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Executives

Michael S. Olsen - Sr. VP and Chief Accounting Officer

Michael W. Sutherlin - CEO and President

Analysts

Charles Brady - BMO Capital Markets

Mark Koznarek - Cleveland Research Co.

Michael W. Gallo - C. L. King & Associates

Joel Tiss - Lehman Brothers

Jerry Revich - Goldman Sachs

Robert F. McCarthy - Robert W. Baird & Co.

Paul Bodnar - Longbow Research

Seth Weber - Banc of America Securities

Barry Bannister - Stifel Nicolaus

Steve Barger - KeyBanc Capital Markets

Joy Global Inc. (JOYG) Q1 FY08 Earnings Call March 6, 2008 11:00 AM ET

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time I would like to welcome everyone to the Joy Global Inc. First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. We ask that you limit your questions to one with one follow up. [Operator Instructions]. Thank you.

I would now like to turn the conference over to Mr. Olsen, Vice President and Chief Accounting Officer. Please go ahead sir.

Michael S. Olsen - Senior Vice President and Chief Accounting Officer

Thank you, Christie. Good morning and thank you for participating in today's call and for your continued interest in Joy Global. Joining Mike Sutherlin and me on the call this morning are Jim Tate, our Chief Financial Officer; Sean Major, our General Counsel and Secretary and Gene Fuhrmann, our Corporate Controller.

This morning I'll begin with some brief comments to expand upon our press release which provides results of the first quarter of our 2008 fiscal year. Mike Sutherlin, our President and CEO will then provide some of his thoughts about our operation and market outlook. Afterwards we will take your questions. During that part of the call, we would appreciate if you would limit yourself to one question and one follow-up and then get back in the queue for additional question. In that way, we will be able to accommodate as many questioners if possible.

During the call today, we will be making forward-looking statements. These statements should be considered along with the various risk factors detailed in our press release and other SEC filings. We encourage you to read and become familiar with those risk factors. We will also be referring to some non-GAAP measures which we believe are important to understanding our business. For a reconciliation of the non-GAAP metrics to GAAP and other investor information, we refer you to our website at www.joyglobal.com.

Now let's take a look at some of the more significant points from our first quarter result. New orders in the first quarter totaled $870 million and were over 50% higher than the first quarter last year. New order activity was strong in substantially all of the company's products as reflected by a $125 million complete longwall system order in Australia, a powered roof support in Russia, continued strength for electric mining shovels, increases in continuous miner in shuttle car orders in the United States and 44% and 16% increases in surface and underground aftermarket businesses respectively. The breadth of the favorable new order activity bodes well for the rest of 2008 and beyond, as for the second quarter in a row backlog increased by $230 million.

Net sales for the quarter of $640 million represented a 14% increase from a year ago. This increase was made up of a 24% increase for surface mining equipment products and a 7% increase for underground mining machinery product. The increase in the surface business reflected a similar increase for both original equipment and aftermarket products as the benefits of capacity increase initiative begin to be realized.

For the underground business a 12% increase in aftermarket products was tempered by flat original equipment sales. The softness in the U.S. original equipment order rate in the first three quarters of the 2007 fiscal year are reflected in the soft OE shipments in the first quarter. The strong U.S. original equipment orders that I mentioned previously that were received in the last two quarters will be reflected in new machine shipments over the next several quarters.

Turning to earnings, operating profit as a percentage of net sales was 17.4% compared to 16.8% a year ago. In addition, a 21.5% return on incremental sales was achieved during the current quarter. As mentioned in the press release, the current quarter's gross profit percentage increased to 33.1% from 31.2% in the first quarter of fiscal 2007.

Favorable price realization, product mix and benefits from product cost reduction initiatives all contributed to this improvement. Additionally, the first quarter results reflects the company's continued investment in product development, the establishment and training of our service organization and our growth market and the investment in operational efficiency initiative. While impacting current period profitability, these actions will position the company to be better prepared to serve our customers over the long term.

Turing to the balance sheet, working capital less cash at the end of the first quarter was just over $600 million, about $8 million less than working capital at the end of our 2007 fiscal year. While a number of initiatives are underway, much work still needs to be done in achieving a more effective utilization of inventory, especially in light of the anticipated increase in business levels over the next several quarters.

During the quarter, the company generated $86 million in cash from operation. This was assisted by advanced payments which were received with the new orders book during the quarter. The company also purchased $12 million of its shares during the quarter, bringing its total share repurchase to $870 million under its current $1 billion repurchase program.

Lastly, after the end of the first quarter, the company completed its acquisition of N.E.S. Investment Co. and its subsidiary Continental Global Group Inc. on February the 14th. In the quarters to come, you will hear more about the integration of Continental into the Joy Global strategy.

Now let me turn the call over to Mike Sutherlin.

Michael W. Sutherlin - Chief Executive Officer and President

Thank you, Mike. Let me first speak to the events of the past few days. As you can see from our results, there were no hidden messages in Jim Woodward's departure. We did want to conclude this ahead of our Board and Annual Shareholders meetings which were held this past Monday and Tuesday and this determined the timing of the announcement. We have a search underway and in the meantime, Jim Tate will move from his audit chair position to be our CFO until a successor is on board.

Secondly, I'd like to acknowledge and thank Mike Olsen, Senior VP of Finance and Chief Accounting Officer. Mike has been with Joy Global for more than 25 years both in finance and operating assignments. More than anyone else, Mike has been instrumental in building the very strong financial processes and controls we have at Joy. As a result of his knowledge, experience and proven ability, Mike has become our go-to guy. I am very confident that he will ensure that we do not miss a bet during this transition.

As you also see from our results, the first quarter was a very good start to the year. Bookings were strong. The U.S. has rapidly gone from a weak market to one of our strongest and the fundamentals in all our other markets have improved. The resolution of last year's supply chain and operational issues have become the basis for increased shipping levels. I am particularly encouraged by the increased aftermarket orders and shipments for both of our businesses because the aftermarket is a key part of our business model. Strong aftermarket parts and service deliver high machine reliability and enhance customer preference for our original equipment.

We have completed the acquisition of Continental Conveyor on February 14th and have added another premier brand to our product offering. Continental will give us cost efficiencies and revenue synergies as we take it to market through our existing Joy and P&H, field sales and service organizations. Our customers already see the logic of this addition and are contacting us to add Continental to our proposals and supply contracts. Continental should be accretive to earnings at fiscal 2008 with further improvements in the following years.

The major value driver of our business is the improving outlook for the markets we serve. So let's take a few minutes to review those markets. The overall outlook for mining equipment is very robust. The fundamentals today are as strong, if not stronger than they have been thus far in this mining growth cycle. Rains in South Africa and snows in China have increased coal demand and impaired supply, and both countries have experienced electricity power outages. On top of that, flooding in Australia has further crimped a major supply region that was already limited by rail and port constraints.

The result has been an almost panic response as coal miners scramble to lock up supplies with coal spot prices moving to levels never before experienced.

These weather conditions have highlighted as stockpile levels of power generators had already been drawn down to dangerously low levels. Lack of coal burn was a contributing factor to power outages in South Africa. Eskom, the national electricity utility, has indicated that they will increase their coal purchases by 45 million metric tons over the next two years to replenish stockpiles. This will increase their annual coal purchases from 105 million to 130 million metric tons per year.

Heavy snows in China came as stockpiles have been already drawn down to a 10 day [ph] average for the South China Grid. Increased coal burn rates forced the shutdown of 6% of the Grid's capacity. As a result, China has mandated that coal exports be stopped until stockpiles can be replenished. Five years ago, China was a net exporter of 83 million metric tons and by 2007, it had become a net importer for 2 million metric tons. This has effectively added 15 million to 20 million metric tons per year to seaborne traded coal demand. And this latest action by China will take another 40 million to 45 million metric tons of annual supply off the seaborne market and will widen the supply deficit.

Although India has not experienced power outages, its coal stockpile levels have reportedly dropped to 7 days and therefore it has increased imports to replenish those stockpiles. In addition, India has only 135 gigawatts of electricity generating capacity for a country where the population is second only to China. India has announced adding 70 gigawatts of new power capacity, and this will increase its coal imports to 80 million tons per annum by 2011, up from 30 million metric tons last year. This translates to growth in imports of 12 million to 15 million metric tons per year.

And against this relentless growth in coal demand, the world's largest coal exporting country, Australia, has rail and port constraints that will not be alleviated until 2010 at least. And in addition, the recent flooding in Queensland is expected to take 10 million to 15 million tons off this year's exports.

The cumulative effect of the changes in coal demand and supply in South Africa, China, India and Australia drives a wedge of an additional 50 million to 100 million metric tons into the supply deficit over the next few years. And demand for coal continues to increase. Korea has plans to build 10 new coal-fueled power plants. The UK has permitted its first coal-fueled power plant in 20 years. Europe is planning to build up to 60 gigawatts of new coal-fueled capacity to reduce its dependence on Russian controlled natural gas with 10 gigawatts of this currently under construction.

Coal use is also increasing in the major coal exporting countries, reducing their capacity to export. Indonesia and Russia are building coal-fueled power plants to enable increases in oil and gas exports. Vietnam, the largest supplier to China, plans to completely reduce its 32 million metric tons of annual exports by 2015. This leaves the U.S. as the only coal producing region in the world with near-term upside capacity. And this is occurring when power generation in the U.S. is returning to more normal levels. And in fact power demand increased by almost 3% in 2007, mostly due to strong growth in the back of the year.

Adding further to coal demand in 2008 is the projection that up to [ph] 35 gigawatts of nuclear generating capacity will temporarily be taken offline for refueling.

Today there are more coal-fueled power plants under construction in the U.S. than at any time in the last 25 years. There are 22 gigawatts of coal-fueled capacity under construction or in late stages of development and is scheduled to come on line over the next five years, adding an additional 80 million tons to coal demand. U.S. coal producers have found themselves as a swing supplier to an extremely strong export market. U.S. coal exports grew by almost 10 million tons in 2007 to 59 million tons with about 5 million tons of this increase coming late in the year.

Our customers are forecasting 80 million tons of export in 2008, and this export growth is sustainable. Coal producers are signing two to three year contracts, some five year contracts and there is talk of seven year deals. Although Eastern coal is a primarily beneficiary, there have been exports of Western bituminous and PRB coal, and PRB coal is moving East to backfill coal being diverted into the export markets.

This has created a second market for U.S. coal and now the U.S. power generators must compete with export demand and pricing. As a result, we have seen Central Appalachian pricing move to above $80. Price sold for Northern App, not far behind at $75 and PRB coal moving towards the upper teen. And our customers are generally talking about contract prices above these index levels. So coal has quickly moved from a regionally traded to an internationally traded commodity. There is a significant shortfall in the international markets and demand continues to grow. International spot prices have reached $130 a ton for thermal coal and $275 a ton for met coal. The consensus expectation is for thermal coal prices to be set above $100 a ton and met coal prices above $200 a ton for year [ph] 2008, starting in April. And as a result, all of our customers, U.S. is well as international, are planning capacity expansions and discussing slot availabilities with us.

Copper supplies are also tight and will remain so. Stocks on the London Metal Exchange have declined 17% since the beginning of this year and are now down to three days of supply. As a result copper price has rebounded to over $3.80 a pound, and this occurred while the U.S. consumption was declining by 6% per year for the past three years due to the weak housing market.

A number of large copper expansion projects are scheduled to come on line by 2012 and add 4.2 million tons of capacity. However, demand is forecasted to increase by 4.1 million tons over the same period, keeping supplies tight and demand to be much higher when the U.S. consumption returns.

Iron ore supply is extremely short of demand. Worldwide steel demand continues to be strong, led by China. But it's not just China. Steel demand is growing in India, Russia, Brazil, Turkey and the Middle Asia as they also industrialize and move to urban economies. And as a result, iron ore contract prices for 2008 are expected to increase 65% to $84 a ton. This represents a 360% price increase over the last four years, and there is consensus that prices will rise another 20% to 30% again next year. And as a result, iron ore expansion projects are now extending out into 2012.

The economics are similarly strong for oil sands. As a result of high oil prices, oil sands producer profits were up 18% in 2007. And there is another $25 a barrel of locked up value in oil sands bitumen if it can be set to Gulf Coast refineries to displace oil currently imported from Mexico and Venezuela. Investment in oil sands is expected to reach $20 billion in 2008. And as a result, we expect the total oil sands demand for shovels to grow from the current level of 4 to 6 units a year to 8 to 10 units per year for the next several years.

So in response to this outlook, we have approved a $26 million expansion program for our Fort McMurray and Edmonton operations to ensure that we continue to exceed our customers' expectations for aftermarket support and services in this important market.

From this review of our major markets, the only conclusion one can draw is that the investments made to date to expand mining production levels have not been sufficient to keep up with demand. It will take significantly more investment over an extended period of time to catch that demand and continued investment beyond that to stay up with expected demand growth. And that's good for the mining equipment business.

This renewed strength in our markets is still evolving. Although we are seeing it in our enquiries, quotes and order activities, we believe it will not have a meaningful impact on revenues until our fiscal 2009 due to the normal order to delivery lead times. However, we have updated our guidance with the partial year impact of Continental. And as a result, we now expect revenues to be $3.1 billion to $3.3 billion, operating earnings to be $545 million to $585 million and earnings to be $3.15 to $3.45 per fully diluted share for fiscal 2008.

I would also like to remind you that we had an exceptionally strong second quarter of last year and you should consider this as you evaluate the comps.

On that very positive outlook, I would like to turn the call over to questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Robert Wertheimer with Morgan Stanley.

Unidentified Analyst

Hi, this is Matt in for Rob. I had a question on the capacity utilization for the underground business. We sort of have a pretty good sense of the surface business, but in terms of aftermarket and OE on the underground side, just get a sense of where the utilization is.

Michael W. Sutherlin - Chief Executive Officer and President

In the underground business, obviously, the market was soft for us last year, so we were underutilizing our capacity. That's filling back up as the order rates improved and we fill our slots up till 2008. Last year's part of our effort to manage the bottom line impact of the soft U.S. market, we brought back inside a volume that was being outsourced before that. So as we've gone to outsource suppliers to help supplement our own internal capacity in 2005 and 2006, we bought some of that back in in 2007.

So as we look at 2008, obviously, we'd start putting some of that work back outside to give ourselves a little bit more breathing room on capacity. But certainly in 2008, we will be working at the end of the year, the back half of the year, we're going to be working reasonably close to the limit of our capacity.

We continue to work on process improvements there and other things to generate more realizable capacity. And so we are expecting that capacity to continue to grow. We've got capacity we brought on line in China this year in 2007; that's still in ramp-up phase. So we still have some more upside in that capacity as well. So we think at this point we're going to be able to deliver meaningful capacity improvements to handle the demand we expect for 2009 and then we have more CapEx programs that we're currently evaluating.

Unidentified Analyst

Okay. And just a quick follow up. When we look at the supply shock that we saw recently, especially in China, I mean how should we think about the longer term impact or the response from the Chinese government and then how can this affect your business in the long term?

Michael W. Sutherlin - Chief Executive Officer and President

Well the China government has been relying on the top tier customers for virtually all of their coal production increases year-over-year. They've been closing down some of the smaller township mines for safety violations, and that's put more load on the top tier companies. Top tier in China roughly 20 companies that produce anywhere from a fourth to a third of their countrywide production. They will undoubtedly look for more improvements from the top tier, they will look for more improvements from the mid tier provincial mines and they may even begin to let some of the smaller mines go back into production temporarily. But in the long run, they are driven to improve their safety record. I think they are very embarrassed about that in the international market. So in the long run, they'll push more of that capacity improvement to the larger mines, and that's good for high productivity mining equipment.

A lot of the provincial mines are only... in China, are only able to produce 1.5 million, 2 million, 2.5 million tons on longwall operation, and they just can't keep up with their demand growth with those kind of small mining operations. So then you get into the big mines, the high productivity mines of 10 million tons a year, and that's our sweet spot that's where they are exporting equipment. So we expect that to improve as they address their own production issues. But the other ripple effect is that taking the export capacity offline is taking supply away from places like Korea and Japan that have normally relied on the China exports to be a primary source of their supply. So now that's got to come with increased production capacity out of places like South Africa, Australia. And I think you will see the U.S. continue to build capacity to deliver to Europe so that South Africa can deliver to India and Australia can deliver to Southeast Asian countries. The whole pattern of supply demand challenges [ph] a shift in here is part of this supply deficit.

But I think as we go through that, we will see that the normal supply chain from the U.S. to Europe will probably get established and be sustainable and then we will have to have a lot of increases in South Africa and Australia to make up the Asia Pacific deficit. And realistically, you look at the output that we can grow capacity, and that's going to be a five, seven year or longer horizon project. It's not something that's going to happen in a year's time.

Unidentified Analyst

Okay, thank you.

Michael W. Sutherlin - Chief Executive Officer and President

Thank you.

Operator

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

Charles Brady - BMO Capital Markets

Good morning. With regard to the Continental acquisition, can you give us a sense if you exclude the accounting charges embedded in there, what sort of margins is that business doing today? And sort of where do you see those margins moving to over the next, I would say, two to three years? And at what point do some of these accounting charges drop off so you get a little bit better margin on the actual numbers?

Michael W. Sutherlin - Chief Executive Officer and President

We are still doing the evaluation on a lot of the purchase accounting charges, and so those numbers are moving around quite a bit right now. Before we did the acquisition, just going back to their numbers pre-acquisition, they had reported margins... operating margins in the 12% to 14% range. I think 12% in 2007, 14% in 2006 when the U.S. market was stronger. So that's a starting point. But we just see a tremendous amount of opportunity, cost synergies as we work the same customers, the same markets, the same mine and also some revenue synergies as we bring them into markets where we have a much stronger presence and they are not currently strong themselves. So we are expecting their margins to get up to levels... close to the levels of Joy and P&H. We don't think the technology of the conveyer product line is going to get us equal margins, but we think we are going to get reasonably close. And that will probably roll out over the next 2, 3, 4 years' year-over-year margin improvement to get there.

Charles Brady - BMO Capital Markets

Okay. And can you speak to the penetration rate that, what you're seeing on the Joy Lite [ph] product in China?

Michael W. Sutherlin - Chief Executive Officer and President

We have been selling the Joy Lite [ph] product in the Eastern European and some of the Russian areas. It's particularly applicable where they have old mines with infrastructure built around smaller volume equipment. We can go in and increase the production rates on the longwall from 1 million to 2 million, or 1 million to 3 million or 4 million tons a year and reach the limit of their outlying capacity to take the coal up to the surface. That's been really good for us and those sales into Eastern Europe and into Russia have been increasing year-over-year for the last four or five years.

We think it's a product that's going to do very, very well with the mid tier group of companies in China, the provincial mines who really haven't done very much upgrading, and now they are going to be under a lot of pressure to get their mine productions up closer to the top tier, the Shenhua kind of production rates. But we are in the process right now. We are going through the regulatory approvals for that. They have got, like other countries, they have got regulatory approval processes for underground requirements and permissible issues with the electronic controls. So we are just in the early stages of that and we are hoping to get regulatory approval here in the next few months.

Charles Brady - BMO Capital Markets

Thanks.

Operator

Your next question comes from the line of Mark Koznarek with Cleveland Research.

Michael W. Sutherlin - Chief Executive Officer and President

Hey Mark.

Mark Koznarek - Cleveland Research Co.

I am wondering given your comment on the capacity expansion up in Fort McMurray area if you could just use that as a launching point to sort of go through a review of the capital expansion plans that are underway and the timing of each of those for the two sides of the business please. Just to make sure that we are all on the page as to what you are planning on doing there.

Michael W. Sutherlin - Chief Executive Officer and President

Let me go back and start with 2007. And in 2007, we brought online the Joy factory in China which was our first OE factory that we started up in China. But in that same year, we expanded our Baotou service center in Inner Mongolia. We built a new service center in Poland to serve the Eastern European and portions of the Western Russia markets. And we set up a mine site service center. We have rented some facilities for one of our customers and we set up a mine site service center in the Kuzbass region of Russia in Siberia. So we made all those service and OE expansions in 2007. Then we have in 2008, we are under construction in P&H's first factory in China which will do gears and shaft transmission components. And that factory is scheduled to come online this summer and will be in ramp up phase probably for the second half of the year. And so with that production rates we'll be building as regards to the second half of the year.

We also have started construction of a major service center in the Hunter Valley region in Queensland, and that's going to be a shared service facility that will serve Joy, P&H and now Continental in that market. So that will give us a strong service and rebuild presence in that key market for us.

And then as we get into 2007, we also improved the second factory for P&H in China. That will be a transmission factory in which we use some of the gearing components that will come out of their first factory. It will build the transmission housing... complete transmission builds. And that will come on line in the middle of 2009. We are just starting... obviously, we just approved the Fort McMurray and Edmonton expansions. But along the way, though, we have also significantly expanded some of our outsourcing activities with some alliance suppliers. So in China, for example, we have been in 2007 bringing on a major fabrication supplier that's going to allow us to build gearing and transmission components in own factory, use them for some of the structural builds and allowed us to do... it will by 2009, we will be getting reasonably close to being able to put complete machines together based upon products coming out of that China market, some from our own factories and some from the alliance supplier factories.

Mark Koznarek - Cleveland Research Co.

Okay.

Michael W. Sutherlin - Chief Executive Officer and President

Covered what you were looking for?

Mark Koznarek - Cleveland Research Co.

Yes, exactly. That's helpful. The other question I had was, Mike, having to do with the comments about the fact that... I am paraphrasing your comments from the release, but you are effectively sold out for '08. And so the record bookings are really turning into '09 revenue and earnings contribution rather than '08. And it sparks the question about how you ensure the company against raw material fluctuations since we are now looking at much longer lead times than you historically have delivered to.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, I am that's an excellent question because we are seeing the raw material inputs into the steel making process with some fairly significant price increases as we go into 2008. And you would obviously expect that to get rolled into steel costs during the course the year. We are... right now we have steel purchased for our backlog that runs through well into the middle of and a little bit beyond in 2008. So we have steel locked down. Some of that steel is on site, some of that stuff is on order with prices firmed up. So we're in pretty good shape on that. We also have in our contracts, we have with our customers, we have some escalation clauses in those contracts that give us some relief for further out deliveries.

So we feel pretty good that we have got the expectation for steel costs either priced in to the quotes and order. Quotes [ph] for making the orders we have in backlog where we have some cover on stuff that runs out for into the back half of this year. And we have got some contractual adjustment capability for the contracts that run out into 2008. We have some contracts that are actually... some backlog that's scheduled into 2010. And I think there is even one machine that is scheduled into 2011, so. And we don't have those locked down without adjustment capability.

Mark Koznarek - Cleveland Research Co.

Great, Mike. Thanks a lot.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thanks Mark.

Operator

Your next question comes from the line of Michael Gallo with C.L. King.

Michael W. Gallo - C. L. King & Associates

Good morning. Question I have just want to come back to the underground side of the business. I was wondering whether you are seeing a more rational competitive environment on the underground side of the business since Bucyrus purchased DBT.

Michael W. Sutherlin - Chief Executive Officer and President

Our primary focus is just on working our customers requirements and we have been spending a lot of time managing their requirements and our build schedules and trying to make sure that our slots line up with their needs. In that process, our enquiry levels are high, our orders rates are high and we don't at this point we don't really see any dramatic change. Bucyrus continues to be a strong and aggressive [ph] competitor. But certainly we don't see... they could be strong in the marketplace and that really hasn't changed. So I think that you will expect to see our order rates begin to improve, you should expect them to see some of the benefit of the improving market conditions as well. But in terms of I mean if the question is have they really firmed up and raised... and firmed up the prices and given us headroom, they still are a strong competitive factor out there we have to work that pretty hard.

Michael W. Gallo - C. L. King & Associates

Okay, great. And then just a follow-up question. I was wondering whether you saw any disruption at the business in China short term here in the first quarter due to the storms and if you did, was there any quantifiable impact from that.

Michael W. Sutherlin - Chief Executive Officer and President

The storms were in the Southeastern part of China in some of the more heavily populated areas. Most of our work is in the Northern part of China, the Northern Shaanxi province in Inner Mongolia. So it really wasn't affected at all. What happened was it did impact some of the rail deliveries that pull to the power plants in the Southeastern region. And then like I said on the script, it really began to reveal how thin some of the stockpile levels have been because demand just hasn't been keeping up.

In terms of mine production outages, no, we didn't see that. We did see power outages in South Africa shutdown mines for a few days. We are seeing the impact of that on coal, but also the copper and platinum and iron ore mines in South Africa had few days of shutdown where they have power outages that rolled over their operations as well. So I think the South African government has understood the importance of keeping the mines running and they are allocating power to them first. But there were a few weeks of mines coming off line there. But we didn't see any of that in China.

Michael W. Gallo - C. L. King & Associates

Okay, great. Thanks a lot.

Michael W. Sutherlin - Chief Executive Officer and President

Thanks Mike.

Operator

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

Michael W. Sutherlin - Chief Executive Officer and President

Hi Joel.

Joel Tiss - Lehman Brothers

If you can just sort of give us a sense of all the debottlenecking and the capacity additions and all the stuff you are working on could have an impact on 2009 incremental margins?

Michael W. Sutherlin - Chief Executive Officer and President

Well, we are going to see... I think we are going to see two things happen on incremental margins in 2009. One is we continue to do the competitor [ph] process rationalization, reengineering of our processes. We continue to streamline those and get more value out of those. We certainly have... we've worked really hard on both businesses and you see the upside on the P&H business with more aftermarket parts coming out of that facility. And we are actually at this point exceeding the expectation we had when we approved the capital expansion here in Milwaukee. We expect those same kind of benefits to accrue as we bring the China capacity on line.

On the Joy underground business, they've just done a really good job of doing their plans for this year and level loading the factory. So we see a much more consistent load going into the factory. You see a lot more pre-work on the order specifications to make sure we don't have any disruptions, and that's yielding some improvements for us. And then the China capacity is coming online with a lower cost base than the equivalent U.S. capacity would carry. So all of those will continue to add to margin improvement. I think I said in the past I think we can get the... our margins can continue to grow into that lower 20s range and we will see the rate of growth continue to improve. But it won't be the rapid improvement we saw in 2005 and 2006. But you could see even here in the first quarter we are seeing year-over-year improvement in gross profit margins, and I think you will see that kind of improvement continue on for the next few years.

Joel Tiss - Lehman Brothers

Okay. And then as a follow up, your illustrious competitor said a couple of weeks back that there was a lot of inquiries but not a lot of it was turning into orders, but they were coming eminently. Can you give us any sense of maybe what the hold up is or if that's changing at all? Thank you.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thanks Joel. We don't see any change in the ordering pattern for our customers. I mean it's a lumpy business. We have always said and we have always demonstrated that the original equipment order rates are quite lumpy. And that's not going to change. But we don't see anything out there that's holding up orders other than the normal process that we go through. I mean there are some things where we'll hit some snags on terms and conditions. Our approvals from the customers will give us letter of intent to getting the final Board approval or something. But from what we have seen to date, we haven't seen anything to date that's any different than the way that process has been pulling for as long as I have been here. And so from our view anyhow, there is no change in the marketplace.

Joel Tiss - Lehman Brothers

Thank you.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thanks Joel.

Operator

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

Jerry Revich - Goldman Sachs

You indicated that increased spending on growth initiatives drove the SG&A and product development costs to 16% of sales in the quarter, which was up substantially sequentially and year-over-year. I am wondering if that's the run rate that you expect for the year on a percent of sales basis and also at which point do you expect the payoff from these growth initiatives to return SG&A to sales ratio back to your normal 14% range.

Michael W. Sutherlin - Chief Executive Officer and President

We are... right now, we are supporting the build out of three factories in China. And that build out is not just building the facilities, but it's also hiring people that are going to work in those facilities, both shop floor people but also technical people like quality control, inspectors and manufacturing engineers. And those people are being trained. We have people coming into places like Milwaukee and doing training... extensive training in our factories here in preparation of going back and starting to man the factories as they come online. So we have got a fairly heavy overhead load in that process.

Obviously, training Chinese workers and language and cultural difference is a lot harder than training extra workers here in Milwaukee for example. So it is a high load. We have quite a few expats on site in China supporting the work. They are to make sure that we get the consistency in our manufacturing processes that we have here. So we will see those factories come online in 2008-2009. We are getting the first Joy factory on in 2008. We have got... P&H... I mean in 2007; P&H comes online in 2008 and we'll be ramping up during the back half of the year. The second P&H factory should come online in 2009. So we will start to see the load factor of that begin to diminish as those factories start producing hours. But we will be carrying high expense levels for a few more years.

We also are building out our service operations in places like China and Russia where we're adding service capability with a clear belief and with our own experience that that can generate a lot of aftermarket demand to keep the customer from building out their own workshop for example. And we are doing that right now and that again is a fairly expensive training process. We have service engineers training in the U.S., training in Australia and going up to trainers up to global standards.

We are supporting some R&D projects. I think I talked on the prior earnings call about the ultra-class dragline that we are working on. And we are continuing to refleet the P&H product line with AC power capability, and all those engineering projects are another load factor. The first quarter as a percentage of revenue, the first quarter is seasonally low for us because the high percentage of holidays that load into our fiscal first quarter we have that in the U.S. Thanksgiving and our year-end holidays as well. For the rest of world, the year-end holidays can be fairly extensive where South Africa and Australia will take off for a couple of weeks.

So the first quarter on a revenue, seasonally adjusted revenue basis, the first quarter is typically about 20% of our annual revenues and the fourth quarter is 30% of annual revenues because we get... in the fourth quarter, we get a period where we don't have any holidays. So as a percent of sales, that's going to improve. I think those costs are going to be level in dollars and now some of those costs will turn into productive hours as the year unfolds. But as the dollars roll out in the back half of the year, they are going to go against higher revenue levels. As a percentage, they are going to fall back down into lower levels.

Jerry Revich - Goldman Sachs

That's very helpful. Thank you. And can you please discuss what portion of your backlog extends beyond 2008? And if you can give us that number as of last quarter as well, that will be great. Thank you.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, on the backlog... costs on the backlog that we first of all, we carry OE backlog that extends out into 2010 on the surface side and 2009 on the underground side. Both businesses are booked out for 2008. However, we also carry aftermarket backlog. That aftermarket backlog, we make a really concerted effort to keep that down as low as possible. Right now, it's running in the range of 6 to 7 weeks. We would like to see that down to 3 to 4 weeks. So in the total backlog number, you are going to see a blend of original equipment and aftermarket. That aftermarket revenues are very sustainable for us. So we don't want backlog there. We lose orders if we get backlog. So you've got to factor out the original equipment from the OEE revenues.

Our backlog is $1.9 billion, and I think that we have somewhere around $1.6 billion of that that will get sold in... $1.5 billion and $1.6 billion will get sold in 2008. But you've got to remember again, that's separating out the OE from the aftermarket before you go into that. And then just our last comment is that we take long-term, we call MAR contracts, maintenance and repair contracts. Some companies will book those contracts at the time as they are received, they are booked into backlog, and we don't do that. So all those MAR contracts we have out there are booked as the revenues are realized. So our backlog numbers may not compare apples-to-apples with other backlog numbers.

Jerry Revich - Goldman Sachs

Okay. Thank you very much.

Operator

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

Robert F. McCarthy - Robert W. Baird & Co.

Actually Baird, good morning guys.

Michael W. Sutherlin - Chief Executive Officer and President

Hi Rob.

Robert F. McCarthy - Robert W. Baird & Co.

I wonder if you can help us get expectations in line with how Continental's results will be reported. So what I am looking for is some help on how you expect the $260 million to $280 million of revenue to break by segment. Will we see a significant difference in margin between the two segments? And can you tell us something about backlog levels at Continental and recent order trends?

Michael W. Sutherlin - Chief Executive Officer and President

Yes, first of all on how we are going to report Continental in segment reporting, we are just not sure at this point. What we have decided is that we don't want to have a second sales organization calling on our surface mining customers. And we don't want to have a second sales organization calling on our underground mining customers. We want to maintain that one face [ph] of the customer presence. That's done very, very well for our business. We run our Stamler products through Joy for underground and P&H for surface mining application. And that pull through has worked very, very well. It's done extremely well in both areas, particularly on the surface side, the P&H guys have been able to pull Stamler into revenue applications that they were not participating in before. We have expanded the size of those feeder breakers and crushers to meet some of the new customer requirements, and we expect to do the same with Continental.

So Continental will go to market through Joy and P&H. So when our sales guys go to talk to our customer about an underground or surface requirement, they will be able to talk about their complete product range. They may bring a Continental expert with them to handle some of the technical issues and engineering technical expertise, but we are not going to have that third sales organization. So because of that and how we are going to put this in our segment reporting is still not clear and we are still working through the details on that at this point.

Robert F. McCarthy - Robert W. Baird & Co.

Okay.

Michael W. Sutherlin - Chief Executive Officer and President

Margins, if you look at incremental margins, assuming that Continental was just up by itself, we still haven't worked with the purchase accounting requirements. We do feel comfortable that Continental will be accretive in 2008 after purchase accounting charges are included. We expect the accretive impact to be heavier obviously in the back half of the year because we have to work through the inventory impact of the purchase accounting adjustments. They actually do a very nice job of managing inventories. So they don't have long inventory cycles. So you will see us start to see the accretive impact in the third quarter and certainly, you will see more of it in the fourth quarter.

Robert F. McCarthy - Robert W. Baird & Co.

Okay.

Michael W. Sutherlin - Chief Executive Officer and President

Their margins, they came off of EBIT margins in their business before acquisitions of 12 to 14% they reported in 2006 and 2007 in a good year, in a weaker year; 14 in a good year, 12 in a weaker year. But we just see a lot of synergies. First of all, we are going to go to market through existing organizations. We are already calling the same customer, the same mine, a lot of revenue pull through. We see a lot of our facility... manufacturing facility rationalization. That's going to give us more volume and cost synergies. So we are expecting those margins to build up over the next 2 to 3 years and get into the high teens. We think that those margins can comfortably get into the high teens. Now where they go beyond that, we will have to see. We don't believe that the technology of the conveyor business will give us equal margins through our continuous miners and shovels. But we think we can get those margins up into the high teens.

Robert F. McCarthy - Robert W. Baird & Co.

Right. And backlog and recent order trends?

Michael W. Sutherlin - Chief Executive Officer and President

Backlog, we don't have a backlog number on them. We will have to get that backlog. I just don't know what it is. I think it's in our 10-Q. I don't know what... it will be our 10-Q I believe, but I don't know what it is.

Robert F. McCarthy - Robert W. Baird & Co.

Okay, that's fine. And then if I could follow up with just a couple of little numerical clarifications. The 7% margin number that you are talking about, just to be perfectly clear, is intended to be all-in number with all of the at least preliminarily estimated purchase accounting adjustments, right?

Michael W. Sutherlin - Chief Executive Officer and President

I think that we, because we are so early in the purchase accounting process, to get an estimate that we felt comfortable with. And that 7% includes the purchase accounting adjustments as we hit our first cut [ph] estimate on those.

Robert F. McCarthy - Robert W. Baird & Co.

Okay. And can we get a number for shares that were repurchased during the quarter at the $12 million number and can we reconfirm the 34% estimate for full year tax rate?

Michael S. Olsen - Senior Vice President and Chief Accounting Officer

Yes, we are still looking at the 34% tax rate is what we are anticipating for the full year.

Robert F. McCarthy - Robert W. Baird & Co.

Okay. And the shares?

Michael W. Sutherlin - Chief Executive Officer and President

While they are looking up the --

Robert F. McCarthy - Robert W. Baird & Co.

Okay.

Michael W. Sutherlin - Chief Executive Officer and President

We think the backlog number on Continental was $125 million.

Robert F. McCarthy - Robert W. Baird & Co.

Thank you.

Michael W. Sutherlin - Chief Executive Officer and President

And then the other question was on the share count. Actually, I don't think that we give those details on the share count. We gave the $12 million.

Robert F. McCarthy - Robert W. Baird & Co.

That's okay. We can estimate it.

Michael W. Sutherlin - Chief Executive Officer and President

Okay.

Robert F. McCarthy - Robert W. Baird & Co.

Thanks.

Michael W. Sutherlin - Chief Executive Officer and President

I think Rob, a fair point is that we are... there was 220,000 shares that we purchased. We were obliviously holding back cash in anticipation of the Continental closing. But I would also point out that we are a cash flow generator. With the exception of funding acquisitions, we are going to be generating cash in good years, in up years and down years. And we are going to be, throughout the cycle, we are going to be generating cash. So we have got to have a program that returns cash to shareholders on a routine basis. So we are not opportunistically buying shares back because we think the price is currently low. We are going to be in the market on a consistent basis over a long period of time. So as part of our share buyback program, we'll continue to do that as the market unfolds. But we are not going to accumulate cash and hope that the price of the shares go down. We don't believe that that's going to happen anyhow.

Robert F. McCarthy - Robert W. Baird & Co.

Thank you, Mike.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thanks Rob.

Michael S. Olsen - Senior Vice President and Chief Accounting Officer

Mike, I guess just one clarification on that 7%, that would in fact be a blended 7% over the remainder of the year. That will be a lower percentage in the second quarter because the purchase accounting will be higher and then that will tend up as we get less purchase accounting charges throughout the year.

Robert F. McCarthy - Robert W. Baird & Co.

Good clarification, Mike. Thank you.

Operator

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

Paul Bodnar - Longbow Research

Just a quick question on the U.S. coal market. When do you see that starting to contribute to either acceleration or just improved underground revenues on that side? And in the quarter, I think just underground production was just so slightly off. And I mean is it going to start contribute additional aftermarket sales? I know you said the original equipment side is sold out, or is that going to be move of an '09 type contributor?

Michael W. Sutherlin - Chief Executive Officer and President

The aftermarket parts... the parts part of our aftermarket business is tied to machine production level. So as machines go back into production, obviously, they work consumables out in normal maintenance and replacement parts go through. So we will see that build up. The decline, if you recall back to 2007, our U.S. aftermarket number only declined by about 6% or 7% against a 60% to 70% decline in original equipment order rates.

And so we don't... we didn't have that severe drop off in the aftermarket order rates and we are not going to see that huge ramp up. It will build up as the machines go to work and work longer hours and more machines go to work. We are seeing an improvement in the rebuild activity and we are seeing more rebuilds or machine rebuilds get booked in the back half of the year. And some of machines that were required [ph] to go back into service, it just doesn't make sense to put them back into work without going through a rebuild cycle. So we are starting to see those rebuilds book up in the back half of the year.

We are seeing a significant improvement in the continuous miner product line, roofing [ph] filler products, Central Appalachia. That's a hard cutting condition market. It didn't seems a lot of rock that gets cut. It's also a great met coal market. So these guys have a high economic incentive to keep mining those thin seams, but we get a fairly high revenue per ton from aftermarket in the Central Appalachia market. So as those mines continue to increase their production levels, as new mines come on, we'll see that aftermarket revenue pick up. But it's not going to be a sudden jump here in the first quarter and we will see that more of a even growth rate through the course of the year.

Paul Bodnar - Longbow Research

Okay. What has been the hold up there just year-to-date in terms of getting underground production back up to speed, even with just '07 levels?

Michael W. Sutherlin - Chief Executive Officer and President

Our customers were extremely disciplined and took production offline in 2006, the back half of 2006 and into 2007. And I don't think any of our customers were going to put that production back online till they got decent pricing with reasonable contract durations. So there was a wait and see process going on, and having gone through the cost of taking a mine offline, you are not going to bring it back online and risk getting into a market oversupply condition.

The price impact of the international markets has really had a pronounced effect here only in the last 3 or 4 months. And that's really changed the outlook quite dramatically. I mean if you go back to the last earnings call, we were talking about Central App prices getting into the mid to upper 50s. And some of those Central App mines have reasonably high cost to operate. So, and we are just getting to the point where the customers are beginning to look at bringing mines back into production, waiting for long-term contracts. But certainly, the markets have changed. And as I said on the prepared comments, the export market right now is looking at contract terms up to five years. There are discussions around seven year contracts. So if the U.S. power generator is not giving them the long-term contract, certainly, the export customers are readily stepping in to give long-term contracts, which will be the basis to accelerate capacity increases and bring new mines online.

Paul Bodnar - Longbow Research

Okay, thanks guys.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thank you.

Operator

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

Seth Weber - Banc of America Securities

: Hi, thanks. Good morning everybody. Mike, in your prepared comments, you noted that pricing was favorable, a favorable contribution to margin, and you guys also had a big bump in the advanced payments this quarter. Could you maybe characterize the pricing environment versus last year? Are customers are more willing to tolerate price increases and provide payments here and advanced payments, or is that just more a function of the products that you are selling and the regional mix? Thank you.

Michael W. Sutherlin - Chief Executive Officer and President

Thanks Seth. I'll give you an overview comment and then I will let Mike talk to the price realization and the advance payments because he is closer to that. But certainly, we have had a fundamental philosophy as a business that we are going to get positive price realization as long as the market is up. And we've stayed committed to that. We even had price increases in our underground business last year when the U.S. market was extremely weak. But we felt that we had to keep those prices running equal to and ahead of our cost increases and not lose margin in that... at that particular market condition. So, if anything, it tells you the discipline we have around maintaining those prices to cover costs and get some positive price realization in the market. Certainly, in the first couple of years of the up market in 2004, 2005 and 2006, we got pretty strong price realization. That's diminished. We still are positive, but the rate of benefit has diminished quite a bit.

So with that, I mean part of our philosophy is to continue to get some positive price realization. We've certainly gotten some mix benefit as well as we have a higher percentage of aftermarket in the first quarter shipment. So that certainly has helped us. But Mike, maybe you can give more details on that?

Michael S. Olsen - Senior Vice President and Chief Accounting Officer

I guess as we look at the concept of price realization, we really look at it from a disciplined perspective and also from the execution of a strategy perceptive. In other words, we have a very, very strong lifecycle strategy that drives virtually everything that we do. And that lifecycle strategy is intended to bring value to the customers. So as we identify that value and maintain the discipline that we have in establishing our prices, we have been reasonably successful in achieving good price realization. As Mike indicated, certainly in the first quarter, we did have some favorable product mix that assisted that in connection with that. But as much as anything, it goes back to the lifecycle strategy where we believe we are in fact bringing value to customers and we are maintaining our discipline in the pricing area. And then we also try to make sure that we are paying attention to what's happening to the cost of material that goes into our product. And our customers are very aware of what's happening with those prices as well and we use that in our communications with the customers relative to price. So it's really a process that we go through.

Seth Weber - Banc of America Securities

Okay. And then on the advanced payments, so is that a change in strategy where you are trying to get more money upfront or that's just business as usual and the number is going up because the revenues... because markets are getting better?

Michael S. Olsen - Senior Vice President and Chief Accounting Officer

I think that it's really a culture that has been established down through the years with the surface mining business. And it's really a conscious decision to begin to drive that same culture in the underground business. Certainly, as you look at the larger transaction, it's a bit easier to get those advance payments. But at the same time on the underground side, through once again discipline, we are seeing that more and more of our customers are acknowledging the fact that advance payments are a way of life in the acquisition of capital equipment. And so the underground side of the business is beginning to catch up with the success that we have had in the surface mining piece of the business.

Michael W. Sutherlin - Chief Executive Officer and President

Certainly, Seth, on that point, certainly, we have seen a really very nice improvement in the underground business in their advanced payments as a percentage of their OE bookings. That's been, over the last 18 months or so, that's really grown pretty significantly and is getting close to the now within striking range of the ratio that P&H has been experiencing for several years.

Seth Weber - Banc of America Securities

Right, okay. Thanks for that. And just a follow up. Mike, I guess in the last couple of quarters, you have had one or two very big orders that have really been a pretty big delta on the order book. I mean as you look through your prospective list out there, would you expect to continue to see every... maybe not every quarter, but you continue to see some pretty big one customer, just customer projects out there where you can book these big orders quarter-to-quarter?

Michael W. Sutherlin - Chief Executive Officer and President

No, there are orders... a number of projects are out there and in fact in today's environment, those projects are getting advanced as much as the customer's can. Particularly, the projects have been there in markets like oil sands, copper and iron ore; those projects have been under way. Coal is probably the one market where the capital expenditure was sort of slowed down because of market demand in the U.S. and because of port and rail constraints in South Africa and Australia. Those are moving forward much more rapidly now as people are trying to accelerate and realize that they have got to catch up to demand. So I think we see a number of major projects out there. We are working those... we are working projects that will run out into 2009 bookings. We are starting... we are already doing the early work on those. We find that we get much better bookings when we start early, do some collaborative engineering with the customers early in the process and carry that through to orders, deliveries, commissioning and start up of the equipment.

But you always have to... everything is very, very lumpy. I mean we, in our first quarter bookings, we had a major order that got booked in the last week of the quarter. Sometimes we get... we have had quarters where it's been booked in the first week of the next quarter. And the lumpiness doesn't go away. If we ever try to manage the lumpiness, we'll be giving on terms and conditions to get something booked in a quarter, and we just have always avoided doing that and we will avoid doing that.

Now on the surface equipment side, this has probably been the... this quarter we've probably had the moist widely distributed orders that we've seen with no one customer dominating the orders surface equipment. That's been fairly well distributed among commodities, or very well distributed among regions. So it indicates the broad base of the demand for the surface equipment. Certainly, there is... in our prospects, there is multiple... a lot of multiple machine projects in our prospects. But this particular quarter, we didn't have one order that dominated the surface business.

Seth Weber - Banc of America Securities

Okay, thanks very much guys.

Michael W. Sutherlin - Chief Executive Officer and President

Thank you, Seth.

Operator

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

Michael W. Sutherlin - Chief Executive Officer and President

Hi Barry.

Barry Bannister - Stifel Nicolaus

: Hi, good quarter.

Michael W. Sutherlin - Chief Executive Officer and President

Thank you.

Barry Bannister - Stifel Nicolaus

Your inventory returns were 2.37 times versus 2.65 times a year ago. And when Don was there, he used to talk about a 3 turn goal. Is there any structural impediment to ever getting to that goal and what do you see turns doing in the next year?

Michael W. Sutherlin - Chief Executive Officer and President

Inventory has been a... has been high in our priority list here for a few years. What we are finding is that the ability to get those high inventory turns is harder in this business than it is in a lot of other industrial businesses. And a part of it, it goes to the value of our business model. We have put a lot of effort and investment in our aftermarket business, not just selling parts but having field service capability, rebuild abilities, running costs per ton and programs and things like that. And all those things add a lot of value to the customer. They add value because we keep machines running 95%, 98% of the time. The consequence of thinning out that field inventory and not having parts when you need it, reduces the availability of all those machines and reduces the value that we bring in those aftermarket programs. So we have been very, very cautious about getting the inventory improvements out of better processes and streamlining on our factory floor rather than trying to squeeze down our field stock.

We still carry a lot of inventory in the field. We carry a lot of emergency and back up spares. And we will probably always do that. We think that there is a lot of gain to be made on the sharp floor and improving inventories there. And improving the replenishment times of the field inventories allows us to reduce some of the stocking levels. But it's a much slower process.

Compounding that a little bit is as we add capacity in China, we actually begin to build up some work in process inventory in and around those facilities during their ramp up phase. So we... that works against us. As any one facility gets better in its inventory management through its shop floor, as we add some footprint, diversify our manufacturing base, we just have more places where we have inventory. So we still have a goal of 3 turns, we still have it in our plans and our objectives. Some of our incentive comp is tied to getting to those levels of inventory turns over the next few years. But it's going to be a real struggle and we are very, very cautious not to undermine our business model of high service levels to the customer to get there.

Barry Bannister - Stifel Nicolaus

Yes, it's a very working capital intensive business, so it's an important goal to get the inventory turns up. Let me ask a final question just to clarify the earlier caller who asked about your SG&A. Your SG&A averaged 14.3% of sales from 2005 to 2007 and as you know, it popped up in the quarter. Just to narrow you down a little bit, is there any reason why that can't get back down to 14.3% of sales in the next year? And in perspective, when I go back and look at competitor, Bucyrus in the very late 70s as the cycle progressed, they had a hard time keeping SG&A down even as sales were strong. And I can go back and check Joy Technologies, Joy Manufacturing, Harnischfeger's SG&A. But can you let me today what you think SG&A is likely to do as your business is booming?

Michael W. Sutherlin - Chief Executive Officer and President

Well, Barry, I think one of the really good things we've done on the SG&A increase is tied to projects. We have got very specific projects that we are resourcing right now on our China manufacturing start up, on the some of the field service of adding field service capability and doing those training programs and some of the R&D projects that we are working on. So in terms of the general, that sort of leaking growth of costs building up in the SG&A, we are currently not experiencing that and we've had pretty tight control of costs all the way through. We have consciously allocated costs for those strategic projects, and that's where really the increase is.

As long as we have growth outlooks ahead and we are carrying strategic projects, I don't know that we are going to get down to that historical SG&A percentage. But it will come from it is, and I think that we realistically have the opportunity to get SG&A below 15%, whether it gets back to the 14.3% average. I don't want to take all strategic projects and sourcing those or staffing those properly just to get the SG&A cost down.

So I guess the good news... the costs will be there for... they will get better as a percentage of sales for 2008 because we will get stronger revenue as the year proceeds. The dollar cost will come down as we bring factories online and convert some of the overhead into productive shop floor guys. But we still have some strategic programs working and we'll resources those with adequate staffing as long as the market is good and we still have growth prospects ahead. So it's sort of a mixed answer there. The lower than 15, not down to 14 and we don't want to drive it down to 14 and reduce our growth opportunities.

Barry Bannister - Stifel Nicolaus

Thank you very much.

Michael W. Sutherlin - Chief Executive Officer and President

Thank you, Barry.

Operator

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

Michael W. Sutherlin - Chief Executive Officer and President

Hey Steve.

Steve Barger - KeyBanc Capital Markets

The coal tightness in China, has that helped accelerate the possibility towards a potential JV there? You discussed that a little bit on the last call. Is there any upside in 2008 possible from a potential deal like that?

Michael W. Sutherlin - Chief Executive Officer and President

Well, we continue to look at opportunities to add in products that are nice extensions to our existing product offering. We don't have any ambition to be a diversified industrial business. We don't even have an ambition to do revenue growth for revenue sake. We continue to look for products that are nice integral fits where the customer looks at that and says that's great because you can now offer a broader range of products and services. That's certainly... Stamler and Continental have fit that very well.

We had some opportunities in China to do that. But the acquisition environment in China is very complicated because of lack of historical records. They don't always manage costs and profits the way we do. We have started working through what they say they do versus what the actual hard data is telling us is more complicated. So we do have that on the list. It would be a nice thing for us to do. But we continue to work that and will continue to work that. I don't think the current market makes it more or less likely to do a deal. I think that's a strategic decision on our part and the near-term market conditions won't change the strategic outlook for us. So we would like to do it, we would like to get a good one, we would like to do it under the right terms and conditions and we continue to pursue that. Hopefully, we'll have something to report, but it's got to be right before we close in on it.

Steve Barger - KeyBanc Capital Markets

Okay. And one other country specific question. I saw an article suggesting that India has a kind of a government and industry consortium out looking to buy coal assets abroad. And I know they have been slow to increase their domestic production. Has there been any expression of interest or change in tone regarding equipment purchases from India?

Michael W. Sutherlin - Chief Executive Officer and President

Well, India probably following the same process that China has been following is trying to lock up resources where they have resource deficiencies in country. To my knowledge, a lot of that activity of Indian companies going outside to buy mining operations outside of India has really been tied to met coal and steel companies in India more so than the government mining industry. And we've seen purchases in places like Australia, for example. But those are all steel companies buying interest in mining operations to lock up a supply of metallurgical coal for their steel making operations. The government in India continues to promise great things, but they have been promised great things for a long time and always slow to deliver. There is a lot of bureaucracy gets in the way. Probably one of the major differences now is we are starting to see some contract mining where they've turned over some of the mining areas to contractors I think like Tata. And some of the Indian companies are now I think Essar, Tata and a few others are now beginning to look at starting up mining operations and doing that as private businesses working off of federal leases. So there could be some changes in the mining industry in India, but India is always going to be a slow and evolutionary process. It's not going to be anything sudden. So we are there and we have equipment, we have people there, equipment there. Our business is growing there. But it's a modest growth rate on a very small base. So we're in the market and we are just waiting for the opportunities to open up. But it always seems to be tomorrow.

Steve Barger - KeyBanc Capital Markets

Okay, thanks.

Michael W. Sutherlin - Chief Executive Officer and President

Yes, thank you.

Operator

There are no further questions at this time. Do you have any closing remarks?

Michael W. Sutherlin - Chief Executive Officer and President

Yes, I'd just like to formally thank everyone for their joining us on the call. Thank everyone for their continued support and interest in Joy Global and we'll look forward to seeing you on the second quarter earnings call. Thanks very much.

Operator

This concludes today's Joy Global Inc. first quarter 2008 earnings conference call. You may now disconnect.

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