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Bucyrus International, Inc. (NASDAQ:BUCY)

Q1 FY08 Earnings call

April 25, 2008, 9:00 AM ET

Executives

Kent Henschen - Director of Corporate Communications

Timothy W. Sullivan - President, CEO and Director

Craig R. Mackus - CFO, Secretary

Analysts

Charles Brady - BMO Capital Markets U.S.

Robert Wertheimer - Morgan Stanley

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Stephen Volkmann - JP Morgan Securities Equities

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

Terry Darling - Goldman Sachs Research

Seth Weber - Banc of America Securities

Steve Barger - KeyBanc Capital Markets, Inc

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 Bucyrus International Inc Earnings Conference Call. My name Carla and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions].

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

Kent Henschen - Director of Corporate Communications

Good morning and thank you for joining us for today's first quarter 2008 earnings release teleconference. As Carla mentioned I'm Kent Henschen, Director of Corporate Communications. And in few minutes I'll turn the call over to Mr. Tim Sullivan, our President and CEO and Mr. Craig Mackus, our Chief Financial Officer.

As we generally do I'll begin today by reviewing our forward-looking statements and cautionary factors.

The press release contains statements that constitute forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of predicative, future tense or forward-looking terminology 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 involve significant risks and uncertainties and that actual results may differ materially from those contain in the forward-looking statements as a result of various factors some of which are unknown. Factors that can cause actual results to differ materially from those anticipated in such forward-looking statements. And could adversely affect Bucyrus's actual results of operations and financial condition include without limitation, disruption of plan 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 or raw materials from key suppliers at acceptable prices and/or on the required time schedule, the cyclical nature of sale of original equipment due to fluctuations in 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 or key members of management, the risks and uncertainties of doing business in foreign countries including emerging markets and foreign currency risks, the highly competitive nature of the mining industry, the ability to continue to offer products containing innovative technology that meets the needs of customers, costs and risks associated with regulatory compliance and changing regulations affecting the mining industry and/or electric utilities, product liability, environmental and other potential litigation, work stoppages of Bucyrus if customers, suppliers or providers of transportation, the ability to satisfy under funded pension obligations, the ability to effectively and efficiently integrate the operations of DBT and to realize expected levels of sales and profits from this acquisition, potential risks, material weaknesses and financial reporting and liabilities of DBT unknown to Bucyrus, dependence on the commodity price of coal and other conditions in the coal market, reliance on significant customers, experiencing underground mining business which is less than some of Bucyrus's competitor, and increased levels of debt and debt service obligations relating to the acquisition of DBT.

The foregoing factors do not constitute any 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's 2007 form 10-K filed with the Securities and Exchange Commission on February 29, 2008. All forward-looking statements attributable to Bucyrus are expressly qualified in their entirety by the foregoing cautionary statements. Bucyrus undertakes no obligation to publicly updated or revise any forward-looking statements, whether as a result new information, future events or otherwise.

I will now turn the call over to Mr. Sullivan.

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

Good morning everyone and thanks for joining us this morning. I'm calling in remotely, so hopefully the technology will hold up, obviously we are very pleased with the results of the first quarter, I will give you some highlights as to the performance of the first quarter after Craig provides you with his customary financial details, Craig.

Craig R. Mackus - Chief Financial Officer, Secretary

Yes. Thank you, Tim. Before I begin I would like to remind everyone that the DBT net assets acquired and DBT results of operations, since May 4, 2007, date of acquisition are included in our financial results now, as a result, the financial results for the first quarter 2008 are not necessarily comparative to the results for the first quarter of 2007 and may not be indicative of future results. Also you should be aware of the non cash purchase accounting charges which affect reported net earnings. I will address this later.

Sales for the first quarter 2008 were $517 million, an increase of $326.6 million or 171.6% from $190.4 million for the first quarter 2007. Original equipment sales were 281... $284.1 million, an increase of $205.8 million or 262.5% from the $78.4 million for the first quarter 2007 and aftermarket parts and service of sales were $232.9 million, an increase of $120.9 million or 107.9% from $112 million for the first quarter of 2007.

The overall increase in our sales was due to the acquisition of DBT and increased surface mining sales.

The surface mining growth was attributable to the strong global demand for our products and services which continues to be driven by high international commodity prices and strong markets for commodities that are mined by our machines, including coal, copper iron ore and oil sands.

Surface mining original equipment sales for the first quarter 2008 increased in all product lines compared to the first quarter of 2007. Bucyrus mining aftermarket parts and service sales for the first quarter of 2008 increased in nearly all worldwide markets compared to the first quarter of 2007.

The expansion of our surface mining facility from South Milwaukee was substantially complete as a march 31st, 2008 which will allow for the annual shovel production of 24 machines and almost doubled manufactured parts capacity from 2006 levels.

Underground mining sales for the first quarter of 2008 decrease from the third and fourth quarters of 2007, primarily due to the timing of new orders in 2007. The lack of available raw material, primarily steel, due to previous ordering policies also contributed to the decline in sales in the first quarter of 2008. These policies were modified at the end of 2007 as part of the modi... as part of the integration of DBT into Bucyrus and long lead time raw material is now ordered in advance of the receipt of customer orders.

Gross profit for the first quarter 2008 was $141.6 million or 27.4% of sales compared to $52.1 million or 27.4% of sales for the first quarter of 2007. Gross profit for the first quarter of 2008 was reduced $8.7 million of amortization of purchased accounting adjustments to the inventory and fixed assets as a result of the acquisition of DBT in 2007, but had the effect of reducing gross margin for first quarter of 2008 by 1.7 percentage points. There was approximately $3.2 million of the inventory adjustments yet be expensed in the second quarter of 2008.

The increase in gross profit was primarily due to the acquisition of DBT and increased surfacing mining sales. For the first quarter 2008 gross margins on surfacing mining originally equipment and aftermarket parts and services were improved from the first quarter of 2007, however overall gross margin was negatively impacted by the sales mix of lower margin original equipment and higher margin aftermarket parts and services.

New surface mining original equipment sales, which have lower gross margin, were 50% of total sales for the first quarter of 2008, compared with 41% the first quarter last year. The availability of the raw materials has not had a significant impact on the gross profit or our surface mining manufacturing schedule.

Gross margin on underground mining equipment for the first quarter of 2008 was improved from the last two quarters of 2007 primarily due to 2008 sales consisting of larger percentage of higher margin aftermarket parts and services.

New underground mining original equipment sales which have a lower gross margins were 61% of total sales for the first quarter of 2008, compared to 65% for the fourth quarter 2007 and 66% for the third quarter of 2007.

Selling, general and administrative expenses for the first quarter of 2008 were $59.5 million or 11.5% of sales, compared to $21.1 million or 11.1% of sales for the first quarter of 2007 and $67 million or 12.2% of sales for the fourth quarter of 2007. The increase in selling and general, administrative expenses from the first quarter last year was primarily due to the acquisition of DBT.

Expenses for the fourth quarter of 2007 included cost related to the SAP computer software upgrade in our underground mining operations and one time expenses related to the integration of DBT.

Operating earnings for the first quarter of 2008 were $67.5 million, compared to $28 million for the first quarter last year. Operating earnings for the first quarter of 2008 for our underground business were reduced by $14.3 million of purchase accounting adjustments related to the acquisition of DBT. The overall increase in our consolidated operating earnings for the first quarter of 2008 was primarily due to the acquisition of DBT and increased gross profit resulting from increased surface mining sales volume.

Net earnings for the first quarter of 2008 were $41.1 million or $1.11 per share, compared with $17.9 million or $0.57 per share for the first quarter of 2007. Net earnings for the first quarter were reduced by a total of $9.5 million net of taxes of amortization, of purchased accounting adjustments related to the acquisition of DBT.

This amount includes $8.9 million for inventory, $5.8 million for intangible assets, $0.4 million credit for fixed assets and $4.8 million of income tax benefit.

Depreciation and amortization of future purchased accounting adjustments related to the acquisition of DBT is expected to be as follows. Inventory, $3.2 million and $2.2 million net of tax in the second quarter 2008. Fixed assets, approximately $0.4 million credit, $0.3 million net of tax for the second quarter of 2008 and $0.6 million credit and $0.4 million net of tax per quarter for subsequent quarters. Intangible assets, approximately $4.5 million, $3 million net of tax in the second quarter of 2008 and approximately $3.8 million per quarter, $2.5 million net of tax for subsequent quarters through April 2019.

EBITDA for the first quarter of 2008 was $82.9 million, an increase of 157.9% from $32.2 million for the first quarter 2007. As a percent of sales EBITDA for the first quarter was 16% compared to 16.9% for the first quarter of 2007. EBITDA is defined as net earnings before interest income, interest expenses, income taxes, depreciation and amortization. EBITDA includes the impact of reductions for non cash stock compensation expense, severance expenses, losses on sale of fixed assets and the inventory fair value purchase accounting adjustment charged to cost of product sold which we itemized in the EBITDA reconciliations in our press release.

As on March 31, 2008 our total backlog was $2 billion, $1.5 billion of which is expected to be recognized within the next four months. This represents a 40% increase and 31.2% increase, from the Dec 31, 2007, total backlog of $1.4 billion and 12 month back log of $1.1 billion respectively.

Included in the backlog at March 31, 2008 was $1.1 billion related to our surface mining operations, $741.6 million of which is expected to be recognized within the next 12 months, and $881 million related to our underground mining operations, $744 million of which is expected to be recognized within next 12 months.

New orders related to our service mining operations for the first quarter 2008 were $260.8 million, and $354.7 million for original equipment and aftermarket parts and service respectively. Included in service mining, aftermarket parts and service new orders was $209.8 million related to multiyear contracts that will generate revenue in future years.

Inquiries for machines in all three of our service mining product lines remain at a higher level. New orders related to our underground mining operations for the first quarter of 2008 were $353.1 million and $124.4 million for original equipment and aftermarket parts and services respectively.

As of march 31, 2008, total debt was $525.5 million, compared with $536.1 million as of Dec 31, 2007. Our cash balances have increased to $176 million as of March 31, 2008, compared to a $61.1 million as of December 31st, 2007. Capital expenditures for the first quarter of 2008 were $21.2 million which includes $7.5 million related to our expansion in South Milwaukee.

I will now turn it back to Tim to discuss our market conditions.

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

Okay. Just a... may be to re-emphasize a few point that Craig mentioned on the financials.

The DBT sales were off in the first quarter, we talked about that in the last call. Uncharacteristic to the normal operating procedures in the surface set of our business, underground group traditionally to not buy forward raw materials and what happened, even with a fairly good order intake level we had in the fourth quarter. As those were rolling into the first quarter raw materials were not available and that did have a negative impact on our shipments in the underground segment for the first quarter.

I think I mentioned in the last call that our underground segment has adopted the principles and practices of our service operations now where by raw materials are anticipated and purchased in advance, and we see that as we move through the rest of the year that the underground segment will stay on track with our shipping plan.

Additionally, you can see that the gross margins were up fairly significantly in the underground segment that again had a direct relationship to the product mix in the first quarter with the fewer OE sales. In first quarter we had approximately 40% aftermarket sales for the underground segment which obviously helped the margin improvements that we did see, particularly gratified on the surface side that this was second quarter in a row now that we have exceeded our goal of EBITDA margins in access of 20%, so we are very pleased about that. And as we've stated previously with the acquisition now and as we progress forward with the underground segment together with surface segment that our overall goal as a company remains the same to achieve this in excess of 20% EBITDA margins as we move forward. And I think, obviously, with the right operational and decision making being brought into the underground segment that will also be able to... we'll be able to match the surface performance.

Engineering as a percent of revenue was a little bit up again this quarter but in pure dollars it was directly in line with our projections and our plan for the year. And again that percentage is a little bit off because of the lower shipping number or the lower revenue number for underground in this segment. And likewise the percentage in SG&A was a little bit up, more than it should have been. But in real dollar terms we are right on track to bring both segments in line with our goal of 10% SG&A. We actually had a follow off from $67 million in SG&A in the fourth quarter of last year down to $59.5 million in the first quarter, so you can see the trend in the right direction as far as SG&A.

Another obviously large highlight of the quarter was the significant increase in our backlog to now an excess of $2 billion effective on both segments, both service and underground. The surface side did not include any draglines, it was all shovels and drills and aftermarket, and as Craig mentioned there was a $210 million increase on the aftermarket side related to two separate marked contracts we had booked in the quarter. I think the better news is that we see that even though we had a strong quarter prospects and enquiries remain at a very high level and we expect that we will be able to sustain maybe not that level of order intake as we move through the year but certainly we are into a very robust period of order activity for new equipment and after market.

I shift into the market, everyone's reading the same things that I am reading and everyone's talked to the same people we've talked to but the commodity prices just continue to astound us. Coking coal prices have now reached a price level on the international market in excess of $300 per ton. We have got iron ore prices up, again significantly. There are still contract negotiations ongoing for this year's iron ore prices with some producers not accepting the current level which is also significantly up over last year and copper pricing remains an all time high and we expect it to stay at a fairly high level as production to move into the market has been restricted.

The typical road blocks we have been talking about for some time remain, they continue to exist and we really don't see any easing on the commodity pricing in the near term.

Let me speak... I think specifically about dragline activity, it seems to be a topic of discussion, we still think that we have potential dragline activity out there. We have four draglines that are currently on quote into the Indian market, these are the medium sized draglines and we still see a significant amount of activity with larger draglines. These order we think though would not be probably consummated in until probably Q3 or Q4. As usual they tend to move fairly slowly as far as time of enquiry to time of order.

There has been a lot discussed recently about steel prices, they continue to go up. I think we had our first... our fifth published plate steel price increase yesterday. We had a surcharge reported last week, obviously this is a direct result of the iron ore prices and coking prices continue to move up. I think the good news is for us, we are able to keep ahead of these price increases and surcharges, and we expect to stay ahead of these as we move through 2008. It becomes increasingly more difficult as you can imagine to make sure that we do stay ahead of it, but, so far so good. I think we will continue to manage that process very effectively, we have historically been able to do so and I don't expect that that would change as we move forward.

We did issue a press release earlier this week. I think some of you have read that we do have additional pressure on us now by the Chinese, with their taxing structures that they do have for certain commodities that we do so under the China market. These duties and VAT taxes have made it even more important that we embark on a different strategy for a very complex, complicated but important market for us, particularly in the underground segment of our business. We did announce potential JV with a local producer in the Anhui province and we will continue to explore other opportunities as we move through 2008 to ensure that we have the ability to service this important market.

I should say and make it clear though that our plan for the year did anticipate some of these issues that we are faced with right now in the China market, and anything that we do see from the China market we see right now with to be an upside to our order intake and potential financial performance for the year. It is complicated and it's difficult, we'll continue to manage that market.

The DBT integration is going to extremely well, it continues to unfold but quite frankly I think the management teams are definitely place, we are really now fine at some of our organizational structures around the world to make sure that we can not only achieve the financial performance that we wish to and want to, but to make sure that we are setup as efficiently as we can be.

There is an announcement also on the 8-K, we are spending more money on our south Milwaukee facilities, the largest portion of that money that's been authorized, which is an additional $45 million, is primarily for the refurbishment of the remaining building that are onsite. There will be some enhancement to productivity but it will be minimal as a result of this additional $45 million expenditure. The $45 million falls within the previously announced CapEx level of approximately $100 million for fiscal year 2008.

We are, as we've reported earlier on track now with the installed equipment and buildings to achieve our plan for 2008. What we'll see I thin as we go through 2008 and into 2009 we'll really see exactly what we did buy. But that I mean we'll begin to fine tune now our production abilities and really began as determine what type of incur mortgage we might be able to achieve as we do ramp up for our capability, we have a lot new people on the floor, they are producing, we are making our shipments. But as we see the speed, accuracy and superiority of any new machines tools, and the new efficiencies that should be able to pick up with our new facilities, we fully expect to hopefully improve upon incremental margins and our efficiencies is our South Milwaukee facility.

I will reconfirm our guidance. For the year, our sales, we had previously advised will be between $2.350 billion to $2.425 billion, adjusted EBITDA $375 million to $425 million. As customary, we will probably look at these ranges and try to fine tune them after our second quarter when we are well and truly into the year.

And I would like to announce before I turn over to questions that you will be receiving some information here very soon about an Analyst Day and Open Day for our new facilities on July 25th, that will coincide with our next Board of Directors meeting but also coincide with other local events here in Milwaukee, and we will be opening up our new facilities to investors and analysts on the 25th of July with a rededication ceremony at noon on that day with the public invited to see what this money that we've spent has brought to Bucyrus on the 26th of July. So you'll be receiving some more information about that but I think that will be a good time for a lot of our investors and people that follow the company to come to South Milwaukee and get a first hand view of the capability that we have put into our facilities.

With that I will turn it over to questions.

Question And Answer

Operator

[Operator Instructions]. And the first question comes from the line of Charlie Brady form BMO Capital Markets. Please proceed.

Charles Brady - BMO Capital Markets U.S.

Hi, thanks. Morning guys. Tim, can you talk about on the drivers from the aftermarket sales within the underground segment, obviously, 40% in mix in the quarter, well above historical levels. Are we at kind of a higher sustainable level, may be not 40% but certainly above this historical 30% for DBT.

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

Well, we hope so. I think as you know... I think you know, we have talked about this on previous call that we have moved the aftermarket group from DBT and embedded them in our South Milwaukee aftermarket group to make sure that all the practices and procedures and policies that we put in place in the aftermarket efforts on the surface segment can be into the underground segment. The 40% was high obviously because of the lower mix of OE for the quarter, but we fully intend to improve and increase our market share on spare parts in particular and hopefully start to grow the service at our business on the underground segments.

Charles Brady - BMO Capital Markets U.S.

Okay. Just want to clear on the purchase... advanced purchase of raw material at DBT which has impacted of some other sale, going forward into 2Q... starting with 2Q. Is that when we should expect that problem to go away?

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

Yeah, we are on track now, I think what we really... we should have been buying steel back in September, October for Q1. We did do that a little late in a year, in November, December. So we are on track now and we are not going to see that again as we move forward.

Charles Brady - BMO Capital Markets U.S.

And one more and I'll get back in queue. Regarding the gross margin, are you getting any... I knew you talked a little bit about the productivity and your potential Milwaukee with the construction being completed. Did you get any of that in the quarter or... I am just trying to dig a... gross margin seem to be a little bit better than what we are looking for and are we at... is that sustainable going throughout the rest of the year?

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

Well it's sustainable, but I can tell you that it really was not from an incremental efficiency standpoint in our South Milwaukee facilities yet. We really just... really got to the point where we can get the price out the door that we have to plan. We really... if you look at the margins that we do report on the surface side of our business, that really is the result of some of our better pricing discipline that we put in place here over the last couple of years. We can sustain that level going forward and again we're hopeful that as we move through 2008 we will be able to give you better guidance on what type of efficiencies and incremental margins we might be able to add on to what we believe are already fairly good margin levels.

Charles Brady - BMO Capital Markets U.S.

Thanks. Great quarter. Congratulations.

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

Thank you.

Operator

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

Robert Wertheimer - Morgan Stanley

Hi, good morning. I had a question on the underground where the margin was impressive and I can see them the mix shift on aftermarket and OEM, but I didn't know if that was enough to drive the entire margin improvement. I wonder if you can tell us if there was a mix shift within either aftermarket or OEM and specifically I guess what I am wondering is, as you have started to run DBT if you stared to deemphasize certain products and emphasize others or whether you've made any moves to shift capacity to focus on higher margin products?

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

First I think the answer to that question is that we are trying to improve margins across the board on the underground segment. Both in the aftermarket and the OE side of the business. It's accurate to state though that the vast majority of the margin improvement in the first quarter was really a result of product mix and not necessarily our initiatives on improving margins. As you've seen over the last three or four years, with the service side of our business it takes us some time to move in pricing discipline, but that is happening on the underground segment of our business.

As far as emplacing or deemphasizing particular machines and models; no, I think we've got a nice portfolio of products. What we do plan to do and in part of the engineering effort that we have got in place right now in the underground segment is to make sure that the products that we do sell are the best in the industry. So there is money being spent to make sure that we are not only improving our products from a reliability standpoint but obviously as we go through that process we also try to move costing discipline into our engineering efforts as well.

Robert Wertheimer - Morgan Stanley

Thank you and the mix affects. You said mostly mix. Is that just the OE versus aftermarket mix or were there are mix affect with any two of categories that drove incremental margin?

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

No, it wasn't really primary or the aftermarket mix.

Robert Wertheimer - Morgan Stanley

Can I ask you a bigger picture question? When you have pricing discussions with the customers, do they involve your margins? And the backdrop of the question is simply, as you get these improvements and as you improve your margins internally are customers going to start bulking at pricing and try push to back more and more over the next couple of years? Otherwise can you capture all the improvements you are going to do?

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

Yeah we think we can. Obviously you any product that we do so whether it's OE, aftermarket, both parts and service, it's a negotiation, but there is push back, there is negotiation that goes on with pricing. But let face it, I think we are into such a strong market. I think the emphasis on the producer side today is to make sure that they can get the product when they need it, and less on pricing, that obviously will reverse and change as we move to the cycle and get deeper into cycle.

Robert Wertheimer - Morgan Stanley

Thanks.

Operator

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

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Hi, guys. Nice quarter.

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

Hey, thank you.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

What is the sequentially affect of dollars of sales foregone in underground in first quarter attributable to this materials issue? And what sort of estimate can you give us of the dollar affect in 2Q, 3Q, 4Q, how quickly it trails off, I need to quantify it.

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

By dollar affect, as far as impact to margin?

Barry Bannister - Stifel Nicolaus and Company, Incorporated

No impact to shipments, sales that were foregone by not having the steel.

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

Okay, we are back on track.

Craig R. Mackus - Chief Financial Officer, Secretary

I can answer that. I think it was about $20 million, $25 million in the first quarter.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And essentially no affect in 2Q and beyond?

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

Right.

Craig R. Mackus - Chief Financial Officer, Secretary

Right. Because of the strong order level in the fourth quarter and first quarter, there was extremely high demands. So, the shortfall we had in the first quarter will be compensated for in subsequent quarters.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And then you mentioned some SAP integration cost on the IT side that hit SG&A, as it pertained to the merger integration of DBT. Can you talk about what the dollar affect was of just miscellaneous SAP and other SG&A charges that might have occurred in SG&A?

Craig R. Mackus - Chief Financial Officer, Secretary

Alright. In the fourth quarter we have mentioned that DBT is in a process of upgrade they already have the SAP, they are upgrading at to the latest versions and they expense about $1 million towards that initiative and they have completed three of the five installations working on the final through right now. On most of the cost we have to expense is related to training cost and they are still in the process of upgrading the software in the first quarter so, the first quarter it wasn't of significant amount of expense for the SAP implementation was very insignificant but probably a little bit higher towards the overhead at the under the year 2004 with part around at that level may be in the second and maybe part of the third quarter as we start spending money on training to in personnel on how to using the software.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Can you put a round number on it or we talking $1 million of SG&A?

Craig R. Mackus - Chief Financial Officer, Secretary

About a $1 million and $1.5 million total between the two quarters.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

In the 2Q, 3Q period.

Unidentified Company Representative

Yeah that whole period. $1.5 million this quarter $1.5 million total we see in the two quarters.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And then lastly, I want to do a chart of the capital spending of the surface only division going way back. Can you just give me the break out for the full year '07 and your '08 projection for surface only CapEx?

Unidentified Company Representative

On that on the year I don't have the number in front of me but, we spent about $97-$98 million last year and we only have DBT for part of that year [indiscernible] and we did significant amount on our own facility upgrades so I think probably around $10-$15 million of last year was underground and the rest sort of been surface. And now for this year, Tim mentioned $100 million, probably a $75 million or there would be $70 to $75 million would be on the surface and rest would be in the underground.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

That's perfect, Thanks a lot.

Operator

And the next question comes from line of Stephen Volkmann from JP Morgan. Please proceed.

Stephen Volkmann - JP Morgan Securities Equities

Hi, good morning. I just want to try to make sure and understand this underground margin going forward because is the OE aftermarket shift back to OE likely to depress the margin as we go forward or is there a kind of roll off for some of the economy stuff likely we kind of keep it flatter or even up?

Unidentified Company Representative

Well, I think you are going to see is may be some near term easing of that margin percent, just for the fact of the mix in Q2, Q3, Q4 is going to more OE than aftermarket. However we will be putting the strategy in place to improve those margins overtime so if you look at Q2, as soon as the mix is going to shift back to more OE to aftermarket we are going to see a little bit more easy on that margin, a gross margin and EBITDA margin for underground. But the goal is to get to 20% on the underground segment, so if that would be rolling in over 18 to 24 months.

Stephen Volkmann - JP Morgan Securities Equities

Okay great. And would you mind just to expanding a little bit on your comments about China, I mean are you sort of shut out of China right now or how should I read the comments about the change in a way that they have been taxing you?

Unidentified Company Representative

No, we are not completely shut out but what they are doing is ...and this is very dynamic. Its moving almost weekly as far as how they are accessing VAT and import duties on various products. There is a tremendous amount of activity going on with their old cold mining machinery groups right now. There is a lot of ...as you get a lot of consolidation and movement at the coal companies to bring together and form a 10 to 12 large coal producing firms obviously that has not going to affect to recall mining machinery companies.

And I think with moving and shaking is going on in that whole coal mining producing and machinery segment that they are affecting certain duties and taxes to and in fact protect certain products in that sector. So it moves around and it's a fairly regular thing and it's very complex how they actually implement taxation so some products that we have got have very high duty on them. NVAT and taxes while others are less and its a negotiation almost on a case-by-case basis between the producer and the government. They want to bring their product in and Western product in, they can negotiate array. So even though you do have a rate out there it can change with correct negotiation with the government, so it's a very complex situation I think and its very dynamic. I think the answer is that we feel that we have to have some mix, some better mix of local production either through a JV or expand our manufacturing capability in China to counteract any types of duty and or taxation changes that are on going right now.

Stephen Volkmann - JP Morgan Securities Equities

Okay. Great thanks for your help.

Operator

And the next question comes from the line of Robert Mccarthy from Robert W. Baird. Please proceed.

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

Good morning gentlemen.

Unidentified Company Representative

Hi Robert.

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

I gather you booked something like it doesn't shovels in the quarter?

Unidentified Company Representative

Yes.

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

And what does that do in terms of selling out your capacity Tim?

: Timothy W. Sullivan: We still have slots available in '09 and basically took up any production that we had in most of 2008, and certainly well into the first half of 2009. We store capacity availability in 2009 and 2010. These things that we've actually booked have been more multiple orders than one's or twos that you typically get, right and they rollout over a longer period of time. But we're very pleased we're pretty well set now for 2008 so we got a pretty good visibility on what we will build the share, we can build the share, and now we are starting to see a lot better visibility in 2009, a little sprinkled into 2010. But those are kind of aberrations in some respect, I don't think people are really looking to do too much of that.

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

And your comments earlier about drag line activity, when you spoke about bookings in the third quarter, fourth quarter time period you were speaking specifically to the Indian opportunity right?

: Timothy W. Sullivan: No, I was speaking; particularly to a large Dragline opportunity that we think we've got in some of the Dragline markets of Australia and North America.

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

Is an Indian opportunity, I mean are you expecting a decision out of India earlier than that?

: Timothy W. Sullivan: Well lets say in Q2.

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

Okay.

: Timothy W. Sullivan: So, I don't what year though.

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

I think it's reasonable they really have done well I think in this quarter finally to trigger some business. And some of that shovel activity that we did get in first the quarter was for India. And so the aftermarket activity in backlog was for India, so we are starting to see some nice purchasing decisions coming out of that market. They say second quarter, I suspect its probably going to be a Q3, Q4.

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

If this would be in your mind related to the new posture the Union Government has taken on external investment?

: Timothy W. Sullivan: Yeah I think, in fact their issues are, they need power, just like most of the developing countries and they have had to import in order the amount of coal and that's complicated for them, when they have such vast coal reserves so it's a great deal of pressure being brought to bear for them to begin buying more cap equipment as quickly as possible to try to reduce some of the pressure and some of the extremely high price they are paying for imported coal.

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

Does that mean that there is other potential business in India that you could book this year outside of this incremental Dragline business?

: Timothy W. Sullivan: Yeah we think there is.

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

Okay.And then one more clarification on the DBT situation if I may; I would just want to make sure I understand it, it's your intention to pick up all of the $20-$25 million of revenue forgone in the first quarter during the second quarter?

: Timothy W. Sullivan: Yeah ...well not, all during the second quarter, but over the next three quarters we feel pretty solid with our plan for the year, and again we may be able to give you some guidance for Q2.

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

Okay, thank you.

Operator

And the next question comes from the line of Terry Darling, from Goldman Sachs. Please proceed.

Terry Darling - Goldman Sachs Research

Thanks. A couple of questions on the guidance, Tim the ...as we think about EBITDA in the second quarter, does the step up in revenue, versus the surface side and the underground side offset the lower margin underground to where would you expect EBITDA to be up sequentially?

: Timothy W. Sullivan: It's ...its kind of a bouncing effect I would say. I think the revenue pickup with probably some easing in the margin side will kind of balance each other all a little bit in the second quarter. But I think we will have like I said a lot a better visibility on that, as you move to the next two or three months.

Terry Darling - Goldman Sachs Research

Yeah.And I guess if you are flattish sequentially ...you are basically at the midpoint of your full year guidance. I guess I am just wondering you could share with us so the puts and takes in your mind on the potential for the year relative to what you were thinking 90 days ago, obviously the backlog is to us, well above what we would have expected it to be in terms of your revenue visibility. You've expressed confidence here that the steel price challenges are going to be manageable but maybe you can take us through why you are pushing the guidance here given the strong first quarter and some of the other and marketing indicators we're seeing.

: Timothy W. Sullivan: I think all the thing that you said will indicate that we're going to move towards the higher end of that guidance and that's probable. But we want to make sure that we're going to continue to be able to perform at the levels we did in the first quarter in our surface segment and to we want to make sure that what we've just said and that we think is true, is that we will be able to move the shipments out of the underground segment are also real but its kind of our historical thing, we want to make sure that we got all our blocking and tackling in place and that these issues they did pop-up in the first quarter can be correct in the second quarter but, I think you are right, I think we feel really confident that we're going to be moving up to the higher end of that guidance.

Terry Darling - Goldman Sachs Research

Yeah, and I guess a little surprise that you are not communicating more progress on DBT integration savings underneath everything else that's move in the margins around. Is that behind schedule or how would you characterize of what's going on there?

: Timothy W. Sullivan: It's on schedule, but we've had some fairly major reductions in staff on the underground segment, excuse me particularly in Germany. And those don't happen immediately those are the way the things are done in the way those integrations occur it basically moves out over time, so when we start approaching Q3 we'll have a lot of those lingering type of expenses and things behind us. So it's not necessarily like we do at the United States when we do have staff reductions. Basically that expenses grow little bit longer period of time.

Terry Darling - Goldman Sachs Research

And finally I wonder if you could talk a little bit about the opportunity with the China joint-venture in terms of looking out a couple of years with the revenue generating capacity might be or volatile [ph] with what the scope of that is and what kind of an investment that might and tell for you?

: Timothy W. Sullivan: That's all been discussed right now, and I think we'll have some really good guidance for year Terry probably not a month or two, its all happening right now and its all been in model right now.

Terry Darling - Goldman Sachs Research

Okay, understood. Thanks very much.

Operator

And the next question comes from the line of Seth Weber, from Banc of America. Please proceed.

Seth Weber - Banc of America Securities

Thanks good morning every body.

: Timothy W. Sullivan: Good morning.

Craig R. Mackus - Chief Financial Officer, Secretary

Good morning.

Seth Weber - Banc of America Securities

Just the $220 million of multi-year contracts that you guys signed. Does that include the alliance with South American Miner that you guys announced last month?

: Timothy W. Sullivan: It does not.

Craig R. Mackus - Chief Financial Officer, Secretary

Does Not.

: Timothy W. Sullivan: That's basically two separate maintenance repair contracts, that pertained to some shovel business quite frankly in two different markets.

Seth Weber - Banc of America Securities

Okay, so that we could see something similar to that with the South American customers at some point?

: Timothy W. Sullivan: Well, the South American customer is ...yes, although they are not going to be their mode of operation does not really include a lot of maintenance repair contracts. Its more day in-day out parts business, I think the good new about that contract is basically, we expect to get significant shovel business from that contract over the next five years but, we will have locked in aftermarket business as well both parts and service, but it will not come in large lumps, like a maintenance repair contract, we don't see that they will follow that mode of operation

Seth Weber - Banc of America Securities

Okay. And did ...were the shuffle orders this quarter a function in that contract?

: Timothy W. Sullivan: The two contracts that ....no.

Seth Weber - Banc of America Securities

At now were there any shovel .....sorry.

: Timothy W. Sullivan:Partof the shovelorders that we did have in the first quarter will resolve in that contract.

Seth Weber - Banc of America Securities

Okay. And just conceptually can you characterized our margins on these multi-year deals kind of on average for the aftermarket business or plus or minus?

Craig R. Mackus - Chief Financial Officer, Secretary

Because, of the length of time that we do have it turn to be a little bit more robust on a front end on margin to make sure that we are protective and we have excavators in those contracts. Because they do spread over a period of time, with excavators and annual excavators in them, so I guess what I'm trying to say is that we try to make sure that we are protected from a margin standpoint out of the blocks to make sure that if the cost excavators are not as accurate as we want them to be that we will continued to be fine with those contracts.

Seth Weber - Banc of America Securities

Okay. And then just with you capacity telling appear on the surface side, or do you anticipate using more outsourcing as we get into the next year?

: Timothy W. Sullivan: No. I think our traditional out sourcing which we do to some anyway we say the same where we are really looking to make sure that we have outsourcing capabilities more if the Dragline activity does increase the level it could that's what we are putting in the place right now.

Seth Weber - Banc of America Securities

Okay. And last question this is to Craig, was there anything particularly large in the underground quarter or this quarter or was there a long wall or anything any one big order?

Craig R. Mackus - Chief Financial Officer, Secretary

Yes were...yeah there are couple of we have talked about in the last call we had, we've receive the letter of intent from Eastern European customer last year and we booked half the order in the forth quarter and we announce that probably we'll book the other half in the first quarter and that did occur. Now with ten long wall units we booked five last year I think it was and five this year.

Seth Weber - Banc of America Securities

Okay.

Craig R. Mackus - Chief Financial Officer, Secretary

That was previously announced then there was some previously we talked about some large orders are at Russia also.

Seth Weber - Banc of America Securities

Great. Okay thanks very much guys.

Operator

Our next question comes from the line of Kent Green [ph] from Boston America Asset Management. Please proceed.

Unidentified Analyst

Yeah my question pertain to the far east it seemed like Australia and china had some weather related problems which delayed some equipment sales according to other machinery companies. Did you see it embedded in the quarter?

: Timothy W. Sullivan: I guess so, it we really thought that we probably have more substantial movement on some of the Dragline discussions we've had and I think with the fact that if you can't get the mineral out of the ground and out of the port people tend to relax little bit but nothing of major substance I don't think that really necessarily affected our aftermarket order in take and I am not the Draglines are so fickle I don't know if it really had an impact on those discussion or not.

Unidentified Analyst

And finally with in prior discussions and then it's a, you could having some kind of a skilled people problem, is that starting to alleviate, I know you are training some of your own people now, it is that the reason why you are still expect better productivity going ahead on your expenses aftermarket?

: Timothy W. Sullivan: Yeah exactly we are ramped, we have up to were we want to be, on people, but obviously we spend a lot of money and time training individuals and what we do is pretty special and it takes a lot for these people to pick up the skills. As we move through this year in into the next year and as these people begin to develop a better skills, that's why we are going got pick up some really nice productivity, increases, but right now, we've got the people in the place, we are able to get the shipments out, as planned for the quarter. We hope they, get to the point where we start and pick up more efficiencies.

Unidentified Analyst

Okay, and then finally, on your IT side, have you completed the IT change with your acquisition, it upgrades and or is there more expenses ahead at that time?

: Timothy W. Sullivan: I think Craig addressed that, we are looking at probably, I think we have two more sites to implement, over the next two quarters and that expense will be about $1.5 million spread over those tow quarters.

Unidentified Analyst

Okay, thank you.

Operator

And the next question comes from the line Steve Barger, from KeyBanc Capital. Please proceed.

Steve Barger - KeyBanc Capital Markets, Inc

Hi, wondering about some of the comments made about capacity and probably on revenue guidance coming at the high end, and what we talked about was capacity and I am trying to think about kind of natural limit to the revenue growth rate. And I guess if you were to hold pricing constant, and understand that you will get pricing, but on a volume basis, could you grow the top line by better than 20% next year based on what you can see what's your capacity right now?

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

Good question and I think what we are going to see and I think I mentioned this on last quarterly call part of the CapEx that we have got scheduled for this year is to move in more machining capability for dragline parts. I think most everyone knows that draglines with the exception of some of the large gears that we manufacture are very conducive to significant subcontract, which means that we can get, if the dragline market gets more robust and we expect it to that, we can get some fairly significant incremental revenue increases without requiring necessarily a lot of additional brick and mortar and plant capacity. Like I said, I think we believe right now, with the machine tools we have on order, of which have yet to be installed, they'll be installed later this year or early next year, that will position us to be able to book those draglines and increase revenue and lines with the type of numbers your talking about.

Additionally and this is where the due movement that we are doing in China, these types of movements will also provide us for more revenue opportunity as we move forward. And last but not least, I think most people realize that we do have a subcontracting relationship in the Indian market. And the Indian capacity for either draglines or shovels does not touch our South Milwaukee facilities at all, it's effectively subcontract throughout Europe and India. So as that market improves we can see additional revenue increases without expenditure for more brick and mortars.

So, I guess in summary, that we like... we're well positioned from a capacity standpoint, both underground and surface. We have what we believe is significant opportunity on the revenue growth line through strategic subcontracting as we move into more opportunities in specific markets and also with specific product like draglines.

Steve Barger - KeyBanc Capital Markets, Inc

That's great color, thanks. So that's... presumably that comment relates to beyond FY09, as well in terms of your ability to monetize the backlog in a more aggressive way?

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

Correct.

Steve Barger - KeyBanc Capital Markets, Inc

Perfect. Earlier this week a hydraulic shovel manufacturer talked about putting their first piece of equipment in place in the oil sands and I'm monitoring is that a function of the capacity constraints of electric shower manufacturers which could lead to share shift or would you view that more of a one off situation and less important to how you think about being able to sell shovels to the tar sands?

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

I won't refer to it as one off situation. What typically happens in the oil sands is the primary movers are electric mining shovels and large trucks. Most every oil sand operation and the traditional ones in particular Syncrude, Suncor and now Albion, they all have at least a couple of hydraulic excavators in the pit and they use those for blending purposes and a... well primarily for blending purposes. In other words as they're rolling the oil sands through their up crater, its like any ore processing, they want to make sure that they are getting the right mix of raw materials through that plan and they will use hydraulic excavators, which are more mobile than electric mining shovels to move through out the pit, very quickly to start pulling the ore from different parts of the pit, because of grade variations, that's also typical for copper, it's also difficult for iron also. So, where you see any basic mining operation, your primary movers are always electric mining shovels with an ancillary assistance from hydraulic excavators.

Steve Barger - KeyBanc Capital Markets, Inc

I understand, thanks. Last question, we all know coal provides 50% base lift power generation. And that exports are likely to raise... stay strong while the prices were high. But can you discuss what some of your domestic customers are talking about with respect to potential cap and trade or carbon tax legislation. And how they are looking at the future of coal in the U.S.?

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

Well, it's all been discussed right now. And I think everyone's got a different opinion on it. On the camp... that let's gets on with it, lets the cap and trade going, let's get things in place because uncertainly is really keeping our coal... our potential for additional coal production somewhat down. I think once we have certainty on these types of things we are going to see I think a fairly large surge in coal activity. And I think that's primarily the view of most of the people in the industry right now in that United States. Certainty is better than just having things at the discussion stage. And so hopefully the nice side of all these discussions and climate changes or anything else... that's fine, lets get on with it, let's get things in place and we'll have some certainty on coal production going forward.

Steve Barger - KeyBanc Capital Markets, Inc

Alright, thanks.

Operator

And we have no further questions, I would like to turn the presentation back over to your host, Mr. Sullivan for any final comments. Please proceed.

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

Okay. Well, thanks again for joining us today, obviously we are very pleased with the quarter. I think we are off to a good start and we obviously with the backlog that we've build up now are starting have some good certainty with what we think our financial performance will be for the year. As discussed with one of our callers we will be adjusting guidance as we have our second quarter call. But it's suffice to say we obviously have the building blocks in place now to move towards the higher end of that guidance. Very pleased with the integration so far with the underground segment, very pleased with the overall efforts of our combined management team, we really combine two companies with top notch managers that are performing at very, very high levels and are highly motivated to make sure that we meet our plan for the year.

Looking-forward to talking with you again after our second quarter call and again keep in mind the fact that we will have the open house and rededication of our South Milwaukee facilities on July 25 and hope to see you there. Thanks again for joining us.

Operator

This concludes the presentation for today. Ladies and gentlemen you may now disconnect. Have a wonderful weekend.

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