“We will not be cutting research and development. As a matter of fact, that is something that we may enhance as we move through towards the end of the year and into 2010,” Sullivan revealed last week during a June quarter conference call, stating that selling, general and administrative expenses currently sat at 9.3% for the year.
Bucyrus did post a positive June quarter last week with profits rising 32%; however, a 52% fall in new orders dampened the positive news.
Sullivan, though, thinks the market may have seen its worst.
“The booking levels on original equipment in the second quarter were low and some of that's a little bit of a timing issue, but the market is fairly soft out there now. Capex for the big multinationals is down. There are pockets of opportunities, but certainly not at the robust levels that we've enjoyed the last two-and-a-half years,” he said.
“I don’t think it’s [new orders] going to pull down. I think that's probably a pretty good level … I don't want to call it worst case but that's certainly the low end of where we think we can book. I think we tend to underestimate at times the strength of that $US28 billion install base out there, which in five years is three times what it was in 2004.”
Sullivan said the OEM’s plan to move original equipment orders into 2010 was paying off, with $200 million shifted.
“Basically [we are] hoping that we can book enough aftermarket to bridge that gap,” he said.
Bucyrus was lumped with $12 million in cancellations during the June quarter, predominantly coming out of Central Appalachia, bringing cancellations for the year up to $27 million.
To contain costs Bucyrus has cut its workforce by about 7-8%, mostly from its south Milwaukee production floor.
The OEM is also closing its service and underground operations in the UK.
Sullivan said he expected further severance costs in the third and fourth quarters of this year.
Despite the dire situation of markets in the US, Sullivan said “internationally, things are not that bad”
“The steel market seems to have bottomed internationally. Met spot prices are creeping up. Iron ore prices are stabilising. It's going to be curious to see how that all plays out with some of the new strategies on quarterly pricing versus annual pricing versus spot pricing.
“But I think the important thing is our customers are as resilient as anyone. What they really need is certainty. The more certainty they have with pricing, the more they can plan for their production requirements.”
Sullivan said Bucyrus had seen a lot more activity for its products in China after a severe slowdown when the global financial crisis kicked in.
“I think we’re going to see a little more activity than we have over the last two years in China as we move through 2009 and into 2010.”
He said activity for new coal equipment orders was evident in eastern Europe, Russia, India and China.
One of the benefits of the downturn has been a drop in mining costs, with Sullivan estimating a 20% fall this year.
“The market correction has done a lot to help reduce the costs in the mines that were running at a very, very high level,” he said.
