Executives
Michael Mason – IR, Allen & Caron Inc.
Jim Busche – President and CEO
Alan Hartslief – CFO and Corporate Secretary
Analysts
Jack Kasprzak – BB&T Capital Markets
Jay Harris – Goldsmith & Harris
Graham Tanaka – Tanaka Capital Management
David Fondrie – Heartland Funds
Vincent Damasco – The Colony Group
Michael Rome [ph] – Diamondback [ph]
Kasper Larsen – Enskilda
Dennis Sabo [ph] – Jodicus Capital [ph]
Su Zhang – Exane BNP Paribas
Geoff Sutton [ph] – Maiden Capital [ph]
KHD Humboldt Wedag International Ltd. (KHD) Q2 2008 Earnings Call Transcript August 13, 2008 10:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 KHD Humboldt Wedag International Ltd. Earnings Conference Call. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Michael Mason, Allen & Caron Investor Relations. Please proceed.
Michael Mason
Thanks very much. Good morning and welcome to the KHD investor conference call to discuss its financial results for the second quarter and six months ended June 30, 2008. As mentioned by the operator, I'm Mike Mason of Allen & Caron Investor Relations. Before we start the call, there are a couple of items I would like to cover. Many of you received a copy of the press release announcing the Company's results for its second quarter and six months ended 2008. It was released this morning, August 13, at 7:30 a.m. Eastern. If you did not receive a copy of the press release, it is posted on KHD's website at www.khdhumboldt.com and in the ‘’Clients section of our website at www.allencaron.com. You may call our office in New York at 212-691-8087 and we will email it to you right away. It is also posted on Yahoo! Finance. As mentioned earlier, this call is being recorded. A replay will be available through August 20 and may be accessed from North America by calling 888-286-8010 and entering pass code number 57651842. International callers should dial 617-801-6888. The call is also being broadcast live over the Internet and may be accessed on the Company's website at www.khdhumboldt.com. A replay of the webcast will be available immediately following this call and will continue for seven days. Additionally, I have been asked to make the following statement.
Certain statements in this call are forward-looking statements, which reflect the expectations of management regarding the Company's future growth, results of operations, performance, and business prospects and opportunities. Forward-looking statements consist of statements that are not purely historical, including any statements regarding beliefs, plans, expectations or intentions regarding the future. Such statements are subject to risks and uncertainties that may cause actual results, performance or developments to differ materially from those contained in the statements. No assurance can be given that any of the events anticipated by the forward-looking statements will occur or if they do occur what benefits the Company will obtain from them. These forward-looking statements reflect management's current views and are based on certain assumptions. These assumptions, which include management's current expectations, estimates and assumptions about certain projects, and markets the Company operates in are expressed or implied and are detailed in the disclaimer for forward-looking information section in today's press release. Additional information about these and other assumptions, risks and uncertainties are set out in the “Risks and Uncertainties” section in our Form 6-K filed with the Securities and Exchange Commission and our MD&A filed with the Canadian security regulators.
It is the company's intention this morning to make a brief presentation on the results announced this morning and then to open the call to questions. Because this is a KHD call, the Company will not take any questions about other companies even if they are related entities. I would now like to turn the call over to Jim Busche, CEO. Good morning, Jim.
Jim Busche
Thanks, Mike. Good morning, everyone, and thank you for taking time to participate in this telephone conference. Today, Alan Hartslief, KHD's CFO and I will focus our financial comments on KHD's second quarter and year-to-date 2008 results. We will also comment about the progress in 2008 to set the foundation for growth in our traditional markets of cement, coal and minerals, and the expansion of our horizons into adjacent opportunities and industry. As a reminder, all financial values referred to by Alan and I in this presentation are U.S. dollars.
KHD continues to demonstrate strong growth in our business fundamentals on a year-over-year basis with substantial increases in order intake, earnings, and backlog. The first six months of 2008 also serve as an indicator of our globalization and diversification strategies are working.
Revenues for the second quarter and first half of 2008 ended June 30 were $144.2 million and $281.1 million, an increase of 6% compared to the first half of 2007. Net revenues for the first six months of 2008 were $241.8 million, 86% of the consolidated revenues and on par with the same period 2007 results. Revenues were up by an amount less than other metrics due to the percent completion recognition of revenues method utilized and the variation in project mix for the first six months of the year.
Coal and revenues minerals were $17.2 million for the second quarter and $39.3 million for the first six months, 48% and 56% above the 2007 results. Second-quarter order intake was $320.1 million and the year-to-date order intake rose to $608.4 million, 105% and 98% above the results for the same 2007 periods. Cement first half order intake grew by 127% and represents 92% of the first half total. Emerging economy region orders dominated the year-to-date total business received with 57% coming from Russia and Eastern Europe, and 30% from Asia.
Order backlog at June 30 was $1.3 billion, a 96% increase over this time last year. Coal and minerals backlog was $104.4 million, 36% above the year-ago position.
Gross margins for the second quarter and year-to-date were 19.6% and 19.1%, respectively, compared to 12.2% and 14.8% for the same periods of 2007. The favorable gross margin numbers are the result of good project selection, more efficient delivery on a number of our projects, the success of our global procurement initiative, and the release of financial accruals for expired warranty obligations of completed projects.
Pro forma net income for Q2 and year-to-date are $19.4 million and $32.5 million, respectively, or $0.63 and $1.06 per share. Pro forma earnings per share increased 89% and 73%, respectively, over the 2007 results for the same period. Based upon the 2008 second-quarter and year-to-date financial results and the anticipated market environment, we continue to forecast 2008 order intake will increase to $1.1 billion and earnings per share will grow to between $2.05 and $2.15 per share.
A solid foundation for growth requires KHD to be well-positioned in the markets with the greatest potential for expansion. Infrastructure is a key driver of cement consumption and mineral commodity prices around the world. The regions of the world with the greatest infrastructure demands continue to be Asia, Russia, and the Middle East. KHD has focused its expansion activities in these markets and has achieved a significant market share in each of these regions.
Cement dominates KHD's consolidated global performance. It represents 86% of revenues and 92% of order intake and backlog. Over 90% of the order intake and backlog are in the named emerging economies. Our quarter-to-quarter comparisons of performance indicators over the past several years have generally been very positive with some benchmarks often doubling. Consequently, we felt this is a prudent time to take stock of where we stand with respect to our 2008 focus. As I said, a solid foundation has been established for the cement group. Management has and must continue to concentrate on execution, margins, converting the backlog into earnings, and building the value of KHD in a risk prudent manner.
The customers' demands have resulted in the need for KHD to provide an expanded scope of services beyond their proprietary equipment. We continue to build our capability and capacity to offer and successfully execute expanded scope services. The nature of the potential work and the location of certain opportunities result in a risk profile that could be higher than our traditional services. KHD will continue to be selective in choosing which opportunities it will pursue with a renewed emphasis on value, margin, and risk, each a key element to successfully generating earnings and building sustainable value.
Furthermore, we will continue to target higher-margin projects on a global basis rather than our historical practice of targeting the highest margin projects in a specific geography. We believe it is important for our shareholders to clearly understand our strategy although a consequence of this strategy may be fewer mega project awards compared to some of our competitors. The objective of our strategy is continued generation of quality earnings. KHD continues to establish strategic technology partnerships to expand the suite of products and services we offer and to broaden our customer base, particularly in the field of coal and minerals. While we believe that this is an element of an appropriate diversification strategy, we recognize that the most effective means for diversification is through acquisition.
We have had an acquisition program for some time with no tangible results. I believe this is a combination of few good targets available with a reasonable price and that we did not have a dedicated champion of the effort within the Company. Consequently, we have successfully recruited an experienced professional specifically for this purpose. Additionally, recent market corrections have reduced the price of some opportunities KHD had previously chosen not to pursue, giving us possible opportunities that did not exist a few months ago.
Our strategy to leverage our knowledge and position in Russia and the CIS to develop, design, build, and operate projects in the region is well underway. Significant project progress has been made and we are in contract negotiations at this time with one potential partner. Our recently formed construction group has identified the skill sets needed to complement our existing capabilities to effectively provide construction management services and we now have developed a staff for this purpose. Several commercial offers, modest in scope, are under consideration for some of our larger international customers. This group also actively supports the design, build, and operating initiative.
In closing, our first two quarters' results indicate that KHD is on track to meet our forecast for the year. To continue the success, we must execute effectively, convert our backlog to earnings, remain aggressively focused on our business expansion strategies, and continue to explore the landscape for attractive partnering, and acquisition opportunities.
I will now turn the call over to Alan who will review the financials with you in greater detail.
Alan Hartslief
Thank you, Jim. Good morning to everyone. I would like to address three main topics in today's call. First, I will spend some time reviewing the financial position and results for the six months and three months ended June 30, 2008. Second, I would like to briefly give an update on recent foreign exchange market developments as they relate to the $100 million cash we hold for business growth in dollars rather than in euros. Finally, I will share the latest status of our planning and preparation for the Mass preference share spin out and conversion.
So the six months ended June 30, 2008, I would like to discuss the financial position reported and pro forma results for the six months ended June 30. I will provide some additional explanation about major account positions and changes from last year. I will start with the balance sheet and the assets and the first asset I will start with is cash.
The majority of the cash and short-term cash deposits and securities of $455.9 million is deposited in Austrian banks with excellent credit ratings. The largest portion of this cash is in euros, the currency of our major operating subsidiaries. The balance is in U.S. dollars. Operating current assets developed in similar proportions to the growth in the business. I will, however, mention two items which do not appear to have fluctuated in proportion to the growth in our business. The first is inventories, which reduced to $115 million from $125 million due to the phasing of the customer billings on projects. The second is contract deposits, prepaid and other increases from $60 million versus $34 million. This relates to equipment and steel orders placed on early stage large projects. Our investment in Mass Financial Group's preferred shares decreased in value from $89 million to $92 million due to the U.S. dollar strengthening against the Canadian dollar.
On the liability side of the balance sheet, the liability and equity side, I would like to highlight progress billings. Progress billings arise as a consequence of timing differences between billing and revenue recognition, based on the percentage of completion of the project. The large growth in progress billings as compared to December 2007 reflects the early stage of many of our projects. The growth in advanced payments received from customers to $25 million from $9 million is directly reflective of the growth in our order intake.
I would like to turn to the income statement now for the six months ended June 30, 2008. I think that Jim has adequately covered the growth in revenue and margin development in his presentation, so I will, therefore, discuss the other positions. Our income from our resource property, the Wabush iron ore mine, increased to $14.2 million from $7.2 million due principally to iron ore price increases.
General and admin expenses excluding stock-based compensation, increased to $26.6 million for the six months from $20.3 million in 2007. A large proportion of our expenses are incurred in currency other than the United States dollar. A weakening in the U.S. dollar, therefore, increases our reported expenses. General and admin expenses increased for the six months by approximately $2.9 million as a consequence of the weakening of the U.S. dollar. Additional costs related to arbitration expenses in our claim for the reimbursement of previously underpaid Wabush iron ore royalty were also incurred and the remaining increase is primarily linked to the growth of administrative and supporting services with the extension of our business activities.
Interest income of $10.9 million represents interest earned on our cash and preferred shares in the Mass Financial Group. Pro forma net income for continuing operations, which excludes unrealized currency losses on cash for investments, expressed as a percentage of revenue, is 11.6% compared to 7% in 2007. On a GAAP reported basis, 2008 percentage of revenue is 9.6%.
And finally, for the six months, let me move to cash flow. This to me continues to be the most positive figure in our results. Cash flow provided by continuing operating activities reached $60 million for the first half of 2007. This is an improvement of $44 million compared to last year. A major part of this is certainly due to our working capital positive business model. In addition, however, the positive cash flow is certainly reflective of our business performance and obviously excludes the effect of non-cash items such as unrealized exchange losses.
Turning to the income statement for the three months ended June 30, 2008, our income from resource property and the Wabush iron ore mine increased to $10.2 million from $5.6 million, again, due principally to iron ore price increases.
General and administrative expenses increased to $13.7 million for the three-month period ended June from $10.8 million in 2007. These are for similar reasons to those described above. Currency fluctuations adversely affected the quarter by about $1.4 million. Interest income of $5.8 million, again, represents interest earned on our cash, and interest from preference shares in Mass Financial Group.
The pro forma net income from continuing operations excluding realized currency gains, expressed as a percentage of revenues, is 13.5% compared to 6.4% in 2007. On a GAAP reported basis, 2008 percentage of revenue is 13.6%.
I would now like to turn to the $100 million, which we have set aside for investments in business growth rather than euros. During the first quarter of 2008, we completed an analysis of our cash requirements for the business. This analysis considered the extent advanced payments from our customers, our bankers' requirements that we maintain a certain balance sheet structure. We concluded that a portion of our cash is available for investment in business growth. We further concluded that the cash required in the business should remain in the currency of our operating subsidiaries, while cash available for investment can be translated into our reporting currency of U.S. dollars. We therefore converted euros into $100 million in our European subsidiaries. The advantage of this approach is that our cash set aside for reinvestment in the business does not fluctuate as the exchange rates move. The disadvantage is that GAAP requires us to record unrealized losses and gains on these funds as they are held in companies with a functional currency other than U.S. dollars.
During the quarter ended June 30, 2008, the euro depreciated against the U.S. dollar, resulting in a partial recovery of previously recognized unrealized foreign exchange losses on the $100 million by $0.2 million after-tax. For the six months ended June 30, 2008, the euro appreciated against the dollar resulting in an unrealized foreign exchange loss of $5.4 million after-tax. In the past weeks, the dollar has depreciated significantly against the euro. This recent depreciation of the dollar against the euro reduces the reported unrealized exchange loss from these funds significantly. This illustrates the need from an economic perspective for KHD to hold cash in both U.S. dollars and euro.
In our opinion, these unrealized foreign exchange fluctuations do not affect the underlying performance of our business. We have therefore presented pro forma net income, which excludes the effects of these unrealized foreign exchange fluctuations. We believe that this allows our shareholders to compare the ongoing operational performance of the business.
Finally, I would like to turn to the Mass preference share spinout. As part of the continued realignment of our business, to focus on our industrial plant and engineering and equipment supply business, we have entered into negotiations with Mass Financial. We plan to enter into an arrangement with Mass Financial pursuant to which in a series of transactions we would distribute to our shareholders a portion of all of the value associated with the preferred shares of Mass Financial by way of a distribution of newly issued common shares of Mass Financial.
As a consequence of the arrangement, on the distribution date, our shareholders will effectively convert a portion of the value of their existing common shares in our Company represented by their indirect interest in the specified value of the preferred shares of Mass Financial held by our Company, into the newly issued common shares of Mass Financial. A proposed plan of arrangement outlining the details will be submitted to the courts in British Columbia and to the shareholders for approval. We are targeting completion before the year end.
And in conclusion, I would like to say we are very pleased with our continued growth and improving profitability and we are excited by the opportunities which we have ahead of us we are currently working on. Thank you.
Jim Busche
We will take questions.
Question-and-Answer Session
Operator
(Operator instructions) And your first question will come from the line of Jack Kasprzak from BB&T Capital Markets. Please proceed.
Jack Kasprzak -- BB&T Capital Markets
Thanks. Good morning, everyone.
Jim Busche
Good morning. Hi, Jack,
Alan Hartslief
Good morning.
Jack Kasprzak -- BB&T Capital Markets
Hi, congratulations on the quarter. You guys seem to be doing a tremendous job with execution and margins. I wanted to ask if you could just discuss a little bit more on the subject of the change in the project mix? How it’s affecting backlog conversion? Obviously one of the things that sticks out in the quarter is that of all of the good metrics, order intake up, backlog up, margins strong, the sales, the actual reported sales were down in the quarter. It's probably got a few people scratching their heads, I would assume. And so if you guys could just talk a little bit more about how the project mix is changing and how that’s affecting sales recognition right now? The pull through of the backlog and how you see that moving forward?
Jim Busche
There really are two contributors, Jack, to what you are talking about. One of those is the fact that both our customers' and our suppliers' commitment timeframes are extended. Customers are taking longer to get their permits, do all of their civil work, get everything set up so it’s extending the timeframe that is planned in a project from the beginning. Additionally, because of record levels of economic activities, certain components that we have two procure take much longer. So we have to quote longer timeframes for delivery to customers upfront. So both of those things are extending the time frame of our projects, thus lengthening the timeframe with which we do our percentage of completion accounting method recognition. Additionally, a very large percentage of our current projects, because our bookings have been so strong in the last six months to a year, are in fairly early stages. In the early stages, we're principally recognizing engineering in some of the lower value components. So in those early stages, we recognize a relatively smaller percentage of the revenues than we do later on in the projects.
Jack Kasprzak -- BB&T Capital Markets
Okay, great. That's helpful. Also, too, Jim in your comments about how you guys are expanding, the way you are sort of expanding your business and looking at -- looking for higher margin, the highest, I guess, margin opportunities globally not just within a specific geography. Could you explain why that implies that you might be getting -- you won't necessarily be getting the mega projects that we see some competitors announcing from time to time?
Jim Busche
Well, I guess it was about nine months ago when we heard from many of our shareholders that they wanted us to focus very much on margins. If you look at the relative margins on the projects that we do, we collect our highest margins on our proprietary equipment. So if we focus a lot of our energies specifically on projects that are dominated by those revenues, those are smaller. They have a smaller percentage of pass-through revenues and they have a smaller percentage of what we are calling construction than many of the projects that our competitors are taking. Additionally, we started about a year ago, monthly reviews of proposals so that we look at what is available on a global basis. We are in a fortunate position today to have more work, more opportunities than what we can actually put proposals in, so we are choosing those that we feel have both a greater potential for success, but also a greater potential for higher margins. So our proposals for about a year have been focusing principally on those projects, so that is tending to raise our net margins over time.
Jack Kasprzak -- BB&T Capital Markets
And the fact that that approach that you just described and the smaller projects, those projects can still be influenced by the factors you discussed before to my first question, they are early on in their stages and the revenue recognition as a percentage is maybe a little lower. That is that the order intake, the amount of the orders currently are younger orders, but they can still be small or higher-margin orders?
Jim Busche
Sure, absolutely. The dynamic is exactly the same whether we do all aspects of a project or only part of a project. Someone is doing the same things in those projects. We are just trying to target the parts that have the greatest potential for success and for us success is defined as bottom line earnings and probability that we will win so we don't waste our time in our proposal efforts.
Jack Kasprzak -- BB&T Capital Markets
Right. Moving onto another subject quickly, could you discuss what is going on with your efforts in China? Your orders have been very good in the first half of this year. Is there any bump there to your efforts in China specifically?
Jim Busche
Well, I mean, we have had real good success from a procurement perspective with China and procurement is both piece part, and product procurement as well as outsourcing of some detailed engineering. We have had reasonable success in acquiring access to some good product technologies that we can sell at a competitive level. I have to say that our success in actually selling within the Chinese market has not been very great. We are still currently pursuing three decent sized projects, but we have been pursuing those since December of last year and haven't been able to close on any of the three at this point.
Jack Kasprzak -- BB&T Capital Markets
Okay. And my last question is, order intake, you didn't change your guidance $1.1 billion for the year. The orders in the first half are a little over $600 million, very strong, implies that the second half would be less than the first half. Is that -- are you just being conservative with regard to that or – I mean you mentioned that you are still seeing some very nice opportunities out there or is it just remaining conservative because timing is always uncertain?
Jim Busche
Absolutely. Whether one or two individual projects fall a few days one side of a quarter or the other can have a big impact. So we are focused on not disappointing.
Jack Kasprzak -- BB&T Capital Markets
Right. Thank you very much.
Operator
Your next question will come from the line of Jay Harris from Goldsmith & Harris. Please proceed.
Jay Harris -- Goldsmith & Harris
Thank you for taking my call. I am wondering if you could give us some insight into the longer-term visibility that you have in your business as it’s composed today. How far in the future are you aware of projects that you might want to be bidding on and does that suggest that you could still be raising your backlog in 2009 and beyond? Or what limitations do you have in looking at these things?
Jim Busche
Well, I mean, we are asked to put in budgetary proposals on things as much as two or three years out, and then firm price proposals tend to be on things that will transact somewhere from a few weeks to maybe six, eight, 10 months into the future. At this point, we are seeing a shift in where some of the work is, a little bit as many of the economists and us forecasted. We are seeing less work in North America, in the U.K., in parts of Central Europe, but we are seeing no slowdown of any type at all in parts of Southeast Asia, Eastern Europe, Russia, and the Middle East, principally areas that are driven by commodity wealth. So at this point, our visibility is as it has been in recent years, maybe a two- to three-year timeframe and we are seeing a shifting of where the work is, but not any real decline in the total amount of it.
Jay Harris -- Goldsmith & Harris
Well, is there a -- in order to grow your backlog, let's say, next year, do you have to maintain your market share or increase your market share?
Jim Busche
Well, I mean at this point in time, with what we know right now, I can't give you a definitive answer, but we feel that we can keep things going on the same trends that they have been going and whether we have to do that through market share gains or just keeping a similar percentage, we feel we can keep things moving.
Jay Harris -- Goldsmith & Harris
All right. To change the subject, I notice on your P&L statement that you have -- you give insight as to the tax rate on two components of your business, the royalty revenues out of Canada and then the rest of the business. Is the tax rate on your investment income consistent with the rest of your business activities or is it different?
Alan Hartslief
Alan here. Let me answer that. We have, of course, the resource property tax is a different calculation method so we show that separately. It’s a flat rate on the royalty we receive. I think your question -- let me just check your question. I think you were asking about investment income on the cash invested or was it the royalty income?
Jay Harris -- Goldsmith & Harris
The cash, the interest income.
Alan Hartslief
Interest income is taxed at normal rates, yes.
Jay Harris -- Goldsmith & Harris
All right, thank you.
Operator
Your next question will come from the line of Graham Tanaka from Tanaka Capital.
Graham Tanaka -- Tanaka Capital Management
Thanks. Just you had alluded to market share -- and by the way, congratulations on the quarter and particularly on the order flow as well as the margins. Market share is rising. Do you know roughly how many percentage points you might be gaining market share, Jim?
Jim Busche
We have no reliable data on that whatsoever. There was some data that came out in the early part of 2007, but I would be giving you our own internal speculations if I quoted a number and I don't really think that’s productive.
Alan Hartslief
Graham, one of the challenges in market share is if you are comparing apples to apples, because if we are talking about proprietary equipment, it's a different percentage than if we are talking about scope of the whole project.
Jim Busche
Yes.
Graham Tanaka -- Tanaka Capital Management
Right, right. The other is if you could just give us sort of a feel for the big picture trends in the gross margins? You were talking earlier about -- you listed a few things but if you can kind of quantify for us or roughly estimate the gross margin lift from the different -- the mix, the location, et cetera?
Jim Busche
Sorry, Graham. We made a choice not to give any kind of guidance relative to our margins because it tends to be anti-competitive if that information gets out. I just tell you that we are focusing on our cost structure. Our biggest expenditure in executing a job is what we buy from our suppliers. So the efficiency of our designs, and the suppliers that we use, the transportation costs have become an extremely big element. So we have had a focus in recent times on new suppliers in the parts of the world where our work is moving to so that we can reduce our transportation costs. We have spent significant time focusing on the right projects, those things that are going to deliver a higher margin because we offer something special, a good relationship with the customer, something that allows us to have a higher margin. So it’s a many-faceted element and we are trying to tackle all of them to keep our margins as high as possible.
Graham Tanaka -- Tanaka Capital Management
So I get the feeling, then, that you have some confidence that you can maintain these margins or maybe I should ask how far out do you see visibility on maintaining these margins?
Jim Busche
Well, I mean, we have -- on our entire backlog, we have a forecasted margin on each and every project. What we have managed to do over recent quarters is to be a little bit better than that forecast. And additionally, over about a two-year timeframe, we have managed to be better than our historic norms when it comes to process warranties and our ability to specifically deliver what we have warranted to a customer and that has allowed us when a warrantee period ends to bring those monies back into profitability. So we are going to continue targeting those things each and every quarter, each and every project moving forward.
Graham Tanaka -- Tanaka Capital Management
That’s great. The other thing I want to ask about was revenue recognition and the lag. Where are you now in the rev rec on the revenue versus -- because you had an increase I guess in that reserve, which is conservative.
Alan Hartslief
I'm sorry, can you just repeat the last part of that question, Graham?
Graham Tanaka -- Tanaka Capital Management
Yes, you had an increase in the reserve, right? I forgot exactly what you call it, the deferred revenue, I think is what the reserve was--
Alan Hartslief
No, I think -- let me just make sure that I'm talking about the same thing. Are you talking about billings in advance of revenue recognition?
Graham Tanaka -- Tanaka Capital Management
Yes, yes.
Alan Hartslief
So, I think that’s – that’s exactly the -- that in fact, synthesizes what is going on about the early stage. We have a billing process where we bill on a certain time schedule but we can't recognize that revenue until we have completed the work. But typically at the beginning of a project, we do billing on a time schedule, and as Jim explained, we, at that point, might not have delivered the equipment and the more expensive parts of a project. The consequence of that is, and that is what I was referring to, it’s very cash flow positive at the beginning of a project, because you get advance payments often and you get this revenue in advance of completion. And Graham, I mean I guess the way to answer that is if you have a look at the balance sheet, you will see from December we have grown quite significantly in that area. And if you close that – that’s reflective of many of our projects being in early stage of completion, which actually feed back into Jack's question as to -- his question, which was what’s happening with the revenue? Why isn't it so big?
Graham Tanaka -- Tanaka Capital Management
Right, so this is the advance payments received from customers of $24.8 million?
Alan Hartslief
That is a different one. The advance payment from the customers is on our order intake. When we get an order intake, a customer gives us an advance payment. The one I am talking about is the billings in advance of revenue -- of revenue recognition. Let me just read you the exact explanation. It’s Progress billing above costs and estimated earnings on uncompleted contracts. And you will see there, Graham that it’s gone up by $64 million over the period and that’s reflective of us having a billing schedule, which is different to the pace at which we are completing our work. And typically that happens at early stages in projects.
Graham Tanaka -- Tanaka Capital Management
Okay, these progress billings are -- you have actually received cash in advance?
Alan Hartslief
Well, we billed in advance and so traditionally we had received that cash in advance, correct. But that’s on projects where we've started the work. The other one you were referring to is on projects where we haven't even started the work. Those are just orders.
Graham Tanaka -- Tanaka Capital Management
Perfect. My only -- this is great, it is very conservative. I love it. What we don't see -- it is harder for us to see is what is going on as far as competitors in the marketplace, particularly in some of the higher growth markets, Russia, and Middle East, Asia, what is the competitive situation maybe in general terms, Jim?
Jim Busche
Well, I mean markets like Russia, I think KHD entered a little before most of our competition, but virtually every one is there right now because everyone knows that it’s one of the greatest growth markets that exists. It is really the only new emerging market with significant growth in the last 12 months or so. So I would say that’s the only place that the competitive environment has changed much. And in case you went from being pretty much a lone wolf to having most of our competitors there, although we are in a very good position and have been very successful in maintaining our competitive position.
Graham Tanaka -- Tanaka Capital Management
Right. So you haven't seen price pressure in terms of bidding?
Jim Busche
Well, I mean there is price pressure everywhere. But the bidding is – it’s partly to do with the competitors and it’s partly to do with the general cultural practices that exists one place in the world versus another. Russia is a place where the competitors are there, and we never have a project that a competitor isn't in it and our price isn't being compared to at least one customer. But it’s a market where customers appear to be quite rational, and they do calculations based upon how long these projects are going to take, if they spend another three months in negotiations, what that is going to cost them on the back end from a production perspective. And they are very rational, so they tend to make more, by our terms, faster decisions that tend to make more sense versus other markets where you might spend sometimes months talking about tens of thousands of dollars when the plant could be returning hundreds of thousands for each of those months on the back end. Russia is just a very rational market. Competition is there but the customers look at it from an ROI perspective.
Graham Tanaka -- Tanaka Capital Management
That's great. I wanted to actually address the design, build, and own or operate, just to ask your progress there?
Jim Busche
We are making good progress. I think I said last time that we had three different projects that we were pursuing. There are still three although one of the ones we were pursuing disappeared, didn't pan out but a new one showed up. We are very far along with one of these. We have agreed on a site. The permitting is in place. We just have to line up all of the partnerships and determine all the financing and I think we are still on track to have one of these in place before year-end.
Graham Tanaka -- Tanaka Capital Management
Great, thanks and congratulations. Nice quarter.
Operator
Your next question will come from the line of David Fondrie from Heartland Funds.
David Fondrie -- Heartland Funds
Good morning or good evening, as the case may be. I wonder if you could talk a little bit about the impact on sales of the large backlog? I mean if you look at your backlog, I guess it would almost be two years of sales. Is that an impediment at all? People being concerned that you don't have the capability to deliver? Or they have to wait so long to get a new plant?
Jim Busche
I mean, it’s a continual question from customers and I would assume our competitors get the same thing. I want to be the most important, I want top priority, you need to put everything in place for us. So it’s incumbent upon us before we put in a proposal to make sure that we have the ability, the resources to carry it out. And that has required us to find new suppliers, hire some people and things over the last couple of years. We have the ability to stay ahead of that as long as we pace our growth in a -- in the proper way. And if you look at our growth in recent years, it’s been relatively linear because it’s been paced by our ability to execute it, not necessarily by the market opportunities that are out there.
David Fondrie -- Heartland Funds
So if I wanted to order your proprietary components for a system, what kind of delivery time could you offer? I mean would it be 12 months from now? Or 18 months?
Jim Busche
It really depends upon what components you are looking at. But I mean, best case on almost anything would be approaching a year, and if you are looking at certain components, not the necessarily the side installation and commissioning, just on the components, it can easily go out to two years plus.
David Fondrie -- Heartland Funds
Okay. And then can you give a little update on the -- you had very strong mining royalties this quarter, iron ore royalties. Could you -- and I believe in the past you have indicated that there was at least talk of expanding that mine and the output. Can you update us on the situation there?
Jim Busche
Well, we had talked about a possible acquisition by Mittal. That fell through earlier this year, and has resulted in Mittal suing the other partners in the mine. So I have no idea what the outcome of that will be. The mine itself has been operating at relatively consistent output levels for a number of years now and we are seeing a similar output right now. I wouldn't think there would be any real significant increase in that until at least after this dispute is resolved, but who knows? We don't actually operate the mine, we just have a royalty that comes off of it based upon tonnage. So I can’t give you a whole lot of details regarding the mine itself.
David Fondrie -- Heartland Funds
Okay, no, that's great. That's very helpful with the information. And then one last question, it's a little broader and maybe you don't have an opinion, but clearly there is some political unrest in Russia and Georgia. Are you concerned at all with what is happening from a geopolitical standpoint in Russia and its impact upon your future in selling plants into that area?
Jim Busche
Well, I mean it has been a little bit of a topic of discussion. And you know, you look at where the world is growing, where the economies are growing, where wealth is being formed in the world today, and Russia has to be somewhere near the top of all of those lists. That means that there is going to be opportunities in all sorts of fields, including ours, within Russia. Whether we are talking an individual week or month or quarter, who knows? Things can slow down. They can speed up, but over a period of time, we believe that Russia is an emerging country that is learning how to effectively be part of the global community. We personally have had no problems from a taxing perspective, no problems from any respect that would give a western company like ours any concerns of operating there. And I would bet that most other companies are finding -- having similar results within Russia. So on a medium- to long-term basis, we are confident that there will not be any problems within Russia.
David Fondrie -- Heartland Funds
Thank you very much and congratulations on a great quarter.
Operator
Your next question will come from the line of Vincent Damasco from The Colony Group.
Vincent Damasco -- The Colony Group
Hello, gentlemen. Thanks for the time. With regards to kind of the changing focus in looking at smaller size opportunities with higher proprietary content from your own designs, is it safe to assume that the backlog as just reported is of higher margin than let's say if we went back 12 months to 18 months ago?
Jim Busche
It is something that we have been focusing on, but we are not giving specific guidance relative to our margins. But it is something that we have been focusing on now for the better part of a year and we will continue focusing on in the future, which is having the highest quality margins within our industry.
Alan Hartslief
Vincent, it is also safe to say that we don't have expanded scope work in our backlog. When we were talking about margins we were discussing expanded scope opportunities and I think it is fair to say that in our existing backlog we don't have any of that expanded scope work.
Jim Busche
It is not to say that we won't have some of that in the future, it is just that at this point we have chosen to focus our energies in other areas.
Vincent Damasco -- The Colony Group
Maybe asking a different way, is there a greater or lesser concentration of subcontracted work as part of the current order book?
Jim Busche
I don't really think that it is substantively different. I mean we still do procure things from other companies and include it in our scope. We are just trying to be as selective as possible and doing as good a job as possible in executing those projects.
Vincent Damasco -- The Colony Group
Okay and then maybe on the competitive landscape, your larger competitor, surprising to me at least, given that I am relatively new to your Company -- Company story, but the amount of and size of their order flow is -- far outpaced yours and maybe I am not sure if that is a result of you trying to focus on more proprietary smaller type of opportunities. But maybe if you can give us a sense of your win rate relative to some of your other peers. And if you don't win, is it price or is it regional competency or history or maybe something else? Can you give us some color on that?
Jim Busche
Well, I mean, we don't really have win rate percentages of our competitors or anything. We know about projects that we participate in, who the competitors were, and whether we won or not. Irregardless of what the reason is, the first thing a customer always tells us is that we were too expensive. When we dig into it, there tend to be many reasons. It might be the fact that the customer has a good experience with one supplier, the other lines within a facility might be that supplier, so that spare parts can be maintained from one supplier instead of multiple. It might be a supplier setup that one of us has within an area that makes us more cost competitive or more timely from a delivery perspective. I mean there are many, many reasons as we look into why we won or lost a project, which we actually do on each and every project, and that there are no real trends or anything. When we discover something that we feel is making us less than competitive, we target that area to -- for improvement so that in the future we have a better win percentage. So can't give you any official statistics because I don't have any. And there is no one or even a handful of reasons why one or the other wins or loses.
Your question on the big projects is really a factor of what an organization decides to focus on, and we have chosen to focus more on our proprietary equipment.
Vincent Damasco -- The Colony Group
Okay, thank you. And then lastly on the Mass preferred spin off and transition, you said it is going to be completed by the end of the year. Is that the actual transaction or is that just the completion of the negotiation and regulatory filings?
Alan Hartslief
Well what we are planning to do – I mean plan is maybe a big word, target is the word I used. The target is that by mid-November we would have the plan of arrangement approved. If we can achieve that target, we can complete the spin by the year end.
Vincent Damasco -- The Colony Group
Okay.
Alan Hartslief
There are, as I said, it has to get through the court and shareholder approval is required. So not all of the steps are in our hands, but we are targeting by the year end.
Vincent Damasco -- The Colony Group
Okay. Thank you very much.
Operator
Your next question will come from the line of Michael Rome [ph], Diamondback [ph].
Michael Rome -- Diamondback
Hi, guys. Great quarter. Two housekeeping questions. You mentioned costs associated with the Wabush arbitration. What was the approximate magnitude of that?
Alan Hartslief
The magnitude of the costs or the magnitude of the claim?
Michael Rome -- Diamondback
The costs that were expensed in the quarter?
Alan Hartslief
I'm sorry, we're not going -- we are not going to go into that detail.
Michael Rome -- Diamondback
Okay, on a different note, the tax rate -- last quarter you talked about an ongoing tax rate of about 20%. Is that still -- this is a reported GAAP tax rate. Is that still your outlook? This quarter it was a little higher, around 25% all in.
Alan Hartslief
I think I -- I don't recall saying that, but what you might be thinking about is the tax rate on the resource property. But let me talk about tax rate a little bit and say that we no longer are giving guidance on a go-forward tax rate, but what is something you could think about is you have a good sense of where our businesses are around the world and you could -- we have to pay tax based on where we do business. From a modeling perspective, that might be a way you could get to it.
Michael Rome -- Diamondback
Okay, thanks. And just lastly, in the release, you talk about how you are pursuing larger projects for the coal and minerals segment?
Jim Busche
That is correct, yes. We have targeted going after some projects that utilize many of our products and technology rather than selling just individual pieces of equipment.
Michael Rome -- Diamondback
Would you consider them large in the context of this segment or even the entire Company?
Jim Busche
Well, not large by terms of some of the larger cement projects, but large compared to what we have historically done. You go back a few years, our whole coal and minerals business was $20 million, $30 million, $40 million. So opportunities that we might target, big opportunities would be in that range where we are not ready for nor willing to take on the construction aspects that would be involved in something of magnitudes of those numbers.
Michael Rome -- Diamondback
Great, thanks.
Operator
The next question will come from the line of Kasper Larsen from Enskilda.
Kasper Larsen – Enskilda
Hello. I only have one question for you, and that is actually, how you see the old cement markets evolve in the future, for the next two to three years? Do you still expect a solid order intake being possible to be recognized?
Jim Busche
Well, as I said earlier, we have seen the markets change a little bit. We have seen some markets definitely slow down. Projects that were out there, that we were bidding, be -- the decisions for choosing delayed. Surprisingly, we have not seen anything actually canceled, but we have seen some things delayed in certain markets. But what is really working in our favor is that the areas that are slowing down are more than being offset by the areas that are picking up. Really, the commodity wealth and what it’s doing to drive income growth and infrastructure spend is more than making up for the parts of the world that are currently slowing down.
Kasper Larsen – Enskilda
Okay, thanks very much.
Operator
Your next question will come from the line of Dennis Sabo [ph] from Jodicus Capital [ph].
Dennis Sabo -- Jodicus Capital
Good morning. Thank you for taking my call. I apologize if I missed it earlier, but did you give a revenue breakdown between cement and the coal and minerals segment and as well, orders too?
Jim Busche
We can.
Dennis Sabo -- Jodicus Capital
Can you, please?
Jim Busche
Okay, revenue was $144.2 million for Q2. And that was overall. I've got to go back through my notes here, so sorry. Okay, cement revenues for the six months for 2008 were 241,840 and for the three months was 127. For coal and minerals, the six months was 39,272, and for the three months, it was 17,240.
Dennis Sabo -- Jodicus Capital
Okay. And did you have the order breakdown as well?
Jim Busche
The order intake?
Dennis Sabo -- Jodicus Capital
Yes.
Jim Busche
Yes, just a second. Order intake was $320.1 million for Q2, and $608.4 million for the first six months. The cement order intake -- I don't have the exact number in front of me, but for the first six months was up by 127%. Cement order intake was $560.8 million for the first six months and it was versus $247.3 million for the same period of 2007. For the three months ended the cement order intake was -- for Q2, $300.1 million.
Dennis Sabo -- Jodicus Capital
Okay, that's helpful. I can back into the other figures.
Jim Busche
Okay, thanks.
Dennis Sabo -- Jodicus Capital
And then on the -- my last question, on the margin side, not to beat a dead horse, and I have been listening to your explanations, it would be -- it sounds like you have some -- are attacking some smaller type projects that have higher margins at least in the short term until the larger projects start to come through the revenue line. Would it be an unreasonable assumption to assume that perhaps your margins would stay at these elevated levels at least in the near term and then potentially trail off maybe or directionally head lower in 2009 as the larger projects come through the P&L?
Jim Busche
I mean, as I said, we have a forecasted number for each and every one of our projects, which is lower than where we have come in, in both Q1 and Q2. We have managed to beat those numbers through the reasons that I said, the order execution, less warranties, that sort of thing. Whenever you see us or anyone else announce a mega project, it tends to be at a lower price because it has more things in it that customers generally pay us less for. Or we have to share the margins with someone else. So you are generally right that the more smaller value projects that we take, the higher the average margin will be on that project. One of the big factors, and I didn't even mention this earlier in our margins, is our aftermarket, providing replacement parts, whether those are on a scheduled or a breakdown basis, are far and above the most profitable part of our business, and this is an area that we have also been targeting over recent years, and have managed to grow significantly in recent times. So that’s been a contributor as well. You can tell I am trying to talk around because we are really not giving margin guidance at this point in time just trying to give you a feel from where it comes from.
Dennis Sabo -- Jodicus Capital
Would you be able to say what percent of your revenue comes from repair and replacement currently?
Jim Busche
Sure, I mean we have that. I don't have it in front of me. I think it was -- we had 60 some million euro last year -- I don't have the number for the first six months, but if you send an e-mail to Rene Randall, we will get you that number.
Dennis Sabo -- Jodicus Capital
Okay, and you said EUR69 for last year?
Jim Busche
It was 60-some-million euros if I remember correctly, but please send us an e-mail and we will get you the details.
Dennis Sabo -- Jodicus Capital
Will do. Thank you for taking my call.
Operator
Your next question will come from the line of Su Zhang from Exane.
Su Zhang -- Exane BNP Paribas
Hello. Hi, Mr. Busche and Mr. Hartslief. Thank you very much for taking my call. Just two follow-up questions. One, the first one is on top line growth. Can you please quantify for us the magnitude of the positive or negative currency effect on your top line and the operating results? Just because you said your operating currency is euros naturally we would assume some currency tailwind in the first half year and am I correct on that?
Alan Hartslief
You are correct on that. But, of course, when we -- when the euro is strong, of course, and we convert to U.S. dollars, it is of course, advantageous to us. We have not actually quantified the positive effect of the euro. Bear in mind that we are also carrying those US$100 million so that is just to some extent what magically acts as an opposite effect. We haven't quantified but you are correct. What we have done is we have given you the magnitude of the change and if I recall correctly, it was 7% in the first half was the appreciation of the euro against the dollar. That is in my note. So in our release, we gave the specific currency movements and I would say that it is not an unreasonable proxy for you to use to actually take the currency rate because most of our business -- most of our operational businesses is in euros.
Su Zhang -- Exane BNP Paribas
Okay, and so if the current U.S. dollar rallies, just saying in H2, it should definitely help you, right?
Alan Hartslief
The current U.S. dollar rally, did you say? Sorry?
Su Zhang -- Exane BNP Paribas
Yes, yes, the U.S. dollar rebound, whatever you call it.
Alan Hartslief
That would help our -- certainly it would help us with our U.S. dollar investments, you know the cash we have on the balance sheet.
Su Zhang -- Exane BNP Paribas
Just want to understand what is the percentage of U.S. dollar versus euro or other currency in your order book? Can you just give us some kind of split on that?
Alan Hartslief
Okay, so let me just mention one thing. Of course, what you should bear in mind about our consolidation is -- well about anyone's consolidations, of course, we use the average rate to convert the income statement that we use, the period end rates to convert the balance sheet. So I think that is important to bear in mind. Coming back to your question of what proportion of our businesses is in euro and what proportion is in dollars, one of the challenges there is that some currencies are kind of, if you like, dollar related. The Asian currencies, some of them are dollar related. The best way for me to answer that is a fair amount of our Middle East business and our U.S. business and -- I would encourage you to look at our order backlog and our order intake graphs, which we have provided by region and it will give you some sense of how our currencies break down. But the majority is -- the Eastern European business is typically in euros, so a good proportion of our business is in euros.
Su Zhang -- Exane BNP Paribas
Okay, that's very nice. And my second question is also on the top line and basically we see your sales and it seems to be bouncing around US$130 million to US$160 million per quarter. So, does that indicate any kind of capacity bottleneck in your human resources and your manufacturing capacity or not?
Jim Busche
Well, I mean there are always capacity restrictions with people, but that is one of the things that we have to manage. We have actively recruited numerous people in markets like Russia over the last two years as we built up that operation. We have actively recruited new suppliers, suppliers for product supplies, suppliers for engineering, and we will continue to do that. And we will make sure that those are in place before we commit to executing an order because it is critical to us doing it effectively.
Su Zhang -- Exane BNP Paribas
Okay, so can you please give us some kind of indicators like headcounts or number of suppliers just to show us that your progress on that front?
Jim Busche
I think we have 1300 and some employees right now. The actual number of suppliers that we have got is quite large. Many of those would be somewhat inactive at any point in time. But as we move into a new market, we have to find new suppliers within that market. So I don't have any exact numbers for you, but we have adequate suppliers for the projects that we commit to.
Su Zhang -- Exane BNP Paribas
Okay, so basically, 1300 employees, you were talking about at the moment. This compares to how many one year ago or two years ago?
Alan Hartslief
You know, we -- the one thing that is a little difficult to answer your question is we move our resources around as our markets move around. So it is kind of a -- the previous number was 1200, but I don't think that is really reflective of answering your question, because --
Jim Busche
Yes, it is not fully the picture, because we use an outsource model. Depending upon the specifics of a project, we might occupy a small handful of people within the Company or we might occupy dozens of them, and the actual revenues, the order intake size of a project is not really a good indicator of the number of people, because it is really based upon what it is we are going to be doing and how much of it we will do with KHD employees, and how much we will do with some of our partners.
Alan Hartslief
But can I just add one thing just for clarity? The overwhelming portion of our costs relate to equipment supply not the cost of people. So if it was a capacity constraint, it would rather be on the equipment supply, not on people necessarily. So it's a combination of those two things. And so you couldn't look at one in isolation. You need to look at the ability, and I think Jim mentioned it earlier when Jack asked him the question that the supplier lead times is probably more important than internal resource constraints.
Su Zhang -- Exane BNP Paribas
Okay. Thank you for the clarification. Thank you.
Operator
Your next question will come from the line of Geoff Sutton [ph], Maiden Capital [ph].
Geoff Sutton -- Maiden Capital
Good morning. Wondered if you could just give us a brief update on what you announced last quarter with the new environmental group?
Jim Busche
Okay. I mean it is a group that is formed to focus on things like energy efficiency, carbon dioxide, nitrous oxide reductions, as well as utilizing potentially some of the water and wastewater treatment technologies that we got through one of our partners. And they are, at this point in time, pursuing a couple of development efforts within the Company. Some of what we are talking about does not exist, so we have to put some of this stuff together, like CO2 reduction or capture. They are pursuing sales activities, utilizing our ability to burn alternative fuels. I think we have got approximately 17 that we can currently utilize for part of the energy requirements for a cement facility. And they are focused on understanding and applying to the flow sheets some of these water and wastewater technologies. To date, we haven't booked anything that we would expressly call an environmental project and nothing separate will probably be a big part of our revenues, but it will become an increasing part over the next few years as customers look at energy efficiency and environmental issues in their procurement decisions.
Geoff Sutton -- Maiden Capital
Okay, thanks. And second question, you had mentioned that one of the ways to diversify is looking at acquisitions and I am just curious if you’ve targeted anything specifically or even in discussion with anybody on that?
Jim Busche
Yes, I mean, as I said, we are looking at a few things now that we had passed on in the past just because it did not meet our acquisition criteria with some recent market corrections, increased desire to form alliances or join with KHD. There are some opportunities now that didn't exist some months ago. So we are actively pursuing a couple of things, and hopefully we will be successful.
Geoff Sutton -- Maiden Capital
And what area are those in, again?
Jim Busche
Well, I mean, we have a stated goal to expand our coal and minerals group and move into adjacent or related industries.
Geoff Sutton -- Maiden Capital
Okay. That's it. Thanks very much.
Operator
That concludes today's question-and-answer session. I would now like to turn the call back over to Jim Busche for closing remarks.
Jim Busche
Yes, I would like to thank everyone for taking the time to participate in this phone call. If there are further questions or someone that did not get through, please contact Rene Randall and we would be more than happy to answer your questions. Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.
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