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Caterpillar pleased with Bucyrus integration


Steve Wunning is the head of Caterpillar Inc.'s mining equipment division, which includes the former Bucyrus International Inc. This month he talked about the strides that have been made since the acquisition, during a conversation at the former Bucyrus headquarters in South Milwaukee.

South Milwaukee - Steve Wunning faces a challenge that many companies would envy: meeting the demands for a multibillion-dollar product line that, in most cases, is sold out.

Wunning is president of Caterpillar Inc.'s mining equipment group, which includes the former Bucyrus International Inc.

It's been eight months since Caterpillar acquired Bucyrus for $8.8 billion in what was the biggest acquisition in Caterpillar history.

A lot has happened since July, including the rebranding of Bucyrus products to make Caterpillar the world's largest mining equipment company.

The acquisition came at a time when mining was booming in China and developing nations. It's still that way, as the world's population is growing by 6 million people a month, creating a huge demand for mined materials such as coal, copper and iron ore.

Sales in Caterpillar's resource industries group, much of which is mining equipment, jumped 80% to $5.26 billion in the company's most recent financial quarter.

"For many of our products, we are absolutely sold out," Wunning said.

Caterpillar has added about 200 jobs in South Milwaukee since it acquired Bucyrus and now has 1,600 employees. The company is spending $6 billion on capital expenditures, much of it in the mining equipment division.

"We have invested hundreds of millions of dollars in our U.S. manufacturing plants. We are confident that, for a lot of our products, it makes sense to have a large North American presence," Wunning said.

All one brand now
Last July, it seemed as if 131 years of Bucyrus history was wiped clean when Caterpillar took over, dropped the Bucyrus name and rebranded everything in its own name.

The change seemed sudden, but Caterpillar spent months preparing for it.

The Peoria, Ill., company wanted one face for the mining division, not two, Wunning said of dropping the Bucyrus name.

"We can grow our businesses faster together than we could individually," he said.

Last fall, Caterpillar announced it was acquiring a Chinese mining equipment company for as much as $886 million. That company, ERA Mining Machinery, is China's third-biggest producer of hydraulic roof supports for coal mines. Its main subsidiary has about 3,500 employees.

The ERA deal is pending regulatory approval in China, where 70% of the world's underground mining takes place and 40% of the world's coal is consumed.

Caterpillar has factories in many countries. In addition to mining machines, it is the world's largest maker of construction equipment.

"We need to be sure that we are highly competitive around the world," Wunning said. "Plants have to make it on their own, but we are committed to investing in our U.S. manufacturing base, just as we are committed to growing our plants outside of the United States."

Caterpillar replaced some Bucyrus management during the takeover, including former CEO Tim Sullivan. But the company says it hasn't lost any Bucyrus custom ers and has gained market share in some products.

"We have spent a lot of time explaining what we can do as a bigger, single company," Wunning said. "Mining companies are looking for fewer, larger, more strategic suppliers for one-stop shopping."

Adding capacity
One of the biggest challenges has been keeping up with the demand for mining trucks that, if ordered now, would not be delivered until 2014.

"We are essentially at capacity in most of our plants. So we are doing a lot of things through the Caterpillar system to increase capacity," Wunning said.

The company spent $426 million to build an axle manufacturing plant in Salem, N.C., that employs more than 400 people.

It spent $300 million in Decatur, Ill., and $340 million in East Peoria, Ill., to increase production capacity for mining trucks and track-type tractors used in mining.

An additional $170 million was spent to expand truck manufacturing in India, and $150 million went for a truck plant in Indonesia.
"We are going to be spending an awful lot of money expanding and modernizing all of our plants," Wunning said.
There's been a slowdown in U.S. coal mining, but most equipment sales are overseas.

The outlook for capital spending remains robust for the next several years as mining projects move forward on the back of strong commodity prices and increasing demand for coal, copper and iron ore, said analyst Charles Brady with BMO Capital Markets.

In a Coal Age magazine survey of mine operators, 75% of the companies said they will upgrade equipment this year and 74% said they will buy new equipment.

Joy a key competitor
One of Caterpillar's biggest competitors is Milwaukee-based Joy Global Inc.
Joy has acquired a majority stake in a Chinese mining equipment company and, like Caterpillar, has a strong overseas presence.

"Within our coverage universe, we believe Joy Global will benefit the most from increasing demand for mining equipment," Brady said.

Caterpillar estimates its 2012 profit will be $9.25 a share, with $68 billion to $72 billion in revenue. The outlook includes about $6 billion in revenue from the former Bucyrus and from Motoren-Werke Mannheim Holding GmbH, which Caterpillar also bought last year.

Analysts polled by FactSet expect profit of $9.07 a share on $66.99 billion in revenue.

Educating Ex-Im Bank
Bucyrus butted heads with the U.S. Export-Import Bank when the government-run lender initially denied loan guarantees for a power plant in India that would have used Bucyrus mining equipment.

Bank officials cited environmental reasons, saying the fossil fuel project was the first to come before them since they adopted a climate change policy to settle a lawsuit and meet Obama administration directives.

Pressured by the White House and Wisconsin's congressional delegation, the bank reconsidered and approved the project.

Some Caterpillar sales also depend on Export-Import Bank financing.

"We are trying to educate them on the importance of mining and have them step up their game," said John Disharoon, Caterpillar's vice president of industry relations.

"Clearly, the export credit agencies around the world are doing a lot more than the Export-Import Bank, so they need to find a way to get competitive," he added.

Just the first step
Caterpillar is taking a long-term view of the Bucyrus acquisition and says the full potential won't be realized for years.

"We think it's going to transform the mining equipment industry. The first nine months was the first step," Wunning said.

The company has been well received in Milwaukee, he added, and it has contributed more than $1 million to civic organizations including United Way and charter schools.

"The most important piece of the acquisition was the integration of the two companies. I think we have done a very good job with that," Wunning said.


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