Bucyrus International, Inc. Q2 2008 Earnings Call Transcript

| About: Bucyrus International, (BUCY)
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Bucyrus International, Inc. (NASDAQ:BUCY) Q2 FY08 Earnings Call July 25, 2008 9:00 AM ET


Kent Henschen - Director, Corporate Communications

Timothy W. Sullivan - President and CEO

Craig R. Mackus - CFO and Secretary

Luis de Leon - COO, Underground

Kenneth W. Krueger - COO, Surface


Barry Bannister - Stifel Nicolaus and Company, Incorporated

Seth Weber - Banc of America Securities

Terry Darling - Goldman Sachs Research

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


Good day ladies and gentlemen and welcome to the Second Quarter 2008 Bucyrus International Incorporated Earnings Conference Call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be 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 our host for today's call, Mr. Ken Henschen, Director of Corporate Communications, please proceed.

Kent Henschen - Director, Corporate Communications

Good morning. Thank you for joining us today's Bucyrus International Incorporated second quarter 2008 earnings release teleconference and analyst [indiscernible]. As Katina mentioned, my name is Kent Henschen, Director of Corporate Communications here at Bucyrus.

In a few minutes, I'll turn the conference over to Mr. Tim Sullivan, our President and Chief Executive Officer and Mr. Craig Mackus, Bucyrus's Chief Financial Officer. We'll begin the teleconference today by reviewing the forward-looking statements and cautionary factors.

This call contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of predictive, future tense or forward-looking 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 contained in the forward-looking statements as a result of various factors, some of which are unknown.

Bucyrus's policy on forward-looking statements including a list of factors that could cause actual results to differ materially from those anticipated in forward-looking statements as well as risk factors related to Bucyrus are included in the Bucyrus 2007 Form 10-K filed with the Securities and Exchange Commission on February 29, 2008 and any other cautionary statements described in other reports filed by Bucyrus with the Securities and Exchange Commission.

All forward-looking statements attributable to Bucyrus are expressly qualified in their entirety by the foregoing cautionary statements. Bucyrus undertakes no obligation to publicly update or revise any forward statements whether as a result of new information, future events, or otherwise.

Now I'll turn the conference over to Tim.

Timothy W. Sullivan - President and Chief Executive Officer

Good morning everyone both present here and on the call. I would like to begin this morning by introducing some of our special guests. It's a fairly unique day for us. We have got a lot of individuals from around world.

I'd first like to introduce our Board of Directors who is here with us today. If you would stand and be recognized please.

I would particularly like to recognize our new Board member Kelly Ortberg who joined our Board yesterday. Kelly is COO of Rockwell Collins and we're happy to have him join our Board. We also with us all of our people from around the world; we have all of our 50 locations represented in the auditorium. If those gentleman would stand please.

I'd like to think that it's Craig and myself that get it all done, but you just saw the people that really drive the results that we are going to talk about today. We're going to go through our normal approach here with the call. And for those of you that are on the call, what we will do after we get through our normal presentations, we're going to take questions and answers, one from the floor and one from the phone until we go through that. Both Craig and my comments will be somewhat abbreviated this morning.

Following our presentations and Q&A, we plan to have our two COOs from our operating segments, Ken Krueger from our Surface segment and Luis de Leon from our Underground segment to give presentations with probably more detail on our operations than what we normally would be able to provide during these normal calls.

I'll advice those on the call that you can pull up both Luis and Ken's presentations on our website. There're available now, so if you want to pull those up as we go through the first part of the presentation today.

Okay, I'll turn it over to Craig to get started.

Craig R. Mackus - Chief Financial Officer and Secretary

Okay, thank you, Tim. I'll go through my normal financial readings here in terms of how we did for the quarter and on a year-to-date basis.

But before I begin, I'd like to remind everyone that DBT net assets acquired and DBT results of operations since the May 4, 2007 date of acquisition are included in our financial results. As a result, the financial results for the second quarter and the first six months of 2008 are not necessarily 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 also.

Sales for the second quarter of 2008 were $621 million, in increase of $246.2 million or 65.7% from $374.8 million for the second quarter of 2007. Original equipment sales were $324.6 million, an increase of $135.6 million or 71.7% from $189 million for the second quarter of 2007 and aftermarket parts and service sales were $296.4 million, an increase of $110.7 million, or 59.6%, from $185.8 million for the second quarter of 2007.

For the first six months of 2008, sales were $1.14 billion, an increase $572.8 million, or 101.5%, from $565.2 million for the first six months of 2007. Original equipment sales were $608.7 million, an increase of $341.3 million, or 127.6%, from $267.4 million for the first six months of 2007. And aftermarket parts and service sales were $529.3 million, an increase of $231.5 million or 77.7% and $297.8 million for the first six months of 2007.

The surface mining growth was attributable to the high demand for our products and services throughout the world and the positive impact of recently completed capacity improvements at our principal surface mining manufacturing facility here in South Milwaukee, Wisconsin. High demand for our products and services 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.

The increase in surface mining original equipment sales for the quarter and six months of 2008 was in both electric mining shovels and draglines. Surface mining aftermarket parts and service sales for the second quarter and first six months of 2008 increased in nearly all worldwide markets compared to the same period last year. The expansion of our surface mining facilities in South Milwaukee is substantially complete, which will allow for annual shovel production capacity of at least 24 machines and almost doubled manufactured parts capacity from 2006 levels.

Underground mining sales for the second quarter of 2008 increased from recent quarters due to strong original equipment orders in the fourth quarter of 2007 and the first quarter of 2008. Lack of steel availability in the first quarter on these new orders has been resolved through changes in ordering policies. Market conditions are strong in Eastern Europe and India, which more than offsets reductions occurring in China due to local sourcing issues.

Gross profit for the second quarter of 2008 was $174.1 million or 28% of sales compared to $96.3 million or 25.7% of sales for the second quarter of 2007. Gross profit for the second quarter of 2008 was reduced by $3.1 million of purchase accounting adjustments through inventory and fixed assets as a result of the acquisition of DBT in 2007 compared to $6.2 million for the second quarter of 2007. This had the effect of reducing gross margin for the second quarter of 2008 by 0.5% percentage points compared to 1.6 percentage points for the second quarter of 2007. Gross profit for the first six months of 2008 were $315.7 million or 27.7% of sales compared to $148.4 million or 26.3% of sales for the first six months of 2007.

Gross profit for the first six months of 2008 was reduced by $11.9 million of purchase accounting adjustments to inventory and fixed assets as result of the acquisition of DBT in 2007 compared to $6.2 million for the first six months of 2007. This had the effect of reducing gross margins for the first six months of 2008, by 1.1 percentage points compared to 1 percentage point for the first six months of 2007. The increase in gross profit was primarily due to the acquisition of DBT and increase surface mining sales.

For the second quarter and first six months of 2008, gross margin percentages on surface mining original equipment and aftermarket parts and services were improved from the comparable periods in 2007. Surface mining original equipment sales, which have lower gross margins, were 46% of surface mining sales for the second quarter of 2008 compared to 40% for the second quarter of 2007 and were 48% of total surface mining sales for the first six months ended June 30 2008 compared to 41% for the first six months of 2007.

The availability of raw materials has not had an impact on the gross profit at our surface mining manufacturing schedule. Recent raw material increases also have not had a significant impact on operating performance. Gross margin percent at underground mining equipment for the second quarter 2008 declined from the first quarter of 2008 due to the mix of original equipment sales, although underground mining equipment gross margin for the first six months of 2008 continued to exceed 2007 gross margins.

Underground mining original equipment sales, which have lower gross margins, were 58% of total underground mining sales for the second quarter of 2008 compared to 61% for the first quarter of 2008 and 65% for the fourth quarter of 2007 and 66% for the third quarter of 2007.

Manufacturing absorption losses at our underground mining facilities for the second quarter of 2008 declined from the first quarter of 2008 due to increased activity levels.

Selling, general and administrative expense for the second quarter of 2008 were $59.4 million, or 9.6% of sales compared to $41.7 million or 11.1% of sales for the second quarter of 2007 and $59.5 million or 11.5% of sales for the first quarter of 2008. These expenses for the first six months of 2008 were $118.9 million or 10.4% of sales compared to $62.8 million or 11.1% of sales for the first six months of 2007. The increase in expenses in 2008 was primary due to the acquisition of DBT.

Operating earnings for the second quarter of 2008 were $99.7 million compared to $45.5 million for the second quarter of 2007 and were $167.3 million for the first six months of 2008 compared to $73.5 million for the first six months of 2007. Operating earnings on our underground business were reduced by amortizations of purchase accounting adjustments related to the acquisition of DBT of $7.4 million and $21.7 million for the second quarter and first six months of 2008 respectively compared to $10.5 million for the second quarter and first six months of 2007.

The overall increase on a consolidated operating earnings for the second quarter and the first six months 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 second quarter of 2008 were $62.3 million or $0.84 per share compared to $27.8 million or $0.40 per share for the second quarter of 2007. Net earnings for 2008 were $103.4 million or $1.39 per share compared to $45.6 million or $0.69 per share for the first six months of 2007. Net earnings were reduced by net of tax depreciation and amortization of purchase accountings adjustments related to the acquisition of DBT of $5.1 million and $14.6 million for the second quarter and first six months of 2008 respectively compared to $6.4 million for the second quarter and first six months of 2007.

Depreciation and amortization of future purchase accounting adjustments related to the acquisition of DBT is expected to be as follows. With fixed assets, approximately $600,000 credit which is $400,000 net of tax per quarter through April 2011. With intangible assets, approximately $3.8 million per quarter, which is $2.5 million net of tax through April 2019 and the inventory write-up that we have been incurring has been fully amortized as of June 30th of 2008. So that will be zero going forward.

EBITDA for the second quarter of 2008 was $114 million, an increase of 97.7% from $57.7 million for the second quarter of 2007. As a percent of sales, EBITDA for the second quarter was 18.4% compared to 15.4% for the second quarter of 2007. EBITDA for the first six months of 2008 was $197 million, an increase of 119.2% from $89.8 million for the first six months of 2007. As a percent of sales, EBITDA for the first six months of 2008 was 17.3% compared to 15.9% for the first six months of 2007. And EBITDA is defined as net earnings before interest income, interest expense, income taxes, depreciation and amortization. And EBITDA includes the impact of reductions for non-cash stock comp expense, severance expenses, loss on sale of fixed assets and the inventory fair value purchase accounting adjustments charged across the products sold, which we itemize in an EBITDA reconciliation in our press release.

As of June 30, 2008, our total backlog was $2.2 billion; $1.6 billion of which is expected to be recognized within the next 12 months. This represents a 50.8% and 43.9% increase from the December 31, 2007 total backlog of $1.4 billion and the 12 month backlog of $1.1 billion respectively. Included in backlog at June 30, 2008 was $1.3 billion related to our surface mining operations, $842.4 million which is expected to be recognized within the next 12 months and $878.9 million related to our underground mining operations, $785.1 million which is expected to be recognized with the next 12 months.

New orders for the second quarter and six months of 2008 were $776.5 million and $1.9 billion respectively compared to $460.1 million and $693.4 million for the second quarter for the first six months last year respectively. Included in our surface mining aftermarket parts and service, new orders for the second quarter and the first six months of 2008 were $70 million and $278.7 million respectively related to multi-year contracts that will generate revenue in future years. Enquiries for machines in all three of our surface mining product lines remain at high levels and remain high on the underground side also.

As of June 30, 2008, total debt was $522.8 million compared to $536.1 million as of December 31, 2007. Our cash balances have increased to $140.5 million as of June 30, 2008 compared to $61.1 million as of December 31, 2007. Receivables have increased to $500.5 million as of June 30, 2008, primarily due to the timing of cash receipts in our underground mining operation. Inventory turns have declined to 3 turns from 3.1 turns at December 31, 2007, which has contributed to the increase in our inventory levels, which was partially due to the changes in our ordering policies.

Capital expenditures for the first six months of 2008 were $44.3 million, which includes $16 million related to the expansion and additional renovation of our facilities here in South Milwaukee. We still expect our capital expenditures for 2008 to be between $90 million and $100 million.

I'll turn it back to Tim to talk about market conditions.

Timothy W. Sullivan - President and Chief Executive Officer

Okay, thanks Craig. I will keep my comments, as I said, fairly brief. We're obviously very pleased with the results of the second quarter. I think I continue to be very pleased by the performance of the gentlemen that are here today, and the fact that they're able to hit the plan numbers and exceed them as we lay them out.

A couple of highlights of what Craig had presented. From a sales standpoint, obviously, our underground segment has now kicked in in the second quarter nicely. As you recall from the last quarter, we talked about the fact that we had a shortage of steel in Q1 and that has now been overcome. And we expect the next two quarters to continue along at the level that we were able to achieve from a sales standpoint in Q2 for the underground segment of our business. And similar to what we've talked about previously, we have changed our ordering policies on raw materials on the underground segment as well. So we see that that will hopefully not have those gaps as we move forward in the future.

Gross margins are where we like them to be. We think that we can move them up a little bit further. There was a bit of a kick in the gross margin on the underground site, primarily the purchase accounting at the DBT acquisition coming to an end at the end of the second quarter.

Engineering expenses are up. That's not a bad thing; that's good. We are rolling out our new hydraulic crowd mechanism as our standard offering on our shovels, and that will be announced at MINExpo in September, and we're already moving ahead. It's been a tremendous success for us. We have the prototype now operating for about nine months at Albian in the oil sands up in Canada. That's a revolutionary change, not transformational; that's revolutionary. The last front-end design change that was made on electric mining shovel was 1950. So you can see that this is dramatic.

We have got a lot of other things in the hopper, and that's why our engineering expense is up. We're pretty excited about some of the projects that we've got, that we're working on that obviously will be rolled out in due course as they become more viable for introducing to the marketplace.

SG&A from a dollar standpoint flat. Obviously, that indicates to you that we've ramped up now our employment to the level that we think can sustain the type of growth that we're enjoying right now. As a percent of revenue, it was a nice drop from 11.5% to 9.6%, and obviously as revenue grows, that number will go less. And that again is a industry leading number and again, credit to our management team here. We run a very lean and efficient operation and we'll continue to do so as we move forward. Market indications have not abated it whatsoever. I think you see some of the things that have kind of created some noise in the marketplace here in our industry in the last couple of weeks. But there has been absolutely nothing to slow down the pace of activity that we have got in the marketplace right now.

Let me talk about two concepts I think that are important, because I know this is first and foremost in everyone's mind. As we move forward and as we book new business, are we going to be able to keep up with the cost increases that we're getting. And we've explained over the years that we do have a perfect circle of cost. We provide machinery to the people that produce the commodities. The commodities obviously drive the raw material costs that we pay, and in turn, we pass those costs back to the producers. So it's a full circle of costs that we understand very well and everyone in that circle of cost understands very well. The challenge is to make sure that we don't book two far in advance that we can't deal with some of the cost increases we've got.

Tying cost increases to industries is not an option. You cannot do that in this environment. The reason you can't is that typically what happens is we can negotiate some very good raw material costs on a go forward basis, and if you look at those cost increases, they typically are in the high single-digit percentages. But that's not the total cost picture. What we have almost on a regular weekly basis today are surcharges, which come in from the steel producers, from the casting producers and the forging producers. Those do not find their way into indices, so to speak. They are one-time "one-time surcharge" that come and go. And those are above and beyond contract prices, and those are the things that you cannot control with buying forward on steel.

Now two ways that we will control costs; we are buying forward. Those of you that are here today, as you walk around our property, you are going to see a lot of steel, you're going to see a lot of castings, you're going to see a lot of forgings. As Craig said, our inventory is up. That's one strategy to make sure that we keep our cost basis visible and under control.

The second way that we plan to do this as we move into the cycle is to control the order entry. And by that I mean as we sit here today, we have an extremely high level of letters of intent. Our letters of intent are treated very seriously in our industry. And in my 30 plus years, I can only think of one time that a letter of intent was withdrawn. So we take them seriously, the producers take them very, very seriously. What we plan to do is convert those letters of intent into orders as we have certainty on cost.

Now at this point in time, for instance, if you had an LOI for an electric mining shovel with us, we can guarantee you a price and a delivery slot 18 months out. We have got visibility we believe for that timeframe. But if we go beyond that, we will hold that LOI until we have cost certainty.

We'll go back to our customers and we will tell them that this is the price that you will pay now based on the LOI even though it was quoted and placed on us at that level. That is the only real way to effectively control cost increases and make sure you don't have margin erosion. I think it's a unique approach, it's an approach that no one else really in the industry is using. But we think it's the right approach and our customers have embraced it by and large.

The other thing I think we are doing that I should talk about. When we are talking shovels and drills, we are not charging for slots. In other words, we will take the LOI, go back to the customer and advice a cost increase, if there is one. And we want to place that... firm that order into our production schedule.

If it is another than a shovel or a drill in the surface side of our business; in other words, a dragline, we will charge for that slot. We will charge for that slot because even though we have again that same approach, that timeframe on converting LOIs to firm orders, to make commitments of that magnitude, we think it's appropriate to that. So we will do that as we have been doing that; we will do that as we go forward. Hopefully, that will answer some of the consternation I think about the cost increases that we and the industry, not only ourselves but others are facing today.

One of the other things that I should say, and that's as far as the commodity market, Ken Krueger will show on the surface side of our business, which has a broader base into the commodity markets. By that I mean, our underground segment is primarily coal, but on the surface side, we sell into other commodities, obviously oil sands, copper, iron ore, gold. Ken is going to give you a breakdown as to how some of those sales are going.

You will see that there is a much larger diversity right now in the spend that we are getting from our producers, particularly in electric mining shovels on the surface side of our business. There is no slowdown whatsoever. Matter of fact, I think these things tend to come sometimes in groups, but there is still strong demand across the board. The only thing that's slowing down demand are the typical things we have been talking about for the last two years: Tires are still a problem for off the highway trucks, which obviously affects our electric mining shovel bookings, the port situations still have not corrected themselves completely and there are new ports being planned now. There were just two new ports that were talked about in the press this last week, one in Australia and one in South Africa. There is another port we don't talk about this country very much, but Russia has just created a new port in Siberia to export coal to the Asian markets. And we have gotten some machine bookings from Russia for coal that we will export from that port. So the port situation eventually over time we think will correct itself.

And the last roadblock that we've talked about over the last couple of years is exploration. There was no money spent on exploration in the downcycle and everyone is catching up as quickly as they can; not just the oil companies, but everyone, copper, iron ore, uranium; everyone is going to try to develop new mines. This is a natural roadblock because in the best case scenario, if you are out there doing exploration and you find something that you think is economically mineable, the best case in that... in a country in South America is seven years from start of the permitting process and approval process to the time that you dig your first load of dirt or ore. In the United States, that can double, easily double. In more of the developed countries, it can be 12 to 14 years as well. So we have that natural roadblock. Even if the tire situation corrects itself, even if the ports correct themselves, new incremental product coming on the marketplace is not happening soon. That has worked out extremely well for us. Sometimes it's good to be lucky. We have been able to ramp up our capacity here over the last three years commensurate with these roadblocks.

In other words, we have not lost any business as this cycle... as we move through this cycle because of plant capacity issues. And you'll see a little bit today firsthand where we are with our plan expansion. And Ken will talk a little about facilities here as well.

Prospects remain incredibly high, and that's across the board as well. Again, they kind of come in bits and starts. The underground integration, I could not be more pleased at how the integration is going and I think Luis will talk a little about that. He'll show you some of the numbers that we're very proud of.

Margins are up, aftermarket market shares are up, SG&A is down, significantly down. And again, I give credit to our management team for being able to affect those changes as rapidly as they have to bring our underground segment in line with the stellar performance that our surface segment has been able to achieve.

Those of you here will be walking around our facilities today. It's not complete; we're sitting here today in the Heritage building. This building was constructed shortly after the turn of the century. The adjacent building is part of the Heritage building. That will be our visitors' center and museum; that's from 1893. The machine shop that you'll be walking through today; that's not complete, was 1893. We found that as we dig back into these historical buildings, you run into a few issues here and there.

The drawings that we have got, not necessarily the same drawings that we used to build those buildings. But it should be very unique, very interesting. The major production that's being done right now, though, is on the new buildings that you see. And the capacity is really right on track where want to be as far as demand from the marketplace.

I think I'll close with that. One thing I will mention, though, and this is something that we just updated recently. With the ramping up of the... and the entrance into the marketplace of all these new machines and this new machine capacity, we reran our installed base calculations. Let me just give you a few statistics here.

On the surface side, we talked about the fact that in the last five years, we have had 23 draglines of 50 cubic yards or larger recommissioned. That number is now 32. And I really thought that some of these old draglines that really are in really rough shape up there would never be recommissioned. I'm now convinced that anything that has a structure on it that can be fixed will be recommissioned, and we're down to a handful of anything that's viable. That has held off some of the dragline demand.

But if you look at the total installed base of draglines now for Bucyrus, we have 442 draglines. That's up from around 415 or so that we had just five years ago. That will probably again peak out over here as we move forward. We now have 531 electric mining shovels, 585 large rotary blasthole drills for a total fleet of 1558 units. The original estimate of the surface installed base was approximately $15 billion. It is now $19.6 billion, which brings our total installed base to $29.6 billion.

Why is that important? Of the 69 new units that have shipped here just in the last three years... four years, excuse me, of shovels and drills, those 69 new units, new net units; in other words, units that are out in the marketplace, those would generate an additional $148 million worth of parts business annually. What usually happens when we get into a cycle, and the reason we have these numbers... we ran these numbers, when we get into the type of cycle that we are in right now, we usually get a very large surge of aftermarket activity. And then as you move forward into the cycle, the aftermarket activity tends to kind of slow down and the new unit sales take over.

As Craig mentioned, we booked just in the surface side in this quarter, $265 million worth of parts, $195 million were run-of-the-mill day-in, day-out parts. That's huge. So we've not seen any abatement or fall off whatsoever in aftermarket. As a matter of fact, we are seeing it ramping up. The reason being is that obviously people are putting these draglines back to work, but also this new installed base that is going out there at an accelerated pace are creating daily opportunities in the aftermarket.

So we will keep an eye on the installed base as it grows. We know with that installed base that we are more than double our only competitor as far as market opportunities on aftermarket. And that's obviously a nice thing to have in more of a down market than a robust market like we are in today.

The underground side of business is a little bit unique. We have approximately a $10 billion installed base of machinery there. That's the $10 billion of the $29.6 billion. And most of what we've sold in the last three years has been replacement, and there haven't been necessarily any incremental increases in our installed base. We think that will change here as we move through the latter half of 2008 and 2009. We have some incremental opportunities, primarily in Eastern Europe and Russia that will begin to kick up this installed base above the $10 billion mark.

Interesting, but really critical statistics that we match and we run. Not only does it determine what our total pool of opportunity is in the aftermarket side of our business, but more importantly, also to determine market shares and how we're doing on achieving our parts business worldwide.

Let me finish with I guess the biggest news of the day. We have been doing this now for four years. We became public on the 23rd of July. This is the first year that we felt compelled to increase our guidance. We typically set our guidance in February for the year and then adjust it as we moved forward. We pretty well have good visibility as everyone knows at this point in the year. Our original guidance for the year for revenue was $2.350 billion to $2.425 billion. We're raising today that guidance to $2.400 billion to $2.450 billion. So $2.4 billion to $2.45 billion.

On the earnings or adjusted EBITDA side, our original guidance for the year was $375 million to $425 million. We are raising that guidance now from $435 million to $455 million. So it's a nice pick up and obviously, we've got some pretty good visibility on those as we try to tighten the range a little bit and move it up to something that's more appropriate for our performance this year.

Obviously, we're having a good year and we expect to close the year out in the same fashion.

With that, Kent, I think we can turn it over to questions. I think we can take the first question I believe from the floor once we're set up to do so.

Question And Answer


Thank you. [Operator Instructions]. Your first question will come from the phone lines. Barry Bannister, representing Stifel Nicolaus, please proceed.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Hi Tim, nice quarter.

Timothy W. Sullivan - President and Chief Executive Officer

Thank you.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

With the installation of the BPS, what sort of working capital percent of sales and inventory turnover specific targets do you have and what kind of timeframe?

Timothy W. Sullivan - President and Chief Executive Officer

Well, let me... Craig may want to give a little more precise answer. From a working capital standpoint, again, I think it's not an issue for us. Matter of fact, working capital becomes an issue for us more in a down market than in an up market because of our terms of payment. We remain cash neutral on anything that we do sell, and in some instances cash positive. So as we ramp up our capability, that will not change. Matter of fact, where we do have working capital issues is more in the down market where we are actually billing [ph] for inventory. But right now, we are well ahead of any of those types of needs.

Craig R. Mackus - Chief Financial Officer and Secretary

As I mentioned on my talk, on inventory turns, which is one of things we monitor, it is at around 3 turns. We have talked in the past about trying to have a goal of 3.5 turns, and that would still be our goal. And we are in a position now where we are trying to protect steel and other cost increases where we are carrying more inventory than we normally would. We also... are also trying to make sure we ensure the accelerated deliveries we have going. So because of supply chain issues, we are carrying a little bit more inventory. But I think we pretty well have added the inventory to a level where we think we can effectuate our manufacturing scale going forward.

So we really wouldn't expect that to continue from that level and it's been more stabilized. And as sales go up, as OE sales go up that have a percentage of completion accounting, that should affect our inventory turns to get back to where we were a couple of years ago, which is 3.3, 3.4.

On the receivables side, we sort of have a mismatch this quarter. You probably saw on the liability side of the balance sheet a fairly large increase in advanced payments. So it's primarily in the longwalls where we have some customers who have given us a significant amount of cash that's allowed us to work on their product. And we're actually ahead of the game, so that's why we had a larger liability within some other customers who have for various reasons, we have not received the same payment terms. So we've more, what I'd call, unbilled receivables right now.

So as you work though these orders over the next couple of quarters, the hope is that receivables, depending on new orders, that receivables will come down and then the advanced payment would be used up against what we are working on. So the answer to your question is that we expect it to stabilize or slightly get better as we go forward.

Timothy W. Sullivan - President and Chief Executive Officer

I guess really, the answer is we hope it to get slightly better. If we can get out far enough with certainly on cost, obviously, with our terms, we can flush through some of those inventory increases that we have been able to affect. So really, the challenge is going to be that we can get far enough out on our cost certainty to lock up the LOIs and to get the terms of payment flowing.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Okay. And then just lastly, Tim, would you adjust downward and by how much the 442 draglines in the filed for the cannibalization of small models for the upcoming and existing intermediate to large ones? And the second part of the question is, 62% of year-to-date shovels were copper and iron ore. And historically, in the last two and half years, it was only 42%. So how should we think about your shovel mix going forward?

Timothy W. Sullivan - President and Chief Executive Officer

On the cannibalization, that actually... the 445 takes into effect that certain draglines have been cannibalized. It's interesting. It is mind boggling some of the things that they are putting back to work out there right now. Obviously, with coking coal prices where they are at in particular, even some of the smaller draglines that probably would not have been touched are being thrown back to work as quickly as they can with, I would say, some minimal expenditure. So that 445 is a net number of anything that has been cannibalized or parts removed from it.

As far as the shovel mix, it's funny. We will have just a rash of activity in one segment of the commodity market. The oil sands have been pretty quiet the first half of this year. We think the oil sands are going to be very strong the second half of the year.

And I think it's interesting, I think there is a little bit of peer... I don't want to call it peer pressure, but certainly visibility between producers. If a copper producer starts buying equipment, it's almost the other copper producers jump on the bandwagon and want to make sure that they get their slots. So I think that's where you see kind of more of a run on the commodities at one point in time. There is kind of that looking to see what the neighbor is doing and making sure they don't get caught out themselves.

But it is unusual to have the mix that we had on copper and iron ore the first half of the year. I think we talked about this on the last call. We have signed a contract with Valley that can be as high as 38 shovels over the next five years. That has kicked up the iron ore demand on shovels here in the near term. We are now up to 11, 11 of those shovels being confirmed with purchase orders as of today. So as the Valley initial business flows through and as we see more of demand coming up on coal and oil sands, that will probably balance out going forward.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And that CVRD order was part of their five year large expansion they announced or something different?

Timothy W. Sullivan - President and Chief Executive Officer

Exactly. I think... I can't remember the exact numbers. It's been a few months now. But I think they announced that they are going to spend $49 billion in capital over the next five years, the 38 shovel commitment to us. And that's just part of their commitment to us. We are negotiating other things with them right now as part of that $49 billion.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Okay. Thank you.

Seth Weber - Banc of America Securities

Good morning. It's Seth Weber from Banc of America. Can you just expand on your comments about the China market, how that's moving more towards local sourcing and how your joint venture might play into that, the effects of that market? And also I would be curious if you have any comments on the particular [ph] price controls that have been put in place there by the government the past week on the price of thermal coal. Thank you.

Timothy W. Sullivan - President and Chief Executive Officer

China continues to be, obviously, a challenge for Western suppliers. It's a government policy that they will buy Chinese manufactured equipment. What that's done, though, and I think you've read this in the press in the last seven days, they're in trouble. They can't get enough coal because their local producers can't provide the type of equipment that we make to get the large mines moving at the level they need to be moving to produce coal. They've actually gone back to some of the township mines and tried to reopen mines that they had force closed here last year.

Obviously, our strategy is to go JV. JV is never your number one choice, I don't think working in a market. But we looked at all the various opportunities in that market, we felt that the policies of the government will be sustained. We're convinced of that. We do not plan to make major investments in brick and mortar in China because of that reason, and the fact that we have a market that's strong right now and putting too much capital in that market I don't think is wise.

We have significantly discounted our opportunities for that market. In this year's plan, we think our new JV with Huainan will position us to at least capture some of the business from that market. This is what you have to keep in mind, though, it's interesting. If you look at a shield supplier, a roof support supplier in that market, if they sell 6,000 a year, that's equivalent in dollar terms and margin terms to 2,000 of our shields. So there is a lot of equipment being sold at very, very low cost, very, very low margin opportunities.

Everyone says well, it's a big market, you've got to be in it. Yes, we've got to be in it, and we will be in it to some level. But our expectations have been kept in check and kept very low as to what we're going to be able to get out of that market. What we like is the upstream play where we are selling to companies that are providing them with the iron ore, the copper, the coking coal that they don't have and keep working that strategy. But we've discounted it. It's to be a tough market. It's going to a tough market for Western companies, particularly in coal mining because they've specified that to be a strategic industry that they want to do on their own.


The next question comes from the line of Terry Darling representing Goldman Sachs. Please proceed.

Terry Darling - Goldman Sachs Research

[Technical Difficulty] Thanks.

Timothy W. Sullivan - President and Chief Executive Officer

Yes. Yes, I do. We, actually in the quarter, we've had some nice bookings in India. We booked three large shovels and five small shovels in India. The three large shovels have a MR contract. We have had a change in management at Northern Coalfields where the four draglines are being evaluated right now. But we believe that those four draglines will be placed in September-October timeframe.

India is going to be completely different market. It's a lot more open to Western suppliers. They obviously want to keep their costs down. On the underground side of the business, they are entertaining quotations from the Chinese manufacturers of underground equipment. But on the surface side, they've been sticking with us primarily. We've run a good run in India and we think that will continue.


The next question comes from the line of Terry Darling representing Goldman Sachs. Please proceed.

Terry Darling - Goldman Sachs Research

Thanks. Tim, wanted to follow-up a question on guidance, which, got our math right here, looks like your new guidance implies a different mix than what we've seen over the last three or four years or so. If we take the high end of your new range on EBITDA guidance, first half of the year actual about 50% versus 40% historically. I'm wondering if you could talk about the drivers of that. Are you still being cautious on your throughput expectations? Is the addition of DVT changing the pattern relative to history, or are you just staying conservative on us here?

Timothy W. Sullivan - President and Chief Executive Officer

I don't think we are conservative, Terry. Obviously, we want to make sure that the guidance that we give is solid guidance that numbers that we can hit. We... I think Ken is going to go through this a little bit. The good news about what we have done here is that we've got tremendous capability. This is a construction site today and as the construction crews move off, we will be reevaluating what our throughput really is in our surface operations here in Milwaukee. So I think we're being somewhat cautious as far as the shipments.

Accredit to our manufacturing team. If you could see some of the things that they've been working around over the last two years, we're really looking forward to have the construction crews out of here to see what we really can do. So are we being overly cautious? No, I think we just want to make sure that the numbers that we do project out there are numbers that you can take to the bank.

Terry Darling - Goldman Sachs Research

And also if you could talk about where your thoughts are at the moment on additional capacity expansions and if you link that into initial thinking on... at least directionally on capital spending for 2009, as you try to deal with the acceleration demand.

Timothy W. Sullivan - President and Chief Executive Officer

Well, obviously, we have been spending at some pretty high levels the last couple of years. At this point in time, we see that the capital will fall off fairly significantly in 2009. It will probably start falling down to more of a maintenance type level unless we see there is something out there that we need to do.

Right now, we are running I think at a pace of around $100 million in CapEx for 2008. We've projected out something more in the line of $30 million to $40 million for next year. Again, that's a moving target at this point in time. But we think 2009 is going to be one of those years that we've got the strategy in place for draglines to build up to five draglines a year. We obviously have the capacity here. I think 2009 will be a year to hunker down and figure out how we can get product out the doors efficiently as possible.

Terry Darling - Goldman Sachs Research

Okay. Thanks very much.


The next question will come from the line of [indiscernible].

Unidentified Analyst

[Technical Difficulty]

Timothy W. Sullivan - President and Chief Executive Officer

Yes, both Ken and Luis are going to give you some very precise numbers on the mix. I can tell you, though, obviously, that if you go back to 2001, 2002, 80% of our revenue mix was aftermarket to OE. We are getting very close to kind of a 50:50 proposition in the surface side of the business. And even on the underground side, and I'm stealing their thunder, they are going to give us some nice presentations here, but we around a 60:40 on underground, which is a major departure from the 70:30 that has been historical with the underground side of the business.

It's going to be hard, Joel, to really I think determine as we go forward because I would tell you that in a normal type of cycle that we are in, we could go 60:40:60 to OE to 40 underground... or 40 aftermarket. The aftermarket has not abated and this installed base is throwing off annuities that are very, very strong. So I'll let Ken and Luis maybe answer that question after their presentations because they may have a better feel for it, though, myself. But I don't think we are going to see historical splits.

Unidentified Analyst

: And just to follow up on, any impact on the underground OEM order comps from the acquisition of DBT? Is there anything that's in there now that wasn't in there a year ago? Or can you give us a number for the incremental?

Unidentified Company Representative

The OEM comps?

Unidentified Analyst

Yes, the order on...because DBT was only in for a partial period a year ago. So I don't know if you can give us what was in for DBT this year, the second quarter versus last year's second quarter?

Craig R. Mackus - Chief Financial Officer and Secretary

Well, on a pro forma basis you are talking about, I actually don't have that number with me now for the quarter. I can get it for you, Joel.


The next question comes from the line Kent Green representing Boston American Asset Management. Please proceed.

Unidentified Analyst

Yes. A question pertains to, say, your labor cost. Is this going to be a problem, particularly with your expansion at Milwaukee? Are you finding enough people? And I know you are fully staffed now, but is availability still there... and the competency is still there?

Timothy W. Sullivan - President and Chief Executive Officer

Well, from the labor side, it's always a challenge, I think we are satisfied with where we are as far as the labor level. What we really want to do is refine it a little bit and move it up a little bit as far as competency. Obviously, when you ramp up your capability as quickly as we have, you want to make sure that as you move forward that you build in the right labor content that's going to be very efficient.

We are still out there hiring. We will continue to hire. I think that's going to be an ongoing type of phenomena for us, especially if you look at the demographics of our work force. We have got a fairly large chasm between this group that starts between 57 and 62 years old; that's a group of individuals. And then you have got the younger guys that are in their 20s and 30s. We are actually... we are having Secretary Roberta Gassman here today who is the head of Workforce Development for the State of Wisconsin. Her and I [ph] have got a taskforce working together to create a solid pipeline for years to come here in Wisconsin to make sure that we have got younger people available as this older workforce moves to retirement age. But right now, we are in good shape. I think we'll always continue to hire and refine, but I think we're at the levels we need to be at, at the production levels that we've planned for this year and for next year.

Unidentified Analyst

And then one quick follow-up question about China on the joint venture. Is there any general terms that you think are appropriate with joint ventures over there? And do you have anything in the pipeline which would establish something like that or are there very large producers or a lot of larger producers in the marketplace that you could do a JV with?

Timothy W. Sullivan - President and Chief Executive Officer

We're looking at all possibilities over there. The JV that we are establishing with Huainan as far as I think to answer your specific question, that's a 60:40 JV with us having 60% of that JV. I think it's important if you can get control, to get control. We are looking at other options in conjunction with Huainan. Huainan is going to be an exceptionally good partner. They're very well placed we think as far as not only their own demand, but demand of neighboring provinces. We like the position we've got as far as our ownership position in that JV, but we are looking at other opportunities to grow that opportunity.

Unidentified Analyst

And does that joint venture cover both surface and underground?

Timothy W. Sullivan - President and Chief Executive Officer

Yes, both.

Unidentified Analyst

Thank you.

: Andy Kaplowitz: Lehman Brothers Equity Research: Andy Kaplowitz with Lehman Brothers. Nice quarter. Looking at margins, you've had a couple of goals out there for a while, you've had surface mining 20% EBITDA, you've had SG&A as a percent of sales 10%; you've obviously exceeded the SG&A this quarter, you've exceeded the service mining goal for several quarters. And so the question is have you set new goals internally for yourself? What can we look forward to? You mentioned that SG&A as a percent of sales could go down a little bit as we see going forward.

Timothy W. Sullivan - President and Chief Executive Officer

Yes, the SG&A as a percent of revenues is going to go down as we grow the revenue. And we don't really need more people to do that right now, at least appreciable increases in personnel. We set a goal four years ago to hit 15% EBITDA margins. When we hit that, we set a goal two years ago I guess to hit 20% EBITDA margins, which were the margins that this company achieved back in the other major cycle that we enjoyed during my career back in the 70s. I think we tapped out at around 20.8. Well, Ken and his people in the surface side of the business have exceeded that and again he will show that in his presentation.

And the underground segment has ramped up very quickly to catch up with our surface operations. Where they're going to top out is a question, I think a lot of what we are going to get now is through the efficiencies of what we are going be able to tour around and see today. That's where a lot of that incremental type of margins are going to come from; I think there is going to be kind of a capping out to some extent, with the producers and I think we're in this for the long term. And we want to make sure that we price accordingly but not to the level that we hurt or burn relationships with some of the large multinationals. So, we're going to pick it up I think more through the efficiencies going forward.

: Andy Kaplowitz: How much is the efficiencies have seen so far in surface mining business or are we just have to service that?

Timothy W. Sullivan - President and Chief Executive Officer

We're just getting started. I mean I think there is we're picking up some, but again as you see as you walk around here today we've got the construction equipment kind of parked off on the side, but you'll see that there is a lot of more opportunity here. And again, Ken can probably address those more specifically during his presentation.

: Andy Kaplowitz: One follow up. I know that draglines is a tough subject you never know when they're coming. You've talked in the last quarter about North American, Australian opportunities; obviously you just mentioned the Indian opportunity. What you see out there this quarter are people getting closer to making these big decisions there?

Timothy W. Sullivan - President and Chief Executive Officer


: Andy Kaplowitz: I'll take that. Good answer.


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

Unidentified Analyst

Yes, good morning. This is actually Tom Brinkman standing in for Charlie Brady. Just wondering about the capacity expansion you have done in Milwaukee. Can you get more shovel production than the 24 per year that I know you have officially stated? And if so, when would that be, about how much more could you get?

Timothy W. Sullivan - President and Chief Executive Officer

We can get more than the 24, and I'm going to let my good friend Ken Krueger address that. I think he's got a presentation that will show you what he plans to do at least this year, and he can answer what he thinks he can do in the future.

Unidentified Analyst

Okay. And also about the demand for shovels, I know that there has been a lot of talk and some sort of an update you need in a weekly basis almost it seems like. What do you think the global market is for shovels. Is it going above 50, 60 out a couple of years? What do you see there?

Timothy W. Sullivan - President and Chief Executive Officer

Yes, I think both our competitor and ourselves thought that we were at a 50 to 60 shovel opportunity a year ago. We both agree now that that's incorrect. We think we are probably at a certainly to 60 to 70 rate. But really, it's interesting. When we visit some of the investment people that are out there, we always tend to have the analyst that deal on the commodity side of the business too because they want to see what the producers are buying. We are well and truly into this cycle in a big way.

And I think I Mike mentioned it at joining [indiscernible] on his last call that he thinks that this cycle is accelerating I would have to agree with that. I think that we're into a point now of extremely strong demand in that 60 to 70 is more the number of shovels that we think that are out there on an annualized basis.

Unidentified Analyst

Okay. Finally, can you just give us some numbers, a little bit of quantification about the raw material cost increases? Thank you.

Timothy W. Sullivan - President and Chief Executive Officer

I mentioned that earlier. I think if you look at contract prices, we are talking just high single-digit type increases year-over-year. But that's not the real story. And I would really suggest that when you are looking at these types of cost increases that you dig into it deeper. If I gave you a number of plate steel going up 9% this year, that's woefully inadequate as far as a cost increase if you roll in the calculation of the surcharges. It's really the cost increases are two-fold. You've got to ask the question very carefully. Are the contract prices up? Yes. Are they up appreciably? Not really. It's the surcharge that's the story out there right now. And I think with our strategy on converting LOIs to firm orders in the fashion that we will, we think we will have cost certainty before we roll things into our backlog.

Unidentified Analyst

Great, thank you.

Timothy W. Sullivan - President and Chief Executive Officer

I think what we will do now, if you don't mind, so we kind of stay on schedule this morning, and this is a little unusual because we are giving you exposure to our two COOs.

I would like to start those presentations. We continue the Q&A after they give their presentations. I think that both Ken and Luis have some very good presentations here, fairly brief, but they will probably enlighten us all a little bit more as to what the real opportunities are and where we think we are on the surface and underground side of the business.

Before I get Ken up here, I just want to introduce a few other people that are here from our senior management team that you haven't met yet. And I will just introduce them. We have Bill Tate, who is our Executive Vice President. Bill has responsibility for all of our international operations, our global sourcing, our marketing, M&A. Bill is the Jack of all trades. He is literally my right hand man on all of these things. But his key role is really looking at our operations outside of our business units and I'm happy to have Bill. Bill was the President and CEO of DBT and he is filling a very important and critical role for us now with the combined companies.

We have Barb Stephens, who is our Senior Vice President of Human Resources; John Bosbous, our Treasurer and Scot Cramer, who is our Senior Vice President and General Counsel and Mark Knapp, who handles our financial reporting for all segments of our business.

With that, I think is it Luis up first?

Luis de Leon is our Chief Operating Officer for our Underground segment. Luis comes to us from DBT and Germany. He is based here in Milwaukee with our senior team. And I'll turn it over to you.

Luis de Leon - Chief Operating Officer, Underground

Thanks Jim. Good morning everybody. Again, my name is Luis De Leon. I have been with Bucyrus DBT for eleven years, seven of those years in Pittsburg, three in Lunen, Germany and now one year here in Milwaukee in August.

As Tim alluded to, I am responsible for the underground mining equipment or the underground segment. Just like the products we cover in this segment are that the longwall products, roof supports, AFC, AFC Plows and shearers, the room and pillar products, mainly the continuous miners and transportation vehicles such as the battery diesel and feeder breakers and then finally the Belt systems products.

As you can see here, you can see the breakdown of our sales. 2007, our after sales portion was about 35% of our overall sales. Since we have merged and integrated the organizations, we've made a stronger push to try to increase our after sales activities. As you can see that the first half of 2007, that has worked. We now have 41% of our revenue coming from after-sales sales and that also will reflect in our gross margins as you will see in a little minute.

There are basically two types of underground mining activities, which I think you are very familiar with that are relevant for us. One of them is the longwall methodology and the other one is room and pillar methodology. Longwall is predominantly used globally. Over 70% of all underground coal is produced in this methodology. Room and pillar is, although it's in the U.S., it's about 50% of all underground coal produced with this method. Globally, that is only about 20% of all activities. The 20% you see there, or 19% on the chart are non-mechanized production methods.

As you know, we are very well positioned in longwall. Those products are manufactured mostly in Europe. We have a very large share of the market in roof supports, AFCs. In shearers, we are a little bit weak. On the ploughs, we are not the monopolist, but we have a very, very strong number one position.

Underground coal mining or our equipment based on underground coal mining is obviously very much dominated by coal. Over 95% of our sales are related to coal mining activities, steaming coal and coking coal applications. We still see a lot of growth potential in coal, especially in the emerging markets such as Eastern Europe, China obviously and also India. And I'll also talk a little bit our sales breakdown in the minute and show you how that is affecting us.

Well CAGR has been about 11% for last until 2004 to 2007. The numbers you see here are pro forma DBT numbers. These are not the numbers that have been reported in terms of [ph] Bucyrus since the acquisition of DBT was obviously May 4 of last year. The first half of 2008 is obviously all in the reporting numbers. We have been able to grow our EBITDA to 17.2%, which is about up about 50% from last year. I am going to go into that a little more in the next couple of slides.

Our breakdown of sales for 2007. A large part of our sales are in the U.S. market, or what is referred to as Americas, mainly U.S. and Mexico. Sort of as a rule of thumb, which I feel breaks down the market as follows. You have about 30%, 30%, 40% coming out of the U.S. market, 30% coming out of further, the mature markets you see here as Australia, Southern Africa, also include Western Europe in that, which is obviously declining and then about a third coming out of the emerging markets. In 2007, a big chunk of that came out of China. In 2008, the breakdown would be more shifting towards the European markets such as the Czech Republic, Russia, Ukraine, Poland and also increasingly, India. We have a lot of activity there on the sales side. Tim talked about that a little bit earlier. And we have high hopes that that will take on a bigger share of our business.

Our major manufacturing hubs were basically three major manufacturing hubs for our capital equipment, our longwall products are manufactured in Europe to a large degree, Eastern Europe supplies us with the steel components, the high-tech components come from Germany, we also have our engineering base located in Germany for the longwall product and that situation works very, very well especially now that the emerging market Eastern Europe again Russia, Czech Republic, the Ukraine and so forth are right in front of our doorstep. So that makes it a lot easier for us to sell. Some of those customers accept also the euro as the currency for our deals.

The room and pillar products are basically produced in the Eastern U.S., Pennsylvania, Virginia. That's where we build our continuous miners and all our transportation vehicles. And our belt systems are also basically manufactured in the Eastern U.S. We supplement all these product lines with manufacturing out of China. So we buy and source certain components there. We have a strong or building a strong sourcing team out there that is trying to find new suppliers to work with. We also have, as Tim mentioned earlier, high hopes that the joint venture partners that we are going to be working with will complement our manufacturing structure for our business to remain competitive.

Our margin expansion. We have here in red you can see the EBITDA curve. End of 2007, we are around 11.4% for the year; it would have been a pro forma number again. And we are there for the first half 2008, we are at 17.3%. I've very satisfied with that. And mainly coming from our increases in the operational side of the business, driven by after sales, driven by efficiencies in the manufacturing, sourcing and we've been able to raise that margin to 27%.

The SG&A has been a strong focus and I'll talk about that in a minute. A lot of it is related to the German activities. We have fully integrating both companies or both segments. We have the integration of the regional centers in the different markets. The sales team are now operating as one team. A lot of the SG&A... a lot of the customer service margins that we have been able to improve, the aftermarket margin comes also from the pollination from surface and also underground activities regionally as also in the headquarter here in Milwaukee.

We have also relocated the German headquarter out of Lunen here into the Milwaukee area about a year ago. The remaining activities in the headquarter Germany have been phased out.

As you may be aware of, we had agreed on a social charter. This goes back to the RAG shareholder, which only allowed us to lay off 30 headcount per year. So it would have been 30 in 2008, 30 in 2009 and 30 in 2010. At the end of last year, we renegotiated that with the unions and we agreed to downsize 125 employees. And we immediately went out to do that and that is all basically taken care of as a complete.

Only caution I have to say there is that a difference then in the U.S. when you downsize in Europe, there is a lag time between 6 months and 24 months where people phase out. But you have to negotiate that with the individual employee within a framework with the unions. So as we go through 2008 and 2009, we'll see our SG&A come down. A large portion of that headcount is overhead-related as you see also in our performance for the SG&A.

Other operational improvements have been on the aftermarket side. Obviously, we have tried to price now on a biannual basis instead of once a year. That allows us to adjust for price increases that obviously also affect the after sales business. We have tried to be more aggressive, tried to get a bigger share of our after sales business. So the ongoing population has grown, so we are also participating in that. And we also have an impact of obviously the exchange rate has helped us also grow that part of the business.

Bucyrus production system, we are trying to become more effective in how we manage our organization. We are working on standardizing products which allows us to go to our suppliers and try to order components well ahead of time that allows us not to miss slots because of lacking supply chain. That's already starting to improve. And I think a lot of the bottom line effects are attributed to that.

Other areas of improvement related to our global SAP platform. Before a year ago, we had five different global... five different SAP platforms throughout the world independent. Their own IT infrastructure, their own setup, their own support functions. And we have gone out during the last year and basically integrated all those platforms on to one global platform.

The dates you see on the chart here are the dates that we transition to that. It was a very aggressive timeline. But I think we will now have a platform that will give us a lot of potential for more visibility for parts for example. Lower costs. Obviously, we only have one IT platform that we operate from now. We have reduced the cost there and we obviously have potential to reduce headcount since we are not at five functions throughout the world, but only one doing it for the global platform.

Some of the things that have already popped up, part numbers. We have had 40,000 duplicate part numbers in the system. Those may not sound like big issues to you, but that allows us now to see globally what parts are available. And we expect to reduce our inventory as part of this platform. Furthermore, we can now use some of the materials that we have in one country. For example, a manufacturer, a continuous miner in the U.S. We can download that bill of material in China very easily. Costs or supplier costs that we are generating or getting in one country is now visible to the whole organization so that everybody can participate in those local prices.

Some of the things we're looking forward to in the upcoming months, we are obviously focused on trying to improve our product lines on the ongoing basis. Some of our products are obviously very strong, but other areas we need to invest a little more in and we are doing that; one of the examples to that would be the shares; also looking at the other applications for mechanizing other types of underground hard rock materials for example. We'll continue to improve on our operations now that we have the global SAP platform, we will be able to drive a lot of that and furthermore, also looking at other companies out there that could be good bolt-on acquisitions for us that can round off our product portfolio. Thank you.

Timothy W. Sullivan - President and Chief Executive Officer

Thank you, Luis. I think we'll hold questions until after Ken's presentation. Next we have Ken Krueger who is our Chief Operating Officer on our surface segment of our business.

Kenneth W. Krueger - Chief Operating Officer, Surface

Good morning. I would just like to add my welcome to our facilities here in South Milwaukee.

Like Luis, I am going to talk a little bit about both the sales growth and the margin expansion that we have had in the surface segment.

Tim alluded to it earlier. Go back over a long period of time, our business was about one-third original equipment, about two-thirds parts. During the second quarter, it was closer to 50:50. We've had an explosive growth in demand in both the machines and the equipment, but we have purposely focused on making sure that we got our share, maybe a little more than our share of the machines to make sure that we set and got that annuity for the future.

As we go through, Tim mentioned we have almost a $20 billion installed base. That really serves as the long-term feeder if you will to our parts and service business. So we've sacrificed a little margin because we make a little more margin on the parts side than we do the machines. But we did it purposely to set that annuity for the future. We have three major product areas. Draglines is the most cost effective way to remove overburden in the world. Typically, they range in price from about $150 million to $190 million. Electric rope shovels, again, range in price from $20 million to $25 million, used primarily to load trucks in coal operations, iron ore and copper, virtually any mining application. Rotary blasthole drills basically drilling a 13 to a 16-inch hole in the ground in order to put explosives in to remove material for hauling away. Those are really our three core product lines.

Sales growth. As you can see if you simply annualize our year-to-date numbers for 2008, we've had sales growth over the last four years in excess of 25%. At the same time, we've moved the EBITDA, the profitability, up from $48 million to about $130 million, more than doubling the EBITDA returns from a little over 10% to 22% here in the first half of 2008.

It has been a very steady and stable growth. It has been largely gated by our ability to increase our production capability. We have done a lot here in South Milwaukee to expand our capacity. I'm going to talk to that in minute from adding footprint and adding people and going forward, we are going be adding to that capacity by making more effective and efficient use of that newly added capacity.

If we take a look at in terms of deliveries, and I think this again reemphasizes that the emphasis towards the machine side, we have gone from delivering ten shovels in 2005; year-to-date 2008 is 12 machines. So if we do the same thing in the back half of the year, that will be our former target of 24 shovels per year. So we have more than doubled the machine sales over the last four years. We have had good growth on the parts side. We've gone from about $400 million three years ago to again an annualized amount of a little over $600 million this year. So more than a 50% increase in parts as well.

There is a number of factors driving that sales growth. I'm not going to spend a lot of time on that this morning because I know you are all very familiar with the fundamental drivers from coal in both the emerging economies. Obviously, the industrialization of China and India and the emergence of the Brazilian and Russian economies, that drives an enormous demand on commodities. Typically, in a stable economy, they will grow by 2% to 3% on the consumption of commodities. That approaches more like 8% to 9% to 10% as they go through the emergence into the global economy.

That creates demand for the mature economies obviously from an export standpoint. The other thing that's going on in the mature economies, especially in the U.S. is a rebuilding of the power grid. A lot of that is fueled by coal or uranium and also creates demand for our products.

Copper historically over long periods of time, copper was $0.60 to $0.85 a pound. I know it's plummeted recently. I think it's down to $3.5 a pound overnight. But we have a situation where there is a short term... short term being three to five years shortage of supply relative to the worldwide demand for copper. At the same time, we serve the oil sands, a tremendous oil reserve up in Alberta, Canada.

Those have all come together, some with really some long-term nature to them. At the same time, we were just beginning to enter the knee of our normal replacement demand. So it truly is the perfect storm of demand in the surface mining equipment business.

So at the same time that we have had an explosion of growth on the machine side, we have also had good growth on the aftermarket side as people refurbish the machines, as they use them harder, as they took machines out of being parked and putting them into an active status. So really across the board, what's driven that sales growth are these factors as they impact us in turn for demand from the customers.

And we take a look at the bookings over the last, I guess, is it ten quarters here. It really reinforces that. The coal markets, the mature markets drove demand from six shovels. This is electric rope shovel bookings, while the emerging economies were behind 13 of the shovels. 15 machines ordered in the copper fields. The one that we hadn't necessarily predicted as were looking forward to building up our capacity to meet what we were projecting, as Tim said, that 50 shovel demand was iron ore. But we have had obviously with the... everything that's been going on again in the emerging economies in the consumption of steel, iron ore has also taken off in conjunction with the oil sands.

So really, what this chart is meant to show is that the things we have been talking about for two to three years is the fundamental drivers for demand have really come to pass. In addition, we've had an influx of iron ore demand. And we've also had an acceleration really of the demand here in the last three to six months. As you can see, we took 22 shovel orders in '06, 10 last year and we took 27 orders in the first six months of 2008.

What we have done over the course of the last 2.5 to 3 years to meet that demand as expand the capacity here in South Milwaukee. And those of you that are here today will see that. I'll go through the building expansion in a moment. We've put about $150 million of investment into our factory. We've also refurbished and refinished the offices, we've also put a large equipment in place, made investments again over the last 2.5 to 3 years of $50 million to $60 million in equipment.

We have on this campus added 600 people, about 350 people in the factory floor and about 250 people in the office and in indirect and support roles out in the factory. About two years ago now, we got together with our vendors to show them the story and what was happening in both the coal fields, the emerging demand in oil sands, the cooper demand, the demand that we saw for the 50 shovels, and really showed them what that meant to them. And as we ramped up from the 10 shovels we had delivered to the 24 we are going to deliver, gave them very specific insight into what our requirements of them were going be so.

We worked with the vendors over the course of the last few years so that we gave them as much visibility as we could into these increasing demands so that they were capable to meet that. And as Tim alluded to, when you walk through here today, you are going to see that there is a lot of castings, there is a lot of forgings, there is a lot of plate steel; that's purposeful. We have worked ahead to make sure that we have the raw material available to meet the customer demand.

We have reengaged and worked very hard also with our sub-contractors as much as we have expanded the capacity and capability of this facility. We can't get all that we need simply out of this plant. We do need to work with both machining centers as well as people who would do some welding for us around the world. That will become increasingly important as the dragline demand hits. And a lot of that by its nature, will happen outside of North America and we will use increasingly and have bigger demand on our sub-contractors going forward.

In addition to what we have done in the facilities here on a global basis, we do have workshops and well capability in virtually all the major mining areas of the world. We have expanded those over the last several years. We have also added another... about a 120,000 square feet wall facility here in Milwaukee, just south of here... I'm sorry, it's just north of here actually.

That's the things we have done to add to the capability or to the capacity over the last two and a half years. Largely, our footprint here has been completely renovated and we have increased and as you see, made available the capacity to go from 10 to 24 shovels.

The market is telling us that's not enough. The future efforts that we will be putting into place really relate around the Bucyrus Production System. It's our implementation of lean manufacturing. I will talk to that in just a minute, but that's really what's going to drive future capacity for us.

Talk a little bit to the expansion, what you'll see here today. North of our Austin facility is a brand new building. I believe ground was broken in December of 2006 for that, and we got into the building in... somewhere in fall of '07. There's 250,000 square feet there, a new machining center, there is 24 going to 30 well base [ph] there, 6 fabrication centers. We also put into place about 100,000 square feet as lay down yard for steel.

On this side on the campus, we completely renovated our assembly hall. We added about 40,000 square feet to it. We took our old foundry. That's now been torn down. It became a 100,000 square foot lay down area for castings right outside here. And then we took our old fabrication building and we turned that into both a receiving and a shipping warehouse that serves not just our customers, but also serves to feed the factory floor in the assembly building and is really the logistics hub of the surface segment.

We talked about as well adding that leased facility in Milwaukee for the well and putting into place some well capability, some workshop capability near our customers around the world. So lot's been done in the last 2.5 to 3 years basically to add to the physical plant of the building in addition to bringing in the equipment and the people necessary to man those buildings, man those machines and increase the production capability.

Bucyrus Production System, our clever renaming of the Toyota Production System or lean manufacturing. It's a relatively new effort for us. We are about two years into the journey. The early part of that was really adaptation, acceptance, broad-based training. We are now... we're through that phase, we're into the first steps of 5S, which are some basic tools to standardize and to organize the work centers. We have put up glass walls with metrics for each of the work centers. You'll see that as you go though the plant today with quality, safety, morale and productivity targets and achievements so that everybody knows what the expectations are. In addition, we've put in problem solving tools through the office through the plant.

The projects that we have underway now are to increase the throughput, the effectiveness, the efficiency. We have got Kahn Bahner [ph] pull systems in place in a few areas; they need to go in in a lot more areas. We have got specific projects targeted towards material flow, transportation, logistics one place and one place only for every thing and really streamlining the flow of material to the plant.

We talked about the fact that the inventory is up and we're kind of okay with that on the raw side because of the availability. Most of the finished goods have been paid for because of our terms and conditions. What we would really like to squeeze down, though, is the work in process, not just because of the investment that we have in it, but by doing that, we're really going to increase our capability, the speed that we get things through the plant and the ability to increase the number of units we manufacture every year.

The other... some of the projects we have going on is we have historically been technology leaders and we have some very effective equipment out there. It's not always been necessarily designed to be easy to manufacturers. So we are taking some of the effort in that design team in our engineering force and working to make the product more effective for... and more easily manufacturing. It really will be a key element, Bucyrus Production System. It is the way we are going to continue on that growth path that we have for the last four years.

This is the margin expansion, the red line. I guess mine line is purple, being the EBITDA return. As we've said, our historical target had been 15% return that was achieved a few years ago. We then went to a 20% target and we've been able to maintain more than a 20% EBITDA return for the last three quarters. That's been primarily through gross margin, a combination of leveraging the capability, becoming more effective out in the plan, having pricing increases at least offset the cost increases. So that has been the primary drivers behind the gross margin.

At the same time, just due to the volume of the SG&A target of 10%, we have actually achieved that... and more than achieved that. We were down into the 7% range here in the first half of 2008.

I think we are going to actually have to bump that up a little bit on the surface side. We've focused on expanding our manufacturing capability and capacity and talked about the 600 people we added there. We are going to need to add a little bit of capability on the engineering side to make sure that we continue to make the technical, the new products we need to continue to fuel the growth. And at the same time, we also need a little bit of help on the sales and marketing side, again, just to deal with the level of demand that we are seeing.

Really, these are the drivers behind the increased in expansion of the margin. One is just leverage. We have 2006 and 2007, marked that period of time when we made the majority of the investments in the building and the equipment. We still have a little bit of equipment coming in. But we are largely manned on this facility. So we are really looking forward now to being able to leverage that capability. We have got, if you talk about adding 600 people and there is 1300 people on campus, that tells you that every other person has been here less than two years. But they are now trained, capable, beginning to come up that ramp. And that will be part of the margin expansion going forward.

Again, through the implementation of lean manufacturing, Bucyrus Production System will have reductions in work in process inventory. We'll have better utilization of the labor, increasing the throughput. We also have made strides in better electronic interchange with both our vendors. I said we made visible to them what our demand was going to be. We've also put in place electronic capability to quote customers, we've had... put in place available to promise dates that are immediately available to them. So put some tools in place so we could be more effective and efficient in our customer interface as well.

The other thing that will help drive and support the margin expansion is to make sure that, as Tim said, it's the prefect circle. The largest cost increases we have are the very commodities that are being mined by the people that we are selling the equipment to. So we just need to make sure that we keep pace on the price side with what the cost increases are impact... or how they are impacting us.

And that's a really it. If you see the... over time, over the past quarter, again the steady growth in sales and the expansion of the margin. We talk a little bit about what we've done historically to set the base and really provide that capability and some of our plans going forward.

So with that, I believe we are to that point where we are going to reopen it for questions.


[Operator Instructions]. Your first question comes from the line of Barry Bannister representing Stifel Nicolaus. Please proceed.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

In the talk, you largely answered the questions I had. But could you give us an idea of what kind of capital spending to expect beyond '09? Is it going to be a maintenance level of $30 million, $40 million or do you think it will rise over time given the constraints you have of producing below market demand size and shovels and with the draglines there yet to come?

Timothy W. Sullivan - President and Chief Executive Officer

I'll go ahead and answer that one. Yes, we really expect that this will get back to a maintenance level unless something usual happens in the marketplace that we don't anticipate right now and we really don't see anything. We pretty well have good visibility on where we think the demand is going to come from. And I think the money that we've spent at the large levels, the high levels here, both the underground segment and the surface segment will go to a normalized level beginning in '09 and kind of continuing forward from there.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

And then lastly, you mentioned the need for more engineering and sales personnel, do you think that that will change your SG&A percent of sales goal to keep it at around 10% instead of the mid 9s or can you can still maintain the current level of control?

Timothy W. Sullivan - President and Chief Executive Officer

No, we really think that we've crested over now and that our SG&A as a pure dollar expense will remain fairly steady. If we think that we need to increase in any particular area, we will. But our R&D staffing is pretty well in place for what we have planned right now. And I think then if those dollars obviously remain constant or relatively constant over the next year or two, that SG&A as a percent of revenue will even go down further than the 9.6 we achieved in the second quarter.

Barry Bannister - Stifel Nicolaus and Company, Incorporated


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

It's Rob McCarthy with Robert W. Baird. First question has to do with the 24 shovel capacity and Craig's comments during his prepared remarks, it's at least 24. I here you saying that you are in evaluation mode. I just want to check my inference. I don't think you'd be talking about this if you thought effective capacity was 25 or 26. I think your message is that you may be able to produce materially more than 24 from the investments that you have made today am I getting that right?

Timothy W. Sullivan - President and Chief Executive Officer

Yes, I think, again, we went back two or three years ago, walked through those factors and projected out about a 50 shovel market and that really was our target for 24 shovels. And it was a pretty bold target at the time. I mean we were moving from 10 shovels at the time. As things have emerged here as the demand has revealed itself it's clear that there is the market has the capability to take on more than 24 shovels a year. We've talked about the fact that we've grown our sales in that 26% plus range for the last four years through adding capital and equipment and people and that we're going to continue our growth now by leveraging that capability and becoming more effective. And clearly, there is room to do significantly more than 24 shovels.

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

But while still maintaining CapEx as a kind of maintenance level that you all were talking about?

Kenneth W. Krueger - Chief Operating Officer, Surface

That's correct. I mean the effort from here is again is really to leverage what we put in place and don't...there are targets in place, but there's significant improvements that we will have in floor space, in inventory utilization and labor efficiency from some of the projects that in place and those would be really a lynchpin to continuing to grow our capability and to continue to expand the manufacturing capacity.

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

Okay, thanks Ken. and then my other question had to do with profitability in the underground side of the business. You have very strong margin in the second quarter despite I believe Craig you had some, some still some non recurring costs associated with SAP ?

Craig R. Mackus - Chief Financial Officer and Secretary

For the quarter, SAP is pretty well... money has been spent in. And as Luis mentioned, it has been installed, the upgrade that we're doing to the latest version of SAP has now been installed in all locations. Last location was in Germany that went in on July 1st. That money is pretty well winding down; it wasn't significant for the quarter.

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

Okay, wasn't significant. So if we think about the very impressive number in quarter clearly benefited some from mix. Your mix probably shifts more towards machinery as we get into the back end of the year, but you've taken a number of steps to improve the profitability of the business. So what should we will looking for in the back end of the year is the kind of profitability we saw in the second quarter sustainable, or is this maybe a higher watermark because of the shift in mix that we see?

Timothy W. Sullivan - President and Chief Executive Officer

Let me answer that. I think we are fully booked for the year. So the margin is literally plugged, if you want to call it that, for the rest of the year both on surface and underground. And I think I've stated that we're really into the orders that we are being passed [ph] through Lunen in the second quarter are very similar to the orders that are going to be processed through Lunen in the third and fourth quarter. The answer to the question, Rob, in a roundabout ways, yes, the margins... you can expect those margins to be maintained through 2008.

It's interesting, the underground side of our business, the lead times are a lot quicker. They were about half of what they were on surface. But with surface going out a little bit further now, they are even about a third of that surfaces. So we are working on 2009 now and Luis and his team's challenge obviously is to move those margins up if they can.


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

Unidentified Analyst

Good morning, it's Tom Brinkman again. And just wanted to expand a little bit on what was said with the capacity expansion. How are you going to utilize the outsourcing or subcontractors to sort of boost your capacity? What point in the production process is the bottleneck that might be relieved by using subcontractors?

Timothy W. Sullivan - President and Chief Executive Officer

Yes, and I am sorry if I didn't make it clear that the subcontractors are not just part of our going forward capacity expansion. We have significantly increased our utilization of subcontractors here over the last two or three years. We have gone from about 40,000 hours a year in 2006 to roughly 180,000 hours this year. And where we use them really changes as our bottlenecks change. If you look back 18 months ago, we were scouring the earth, if you will, for gear cutting capability and had a lot of our subcontracting there.

Since then, we have brought in some machinists, done some training, brought in some equipment and we have very little subcontracting out there non-gear trading. Conversely our bottleneck has moved to the weld arena. So a lot our subcontracting is with folks making large weldments for us right now, trucks fringe, rev fringe and dragline tubs.

So significant utilization of subcontractors. That has grown at the same kind of pace that our internal capacity has. It will continue to grow and where we'll use them is wherever our current bottleneck tends to be or happens to be at the time.

Unidentified Analyst

I see. Do you have some kind of I guess training going on for the I guess some middle of employees or some king of program where you are target middle level employees? It sounds like you say you have a gap between the younger employees and the older employees and may be you can just talk about what you are doing to bridge that gap a little bit?

Timothy W. Sullivan - President and Chief Executive Officer

Yes,we very much do have a Barbell of demographics [ph] here and it's something we work at everyday because we have got half of our workforce that typically has been here 20 to 25 years and typically they are 50 to 55 or older. The other half, because they are newer employees obviously have much less experience. They have been here two years or less and they tend to be in the 20s or 30s.

So it's real effort to have they training go on as well as to make sure you recognize those differences and that you make sure that the fewer folks that haven't been here as long as sort of honor and respect the capability and the experience and the knowledge that the long timers have.

As well as you encourage people that have been here little longer to work with the new comers and understand the new ideas and invest them and bring them into play. I talk about it in very short senses like that for something the we work at actively everyday and we have had obviously expensive training for the new people but we are also trying to reach into our development programs and the training that we have for all of workforce and that really is one of other objectives and programs we ahead going on in 2008.

Unidentified Analyst

Okay. Thank you very much.

Seth Weber - Banc of America Securities

Hi, Seth Weber, Banc of America. Just following up on the DBT side, is there any other opportunity to revisit the social charter to a raise the job reductions again this year?

Unidentified Company Representative

The number of people?

Seth Weber - Banc of America Securities

Number of job reductions... is there... is that going to be revisited every year?

Unidentified Company Representative

The agreement... we feel that the agreement that we've reached with them at the end of last year is the number that we were looking for and we will do what we need. Obviously, we do need to have some administrative workforce in Germany with 125 as they phase out. We will now recruit here in there to fill certain critical position but at the stage, we don't think that we need to a lower that number. So therefore, we would not be negotiating that. The agreement itself will go to the end of 2010. So it's a little shorter than it was before. So we don't have a three year agreement... a two year agreement. And I think the relationship that we have with the unions in Germany is so good that if there were any reasons for us to have to go further we would reopen that discussion with them and come up with an acceptable solution for both sides and then obviously reduce that headcount.

Timothy W. Sullivan - President and Chief Executive Officer

Let clarify something as well, and that is in Germany everything, all positions are unionized. So we were not taking production off the floor, these were administrative type positions. So we won't... we didn't miss anything with that reduction. But as Luis is... I think this is important because I get a lot of questions a lot about our driven operations as a negative thing; but extremely positive thing for a couple of reasons. First of all we have got an incredibly well tuned lean team, its over there doing a exceptional job from a production standpoint, we're based incredibly well for other longwall activity in Eastern Europe and Russia and that's been our success. I think a U.S. based company would not be nearly as successful as, as our Lunen based German colleagues to achieve that type of business.

And last but not least I think you have to get up-to-date a little bit on what's happening in Germany. Germany like United States was losing a lot jobs to Mexico, China in the case Germany they were losing it to Eastern Europe. The union situation in Germany has changed dramatically and as Luis alluded to, if we need to make changes I am confident that when we sit down and talk to them that they're more than will to help us in that respect. We are very pleased and I just want to make sure that that misnomer is dispelled, we are pleased with our European based manufacturing capability in Germany and our marketing base for Eastern Europe and Russia being based in Germany.

Unidentified Analyst

Just a quick follow up. On the discussion about the size of the installed fleet and CapEx, do you anticipate spending more money to add service centers around the world?

Timothy W. Sullivan - President and Chief Executive Officer

Good question. I think we've got 51 now 50, 51. We will possibly increase some of that capability in Russia and Eastern Europe with a big increase in activity we've we had there. We're probably a little bit too lean on the ground, we have a new facility that we opened in the Kuzbass region. And we are fairly close with the Eastern European markets being based in Germany but not close enough. So are we going to see 60, no; we see another 1 or 2 in some of these growing markets yes. Will we some activity in India, yes. So I'd say probably over the next two to three years you might see another 3 to 4 our service facilities pop up in those regions. Those are not huge expenditures; they're relatively small, but yet critically important.


Your next question comes as a follow up from the line of Barry Bannister representing Stifel Nicolaus. Please proceed.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

Just could you talk on a broader basis comparatively how you would assess market conditions right now within your own electric mining equipment industry? And then second to that many of the new mines that are expanding in developing countries, on the base metal side and even the surface coal side, these countries have trouble electrifying even their cities. And I've heard that electrification of mines is become an issue, and that would argue for hydraulic equipment like the Hitachi 40 cubic meter bottom dumping three pass 240 tone truck shovel that they've introduced this past year. So can you talk about market share and also competition within electric?

Timothy W. Sullivan - President and Chief Executive Officer

I'll let Ken comment as well, but let me give you my two cents first. I think most of anything that we will produce and move into the marketplace were some of the larger type projects. Whether electrification is absolutely doable. Some of mines that you are talking about, Barry, are typical reserves that Middle has picked up recently, places like Liberia, Mauritania, Algeria, Ukraine, Bosnia, Indonesia.

Now of all those, there is electrification in Liberia, the reserves that they bought are mines that we had some of our old shovels in, we have machines in Mauritania, electric mining shovels, we have machines in Algeria. They basically bought up a lot of the reserves where we had older smaller machines operating.

Having said that, I think the opportunities, if you look historically between hydraulic excavators and electric mining shovels, I think they are going to grow fairly parallel. I think just because of what we see happening in the developing and some of these reserves that are out there. Indonesia, they are not electrified. And those would I think mostly be hydraulic shovel opportunities. Bosnia, same type of thing there electrification there but not sufficient to deal with large scale opportunities. Take for instance Southeastern coal field, in India we need little to no equipment there now we are going to have 3,495 size shovels and cap 240 ton trucks.

So I think if the market is strong at the point that are we believe I think people will spend the money to updates and improve electrified pits and certainly put the expenditure in our large enough type of the deposits that are being developed.

Barry Bannister - Stifel Nicolaus and Company, Incorporated

That's great. Thanks.

Unidentified Analyst

I wonder if you fellows [ph] can talk a little bit about the geographic mix on roof support? Where is it? Where is most of the end market?

Unidentified Company Representative

Well we've had in the last couple of months in 2008, 2009, you will see a much larger share of the business going into Eastern Europe. So we have a lot of business in the Czech Republic through the OKD deal we just signed last year and again in year. And there are other works, their are purchasing going in Ukraine, Russia also Poland. Otherwise, we have obviously the U.S. market has always been strong for us and we'll continue to see a big share of our longwall business going there and we hope not in the infrastructure firms in Australia being resolved that they will be another increase demand for longwall products in South Africa... in Australia, sorry.

Timothy W. Sullivan - President and Chief Executive Officer

Let me add to that Joel. As Americans, we tend to kind of discount Russia in through those difficult times. President Putin took over and pulled really the country up by its bootstraps. Keep an eye on Russia. Russia is advancing quickly. I was there recently and then we recently just took obviously a lot of underground business but the Russian government decided to export their natural gas to Western Europe and that meant really an increase in coal fired power plants of 18% countrywide.

They are also exporting their coal and I mentioned in the Poland and Siberia. With this out currency that the Russian have now they are buying our equipment both underground and surface that was a market completely discounted by us just a couple of years ago. It's a huge market, absolutely huge and I like our position there and I think here as you look at the world economy going forward keep an eye on Russia. They are coming back very, very strong economically.

Unidentified Analyst

Just a quick follow. Ken, can you talk about some of the pressures on the copper mining industry it seems like they are adding shovels and there is not a lot more stuff coming out of the ground. Can you just give us a little snapshot on what's going on?

Kenneth W. Krueger - Chief Operating Officer, Surface

Yes,there is an expansion in the capability and capacity to take ore out of the ground. And the issue is they are just barely beginning to keep up with demand and we have depleted the worldwide inventory of copper. There used to be 1.2 million to 1.4 million tons of copper around the world. And over the course of the last year, I think they have shut the London Metal Exchange down three times because there was no inventory.

So you do see a lot of activity going on with not a lot of perceived progress yet simply because the demand is that strong and the inventories are there low. There is also little bit getting a capability and capacity in the refinery side the most of it is just the fact that the industrialization in China to lesser degree in India. Some of the other emerging companies... countries have put such demand on the base commodities that once inventory ran out they try catch the supply up is little bit of a longer haul than I think people at first expected.

Unidentified Analyst

Can you follow up along with your BPS efforts to have begun to apply in what I call a transactional world, i.e. often manufacturing floor into finance accounting supply chain, new product development. And if so, what has been your experience to date?

Kenneth W. Krueger - Chief Operating Officer, Surface

We are very fairly early in our journey, we are about three years into it so we are through the adaptations facing when I say that's really code for I think its been not only excepted but embraced on the factory floor and that was really one of the first efforts the union leadership here is our partners with us in this effort and really that part of it's gone very well. We're now through to the dual phase where we introduce the capability to... the 5S to shine, sort, standardize and organize the work areas. We are into putting up the metrics and the glass wall. So everybody knows what the expectations of them are and that they are being measured against some very specific goals for that.

We're now just beginning that next phase. We're having been trained in problem solving and having gotten organized and understanding the importance it, we're working on time bound projects material flow projects. The next stage of that will be to flow that back through more of the... been used to phase back office because that's what I am used to using, with those kind of applications and operations. That's not to say that they haven't been doing some of their own continues improvement activities but really have not been yet link up as well as we're going to with the factory floor.

Timothy W. Sullivan - President and Chief Executive Officer

We'll take two more questions if we have them. Maybe one from the phone lines if we have anything in queue and then one live.


At this time, there are no further questions.

Timothy W. Sullivan - President and Chief Executive Officer

We'll take one more live caller or one more --

Unidentified Analyst

Backlog [ph] visibility a little bit more. You mentioned all these LOIs that you have and you've said in the past, you have visibility through 2009 to a great extent and you were starting to orders for 2010. So where are we now when you look forward? How solid are these commitments when we get out there in 2009 and 2010?

Timothy W. Sullivan - President and Chief Executive Officer

We are beyond 2010. We have got LOIs going out as far as 2012, and that's why we don't convert those into orders until we got certainty on cost. I'll call it the pipeline, because the LOIs have become almost their own backlog in and of itself and we're managing that, like I say, in a much different way because it is large, it's very large, both on the surface and underground side.

Good certainty. like I said, LOIs with a very, very high degree of probability turn into firm orders, our challenge, the gentlemen here's challenge to make sure we get certainly as quickly as possible on costs for those time frames to move those LOIs into firm orders. As we see today we're sold out on the surface side through 2009 on shovels and drills. We're still at dragline capacity. On the under ground side we are not sold out for 2009. We have very long pipeline there that we are going to be converting here very soon into back log. But... it's a very unusual situation, very unusual in the sense that we got those two phenomenon kind of going on and its positioning but again I think the good news about, I'll call the pipeline is that both are producing, purchasing public and our sales take LOIs very, very seriously and they would not do this frivolously, because they know the they can be and will be converted into orders.

Unidentified Analyst

Okay, thank you.

Timothy W. Sullivan - President and Chief Executive Officer

With that, I think we'll close it off and stay on schedule. For those of you on the call, thanks for joining us this morning. It was a protracted two hour session, but hopefully, it was beneficial and certainly productive for you to be on the call.

We had a great quarter. We are in for a good year. As I've said, we've got good visibility and the changed guidance we think is virtually certain for the rest of the year. And we hopefully have expressed the thoughts that the market remains incredibly strong and that we think we're on for a very good run for hopefully several years to come. Those on the call, you're welcome to visit us anytime and it's unfortunate you couldn't be here today. I think we're going to have some activities for the group that's here. Thank you for joining us.

And for those you that are here, between now and 11:30-11:45, we will be conducting plant tours with our manufacturing personnel. Ask anything you want, take any pictures you want, this is an open forum. Hopefully, you'll see what we are doing here. Obviously, it's still a work in process. But we're further along than we have been in the past. We will reconvene the entire group at around 11:30 to 11:45 in the central stage area, which is outside here. We are going to be joined by probably another 1200 people for the rededication commemoration of the facilities here in South Milwaukee.

So enjoy your plant tour. We'll reconvene for the commemoration ceremony at noon and then lunch will be served back in here in the Heritage building following the commemoration ceremony. Again, thank you again for joining us today.


Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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