 100 years.

The roadblocks that are out there in the marketplace remain... ports remain a major problem and that phenomenon has now moved beyond even Australia. It's become a problem in South Africa. If you look at coal and you see what's happening with coal right now, obviously China became a net importer of coal in 2007. We see that to continue the production that was taken up to domestic U.S. market. 14, 15 months ago remains off the market although there are moves by the U.S.-based coal mining companies to put that productivity back in place.

We are still running at a negative to coal production to power generation needs which really means that now is the time to bring that production back on line. The strong demand from China, the resurgence in demand in India; India has been importing a great deal of coal more than they have in the past. They are trying to make sure they have adequate power generation. We've seen machine activity in India, in the fourth quarter we're sure that that's going to run into this first quarter and second quarter this year. We quoted four draglines today to coal India. It was just one sign of many that the Indian market is trying to build up their coal production capability; in the meantime they are imported. They are importing from South Africa, the South African mines that typically export to Western Europe now have avoided that market and some of the Eastern U.S. coal suppliers that have not seen a lot of export activity for quite some time.

I was trying to see resurgence in some of the export activity to reach the voids [ph] that are being created by the unusually high demand for coal importation in India and obviously in China as well, the port facility problem in Australia, South Africa has exasperated the problem. It's a problem but obviously it's a great opportunity for coal mining in general.

Tires continue to be a problem, permit in delays continue to be a problem, again in my opinion I think that's really helped create some discipline in the market and we will lengthen the cycle further. If you look at the demand that we have in oil sands, there is a press release just recently by Suncor, they have approved their $20 billion Canadian expansion that will constitute a demand for 17 shovels over the next couple of years and we expect that they will probably start to move forward with some of those purchases in 2008.

Imperial Oil is moving forward, Synenco is moving forward, Total [ph] is moving forward, Suncor is looking for more expansion it just continues on in the oil sands and that that market demand we think is going to carry us through for several years to come now and that's obviously very positive. I mentioned copper price remaining strong, again I think the issues with copper, the fact that we just can't ramp up productivity to a level that's going to help us much in the short term which will hopefully keep demand for our products in that market strong as well. Iron ore prices are up, we are seeing a significant increase in iron ore activity for shovel demand in particular and we see that that will play itself out here in 2008 as well.

As far as integration, not many surprises there's always a few but quite frankly we've been very pleased with the full integration that we have been able to accomplish. We did a lot here at the... as we reached the end of the year to position ourselves for 2008 to really help out to clean things up and to make sure that we could have a fairly clean fiscal 2008.

With that I think I'll provide you with the guidance for 2008, and then we'll open up to questions. Looking at the combined companies and the markets that we are in, we are providing guidance for revenue for 2008 to be somewhere between $2.35 and $2.45 billion. We expect adjusted EBITDA to be somewhere between $375 million and $425 million for the year. Now the pro forma basis year-over-year that's a 20% increase in revenue and a 38% increase in adjusted EBITDA, which we think is obviously a strong indication of where we see the markets to be up for 2008 and where we see new machine and aftermarket activity continue to be strong. I will also provide the guidance that the tax rate for 2008 should be 33%.

I think that's a good enough update for now and I think we'll open up to questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Terry Darling with Goldman Sachs. Please proceed.

Terry Darling - Goldman Sachs Research

Thanks good morning.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Good morning Terry.

Terry Darling - Goldman Sachs Research

Yes. You guys went through a lot of detail on the fourth quarter DBT margin but I just... I want to make sure that I am not missing something in translation. Craig if you could just walk through all the piece of the adjustment one more time and if you start with the $5.48 million negative in the press release, writing back the 8.86, the inventory piece I think was 6.5 on the name amortization. Then we had a $3 million onetime acquisition integration hit. We had 1 million of SAP some of which will continue for the next couple of quarters and then there was $2 million credit asset... fixed asset credit of source, am I missing any other pieces there?

Craig R. Mackus - Chief Financial Officer and Secretary

No you pretty well have it. I think in the press release last night we had a... the table broken down by segment, and you are right operating earnings were negative $5.5 million, and we had a total of around $15.1 million of depreciation and amortization add backs, to get back to an EBITDA number. What that number does not include at least for the quarter the effect of the inventory adjustments, inventory write up which would... if you want to add back that amortization of inventory there would be additional $8 million... $859 that you would add back to that table, and that would get you a back to at a subtotal and then from there if you... if you would add back some of the, the items you just mentioned about some of the detail we came up with, that will give you more of a than normalized amount for the quarter, so you have got all the pieces there.

Terry Darling - Goldman Sachs Research

Okay. So, and then this... the impact on the advance purchase or catch-up purchase of raw materials was... can you quantify that piece at all?

Craig R. Mackus - Chief Financial Officer and Secretary

I think in my... I said there was about $3 million.

Terry Darling - Goldman Sachs Research

Is that related to the... is that what you meant by the acquisition integration piece?

Craig R. Mackus - Chief Financial Officer and Secretary

No that was on the cost of sales side, you said on the material front.

Terry Darling - Goldman Sachs Research

There is another...

Craig R. Mackus - Chief Financial Officer and Secretary

$3 million... but then it would be an additional $3 million on the SG&A side and $1 million for the SAP. So the total of $4 million there.

Terry Darling - Goldman Sachs Research

Okay. And in the 2008 guidance then, what is the DBT operating income margin assumption?

Craig R. Mackus - Chief Financial Officer and Secretary

We really haven't broken that out by segment so we really probably won't be disclosing that at this point in time, what the break down is?

Terry Darling - Goldman Sachs Research

But you did talk about SG&A coming down to 10%, so are we in the mid-teens that essentially the translation we can make?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes that's a good assumption.

Terry Darling - Goldman Sachs Research

Okay great. And then, wonder if you can just talk little bit more about the U.S. coal market prospects for the underground business, are you seeing a pickup in increase there, what are your expectations for growth out of that business in '08?

Timothy W. Sullivan - President, Chief Executive Officer and Director

I think we are seeing a little bit of a pickup in Central App. Part of that's because of some coking coal exports to India, that have been picked up some of the producers in Central App. Northern App if you look at that its primarily steam coal. A lot of that production was the production that was curtailed about 15 to 16 months ago and we see a couple of longwalls starting back up but we don't see potential new machine activity just jet from Northern App and there should be, there hasn't been yet but we think there should be carryover back to the PRB as well. There is... so I guess in summary there is a little bit of activity in Central App but there is capacity that's got to come back online I think before we see any significant machine activity.

Terry Darling - Goldman Sachs Research

Yes. And then lastly could you give us an update on timing and how the handicap [ph] Bucyrus opportunity related to the Olympic Dam project?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes that's... discussion are ongoing. We have an extension on our bid offering until the end of May. So we expect them to make a decision before the end of May on which the player they will choose. The delay has been... the filing of their environmental impact study and getting government approvals, but I think we should have some clear direction by the end of May on Olympic Dam.

Terry Darling - Goldman Sachs Research

Thanks very much.

Operator

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

Barry Bannister - Stifel Nicolaus and Company, Incorporated

I just have a few numerical questions as well. You had listed $7.1 million of COGS related inventory and then you said $18.3 million of purchase accounting adjustments, may I presume that the $7.1 in COGS appears in the $18.3?

Craig R. Mackus - Chief Financial Officer and Secretary

Yes, it does.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Okay. The tax is all over the place and it's a little confusing for us, we understand the repatriation and the onetime adjustment related to German operations, but in your press release, you say operations in lower tax regime areas resulted in about $4.7 million of savings. One would presume that if you are operating in lower tax areas that that's a permanent carry forward in a very large number in terms of the tax rate. So why dive to a 33 rate when it looks like the rate is a little bit lower than that?

Craig R. Mackus - Chief Financial Officer and Secretary

Okay, yes that bid is true, in the fourth quarter we had significant amount of earnings and revenue more than we had forecasted in. Some of the jurisdictions like in South America where the rates are in, in the low single digit. So, like 15%, 16% and compared to the U.S. we are at 35% and some of the other countries that are going strong, South Africa is at 30% and going on but the... with more entries... entities and more countries involved the tax rate is a little more difficult to forecast, especially with the foreign tax credit issue we are addressing.

We have around 10 different initiatives working out to minimize taxes as much as possible and we have been pretty successful to-date on that situation. Going forward, where you think 33%, despite the fact that we had a good 2007, because we couldn't be generating significant amount of cash in foreign countries and to bring that cash back does trigger some potential negative tax implication. So our challenge will be to bring cash back on a tax effective basis so that we minimize amount of taxes repairing so with lot of tax planning is going on here but at this point in time I am not knowing exactly how much cash we are going to, have to repatriate based on our corporate needs. We are forecasting the rate of 33%. Its kind of... I know its a little complicated answer but it's a complicated situation.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And makes sense, the tax rate a year ago in the quarter was $28.5 or so it seems that you might do better than $33 but you're not going to guide at this point.

Craig R. Mackus - Chief Financial Officer and Secretary

Right it just depends on how much we bring back in. Again we're... the U.S. original was 35% plus there's some state tax and actually the state tax for the quarter was very good. Better than we expected also which is part of that miscellaneous number. So we've been pretty aggressive, not aggressive but pretty aggressive in trying to maximize the amount of benefit that we can take advantage of. So it's a good outcome for us.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And then just a recap, so I get the table right, $5.5 million of trademark appeared in 3Q, $5.8 in 4Q and then now it's gone. Inventory was $8.9 in 3Q, $8.9 in 4Q and it will be $8.9 and $3.2 in the next two quarters?

Craig R. Mackus - Chief Financial Officer and Secretary

Well, it will be $8.9 in the first quarter and then it drops down I think that a $3.2 in the second quarter, then its gone.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Gone. But what is the other long liability intangible amortization, its very confusing for us to get that number right quarter-to-quarter. For instance last quarter it was $5.7 million, so we don't know what fourth quarter's contribution was and what would be continued in the future beyond what you said.

Craig R. Mackus - Chief Financial Officer and Secretary

The trademark I think I said in my write up for the fourth quarter was around $6.5 million.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

You got that.

Craig R. Mackus - Chief Financial Officer and Secretary

It was $5.5 million in the third quarter. So there's a total of $12 net that goes away now, that's all done. Intangible assets would be about $5.8 million and of what's remaining would be $5.8 million in the first quarter, $4.5 million in the second quarter and then $3.8 million in the third quarter and on.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And what was it in the fourth quarter '07?

Craig R. Mackus - Chief Financial Officer and Secretary

Would be the difference between $6.5 and I think it was like $12.2 so I guess approximately $6.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Got you. Thank you. I'll get back in line.

Operator

Your next question comes from Charlie Brady with BMO Capital Markets. Please proceed.

Charles Brady - BMO Capital Markets U.S.

Hi good morning. Can you guys speak to the Australian flooding potential aftermarket orders that you might be seeing from that and when that might hit given if we've got dragline half emerged in the water. And then also on the DBT new orders in the quarter, how much of that came from that large check longwall order and when do you think you'll recognize sort of the other part of that. Would that wait until about 4Q of '08? To get the other five longwalls into your backlog and new order numbers?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Okay. First, the flood [ph] in Queensland that really affected only one dragline, most other suppliers and even that particular producer was able to get their new $87.50 large dragline out of the pit before it flooded. That's not going to be significant. The dragline will have to be basically stripped down. It's going to be more of a electrical type parts and cleaning up of the motor generators sets in motors, new bearings. There's going to be a labor content to that but its not going to be unusually high or its not going to be unusual I guess episode for us as far as aftermarket opportunities.

About half of the OKD which was the Czech Republic underground order was booked in December, so approximately $200 million, $225 million. The other half will actually be booked in the first quarter... first and second quarter this year. So those contracts actually part of that's going to happen this month and the other part will probably happen in April. So we have it all in before the end of Q2.

Operator

Your next question comes from line of Joel Tiss with Lehman Brothers. Please proceeds.

Joel Tiss - Lehman Brothers Equity Research

All right. I wondered if you, if it would make a noticeable difference if we took the backlog number as of today as opposed to the end of December in the way you guys reported it.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Well it would, obviously because we've got some of the OKD being booked already this year. We also expect to have... and I won't say today necessarily but certainly in Q1, we will have several LOIs in the surface side. We booked we think also this quarter. So you know there will be a bump, their would be a bump in the backlog for Q1 over Q4.

Joel Tiss - Lehman Brothers Equity Research

Okay. I wonder if you could also just spend a minute and sort of give us a sense of where we are in the plant capacity. When it's done at the end of the first quarter or you ready to run full blast? Are we going to kind of ramp into that capacity over the year and can you just remind of what the cost... the cost absorption was in '07 which will go away again in '08? Thank you.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Okay. We are actually... we are improving [ph] our run rate right now and I think we've talked about the number of units that we are able to build. Our plan is to build 24 shovels this year. We did build 16 in 2007 and 10 the previous year. So we are at the 24 shovel run rate for fiscal 2008 with the completion of the expansion of wrapping up here in the next six weeks. That also has doubled our capacity on manufactured parts and we are pretty much at that run rate already, and we obviously are trying to gear up for some of the dragline activity.

I think I mentioned on our last call that, we did spend some additional capital for some large boring bars to deal with some of the eminent dragline activity that we think is going to come our way. Not that we would build a structures here for the draglines but the gear boxes and other things that we do put in the draglines need to be build here. So that's we are in pretty good shape there.

Capital I think you are talking about the full capital spend for the year, full capital spend for the year was around $90 million. We expect to spend that kind of money this year pretty much though the entire year. We have got a few other initiatives on around the world both on the underground side and the surface side to ramp up some capability. On the surface side it's primarily spending money to again position ourselves for what we think to be some fairly eminent robust dragline activity, on the underground side its to establish some new service facilities with the... really the great upsurge we've had in Eastern Europe and Russia. And we are also trying to position ourselves in some of the growing markets on the surface side of the business as well, particularly in oil sands we expect to spend some money up in Western Canada this year. So, the CapEx is going to be pretty stiff for the entire year and we think it's all appropriate and it should be very much in line with what we spend in 2007.

Joel Tiss - Lehman Brothers Equity Research

Okay. Thank you very much.

Operator

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

Robert Wertheimer - Morgan Stanley

Hi good morning everyone. I am with Morgan Stanley. Can you please talk about China revenue for 07 and also for the booking activity on underground whether there is any material component of that in China?

Timothy W. Sullivan - President, Chief Executive Officer and Director

I will answer the second part and Craig can answer the first part. The second part is China continues to be a very complicated market for Western machinery suppliers. I think we mentioned... and it's primarily an underground market for us. We have had some good shovel in dragline activity but the Chinese they have come out in the press and they have basically followed through of what they've said in the press and that's the fact that they plan to try to support a lot of their local suppliers of underground mining machinery as much as possible.

We have had some activity on AFC's, armored face conveyors. We have had some activity on some of our transport equipment in China but it hasn't been at the levels of booking activity that we had two years ago. They are buying local roof supports and they continue to buy local roof supports, that's going to be a challenge for us to book those types of components for that market, its going to be a challenging market. We have our strategy that we think will work, that we're trying to formulate right now to try to get a bigger piece of that market.

But they are going to be buying a lot more local machinery than they have in the past whether that will be sustained or not is yet to be seen. Some of conventional wisdom says that they will find at the locally manufacturing machine will not perform nearly to the levels of their expectations and we will see I think some of that coming back our way. As far as the revenue percent or the revenue level for China for 2007, Craig?

Craig R. Mackus - Chief Financial Officer and Secretary

Okay. On the surface side we did see a rather significant reduction in the China revenue for sales in China. Again the benefit we get is because China is a net importer of raw material so we get a big surge in Australia, South Africa some of the other countries. While in the China market itself on the prior year we had the dragline, that they had bought the ABN [ph] have bought four large shovels and we didn't see that type of OE activity, original equipment activity in 2007, so on a total sales volume level we saw a decrease. The revenue on the aftermarket which is not very significant on a surface side was flat up a little bit, but it was a fairly insignificant number for us. So the revenue in aftermarket haven't been a big number and it was not a big number in 2007. We did see a drop off on the OE side, on the DBT side which China has been a significant part of their numbers the... as we predicted it did have probably around a 25% fall off in their revenue between 2006 and 2007.

Robert Wertheimer - Morgan Stanley

That's very helpful. Thank you. And is there been much interest in the share that the new product of the share... is that helping offset some of the competitive dynamic from the lower quality or lower end local manufactures in China?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes, there has been and quite frankly that's where a lot of our R&D money went in the fourth quarter to make sure that we make ourselves a lot more competitive for that product line.

Robert Wertheimer - Morgan Stanley

Thank you.

Operator

Next question comes from the line of Robert McCarthy with Robert W. Baird, please proceed.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Good morning guys. Can you share with us whether you expect to see more of the... as you call it compensational alignment early retirement expenses and similar expenses at DBT in 2008.

Timothy W. Sullivan - President, Chief Executive Officer and Director

The answer is no. I think we are pretty pleased about the clean up that we have done and that's not to say that we won't be refining our integrator organizations but nothing of any significance.

Robert McCarthy, Jr. - Robert W. Baird & Co.

So you think you have got everything done and in place to be able to get to this 10% SG&A target?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Okay and then in the... obviously very strong underlying new order activity there, even after you exclude the check business, did DBT see a pick up in the U.S.-based business specifically?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No, not significantly. I think if you look at the quarter it was primarily Eastern Europe and Russia and the significant activity there some of that hasn't been looked yet some of those were still LOIs but that was where the big surge was. I guess it shouldn't have been surprising with the announcement of the Russians who are going to increase their coal production but it came pretty fast and happened pretty quickly on us.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Can you remind us roughly what proportion of DBT's ongoing revenue or backlog is U.S. based?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Historically it's been around 40%, I think probably in 2008 that may go down a little bit just because of the strong activity we've had elsewhere.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Right. Okay and then I wanted to ask about order activity on the surface side. Tim you specifically said when you were talking about expectations for stronger bookings in the first half of '08, you talked about high level... that you expect to write or sign a lot of letters of intent but that doesn't trigger recognition of a new order booking right?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No it doesn't.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Okay, so you need... should we look for a significant change in trouble order activity as early as the first quarter or does this stuff need a little more gestation time?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No you're going to see some good activity in the first quarter. We haven't announced anything else because we don't anything firm yet. But we expect to have a lot of the LOIs turned into contracts including the margins.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Is this still kind of 1D, 2D business or do you have some larger stuff that you're working on?

Timothy W. Sullivan - President, Chief Executive Officer and Director

It's a combination. We have some largest that we're working on as well.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Okay and then you used the word eminent twice when you were talking about dragline prospects. Can you talk a little bit about what you're seeing in that market?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes it's a lot of activity. Some of these things are such big acquisitions or big purchases that it seems like it takes forever for these things to move to completion of a contract or maybe even an order. We are starting to see the type of LOI type of the things happening right now and we don't announce the LOIs on draglines because they are so large unless the customer themselves lay it out into the marketplace but we're pretty confident there is going to be some good dragline activity this year.

Robert McCarthy, Jr. - Robert W. Baird & Co.

And do you think the Indian business would be led by in what kind of timeframe? These are the smaller machines that you talked about before right?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Right. Yes those are amount of third the revenue that we would get in our large dragline. There are four of them so that's the dragline in the quarter and the dragline in the third. I am going to say that this is hard because the Indian's don't move that quickly but they have been moving quicker. I am going to say mid year at the latest, maybe little bit sooner. We will be announcing very soon some shovel activity that looks like its going to ramp up in India here this week and next. Some of its small but they all add up and that moved along pretty quick. So, I am going to say May-June.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Okay, you are on the limp [ph].

Timothy W. Sullivan - President, Chief Executive Officer and Director

... Indian market. We'll see how we go.

Robert McCarthy, Jr. - Robert W. Baird & Co.

Okay, thanks a lot.

Operator

Your next question comes from the line of Seth Weber with Banc of America. Please proceed.

Seth Weber - Banc of America Securities

Hi, thanks, good morning. Just conceptually, can you characterize where we are in the production slots for the shovel business and if you were to get, for example, this Olympic Dam project I mean, can you guys squeeze that kind of order in somewhere or where are we becoming real orders today. Are you booked through '08 at this point?

Timothy W. Sullivan - President, Chief Executive Officer and Director

We are not completely booked through '08 but we do have a very high percentage of the schedule committed. We have shovels out into 09 and some... we actually have some shovels out into 2010 right now, those were some of the multipliers that we got previously from the oil sands, but now we still have some spots available. I would think that whichever way Olympic Dam decides to go on their shovels and drills either ourselves or our competitor; I have made sure that we have got spots available for them.

Seth Weber - Banc of America Securities

Okay and just going back to the materials question in the supply chain, you are not really seeing anything there that would prevent you from hitting your targets for 24 shovels this year and couple of drag-ons?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No, quite frankly all of the raw material for this year has already been procured and even raw material for part 2009 has already been procured. So we are in good shape. We work... we are well ahead of the game on the surface side and we will be working a lot further ahead of the game in the underground side of business.

Seth Weber - Banc of America Securities

Okay that's all I had. Thank you.

Operator

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

Paul Bodnar - Longbow Research

Yes thanks a lot. Quick question the aftermarket business and services side, came in terms of revenue growth sequentially but year-over-year pretty strong and it has something that we can kind of look forward going forward I know seasonally obviously it's a good quarter but just a little color on that as well?

Timothy W. Sullivan - President, Chief Executive Officer and Director

That doesn't seem to be abating whatsoever and we had obviously a good quarter in the surface side of the business. We see just a lot of good steady activity in the aftermarket side of our business as we move forward. Typically when you get into this type of the cycle where people are buying a lot of new machinery. You do see some of fall off in aftermarket, that's not the case at all right now, and I think, its part of what we talked about in the past is that they have a very large installed base of draglines. People have money and they are putting now the money into refurbishing their dragline and that just continues.

Paul Bodnar - Longbow Research

Okay. Thanks. And then on the underground side, what is the plays that you are kind of expanding the aftermarket along those lines, how is that progressing? Is it some of the R&D?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No, it's not really been the R&D, you know that's part of the CapEx, we are going to be spending this year. We think that in the underground side of the business different than surface a lot of that work has to be been done in service facilities. We think that we need to improve some of our infrastructure on the underground side of the business to bolster our efforts to attract more aftermarket. The aftermarket percent, as a percent of revenue is now where we wanted to be in the underground side of our business and we've got aggressive plan to grow that this year and we will see how we go.

Paul Bodnar - Longbow Research

So do you think you can expand that in '08 and 09 what kind of... any idea or targets, that you put on that?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Well, to give an example, historically aftermarket has been about 27%, 28% of total revenue for our underground segment. Our goals to get at least another 10 points out of that type of a mix in fiscal 2008, quite frankly that's aggressive but I think we can do it.

Paul Bodnar - Longbow Research

Okay, thanks. And then one quick question. The R&D cost was up in the quarter is that something we should look forward to first two quarters of '08 or is that kind of retreat back to tricky levels?

Timothy W. Sullivan - President, Chief Executive Officer and Director

I think its... it may be a little higher, but it's... we really gave it a big shot in the arm here in the fourth quarter. I don't think its going to be at that level, but we want to make sure that we position ourselves well for the market. It's going to be less but its still going to be probably a little bit higher than historical levels.

Paul Bodnar - Longbow Research

kay, thanks a lot.

Operator

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

Steve Barger - KeyBanc Capital Markets, Inc.

Good morning.

Timothy W. Sullivan - President, Chief Executive Officer and Director

Hi Steve.

Steve Barger - KeyBanc Capital Markets, Inc.

Just a follow up on your comment that you procured material for the '08 production. Are you under contract for all you steel [ph] and do you have any exposure to the spot market?

Timothy W. Sullivan - President, Chief Executive Officer and Director

No exposure to the spot market and we basically borrow steel [ph] for the year.

Steve Barger - KeyBanc Capital Markets, Inc.

Okay, thanks very much. And you know as global... as coal becomes more global are you seeing more increase on underground in terms of Eastern Europe and do you think you are going to increase your share there?

Timothy W. Sullivan - President, Chief Executive Officer and Director

Yes, matter of fact, the part of the OKD deal, that was 10 new longwalls now that was replacement of old underground equipment in the Czech Republic but we see that Eastern Europe and Russia will continue to be pretty good market for us here as we move through 2008.

Steve Barger - KeyBanc Capital Markets, Inc.

Okay thanks gentlemen.

Operator

Ladies and gentlemen this concludes our Q&A session. At this time, I would like to turn the call over to Mr. Tim Sullivan for closing remark.

Timothy W. Sullivan - President, Chief Executive Officer and Director

I'd just like to thank everyone for joining us again and I think we are as I think we've said, pleased with how we finished 2007. But I think the better news for what we've reported today is that we position ourselves what we think is going to be a very good 2008. We feel pretty solid about our ability to hit the guidance that we provided and with the full integration now in some of the clean-up on the underground segment of our business, I am really pleased about where we sit as far as the company and how we are poised to take advantage of what we think they are going to be some very strong market opportunities in 2008 and as we move in to 2009. As always, feel free to contact us anytime and we will be posting it on our website. Some of these LOIs move to contract here as we progress forward to the quarter. Thanks again and talk to you again in the quarter.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. And have a good day.

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Source: Bucyrus International, Inc. Q4 2007 Earnings Call Transcript
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