Joy Global Earnings Call INSIGHTS: 2013 Guidance, Free Cash Flow
On Wednesday, Joy Global, Inc. (NASDAQ:JOY) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Andy Kaplowitz – Barclays Capital: Mike, can you talk about your 2013 revenue guidance in a sense that you are guiding flat to down slightly what kind of order rate does that entail. How much of the revenue next year is already in backlog if there is anything you can give us there and can you still get book-to-bill close to one in this environment?
Michael W. Sutherlin – CEO and President: Mike is kicking me under the table about 2013 guidance. We don’t really have specific guidance for 2013 but there are some implications as you look at our recent order rates and cost reductions and number of things. We are expecting our 2013 to be a more difficult year for us and we think it will be flat to down slightly, when I say slightly probably single digit range still at this point. Our second and third quarters our bookings have not included any major projects which is very unusual for us, it is not that they are not major projects in the pipeline but customers are just being more and more methodical. As I said in my comments, we’ve got four projects that we are actively working on – have been working on and they are getting closer to decision phase right now. What we see in the pipeline are some projects that are better more viable projects (indiscernible), but it will be a lower number that we’ve been looking at historically. So, as we look at our recent order rates second quarter order rates probably was a good reference point to – third quarter order rates are down a little bit from the second quarter some of that is a dip particularly in the U.S. as we take production out of the U.S. Customers will naturally deplete some parts that they hold at mine site and that depletion of those parts inventory at mine site takes parts down another notch for a quarter or so and then it sort of normalizes a little bit higher level. So, if we look at that average and we expand that out to 2013 and we add some projects to that that’s how we get to those sort of within single digit range of what we are looking at for 2012 and that’s the way we are looking at our business today. Obviously 2013 will involve some backlog depletion. I don’t have the backlog numbers, but I think we’re clearing about 60% of 2013 in backlog and expect to be in backlog at the end of year. So a good portion of that and that’s not so much on aftermarket and carry about six weeks of aftermarket so you can sort of adjust that for the original equipment versus the aftermarket. So we have quite a bit of backlog going into 2013. Right now we are more worried about the upside, as we look at 2013 the upside is a bigger factor because of that backlog and the run rates we’re seeing right now, we feel pretty good that we are going to be within striking distance in 2012, but don’t see any catalyst for upside until we see some more strength in the end-use commodity demand.
Andy Kaplowitz – Barclays Capital: Mike is going to kick you again probably for this, but I’ll try and ask in a way that you can answer it, so when you look at ’13 and you looked at you’re going to get $40 million from this year’s restructuring, how do we think about margins? It seems like margins should be resilient in that type of atmosphere, we have flattened down slightly revenue, but should we think about decrementals under 30%, if you are going to have revenue decline, how can we think about margins into next year?
Michael W. Sutherlin – CEO and President: I’ll give you just overview and I’ll let Mike give you more specifics, but in 2008, 2009 adjusted period from ’08 to ’09, we held the decremental margins in sort of a 32% to 34% range, we believe that that’s the right thing to do and that’s our planning range right now, some of that requires restructuring cost to keep the decremental margin in that range, so that’s excluding the restructuring costs associated with that. As we – part of the reason we have those kind of decremental margins as we really-really believe we are going to get some good revenue growth not in the next quarter, but in the next few years out of some new product development programs we have underway and we really want to maintain those, probably that we think it’s important for expanding that product line and adding streams to our topline. So that somewhat limits the amount on the decremental side and we think that’s an investment in the future. As we look at our margins, we have done a really-really good job during 2008, ‘09 and holding our margins during that period. We stuck to our guidance that we would be very consistent and predictable with our customers. So our plans, our expectations are not to see overall margin degradation in our products and we think that, products are – delivery great value, they are well priced, we want to hold where we are right now. We may not get a lot of large price realization in 2013, that maybe down to like decimal points of price realization, but we don’t plan or foresee giving any margin away either. So, Mike, if you want to give a little background.
Michael S. Olsen – EVP, CFO and Treasurer: I think Andy, as we look to manage the business, we manage the business very strictly on incremental profitability and decremental profitability. The actions that we are taking in the fourth quarter to take about $40 million worth of fixed cost out and that fixed portion is actually important because there’ll be variable costs that will in fact come out if there are some softening in volumes, but 40 million that we’ve targeted are in fact structural fix cost. And as Mike indicated, we believe that there are programs that are very, very important for the future growth of the business. So, as we move into an uncertain market what we want to do is we want to make sure that we position ourselves in a cost structure perspective to be able to continue to fund those projects for a product development and after-market service. So, we would anticipate as we go into 2013 that we would continue to manage 25% incremental profitability and about 32% to 34% decremental profitability and also be in a position to continue to fund the projects that will drive future growth.
Free Cash Flow
Schon Williams – BB&T Capital Markets: I am wondering if you could just give us some – you gave earnings guidance, could you give us some guidance on maybe free cash flow for the full year including as a pension contribution. Maybe as a follow up to that, just to maybe give your thoughts on CapEx spending as well looking at spending $220 million this year could you just talk about what your thoughts are on CapEx going forward?
Michael S. Olsen – EVP, CFO and Treasurer: Yeah, if you take a look at where we are on free cash flow at the end of nine months for 2012 fiscal year we have approximately $100 million worth of free cash flow. Our cash flow historically throughout the year has experienced a lumpiness, some of which is associated with where investments in inventories are going? What’s happening with the advance payments and so forth? We early on had talked about free cash flow in that $300 million range. Our view currently is that free cash flow will be in the range of $250 million, may be slightly above that, for the full year this year. We would expect that our capital expenditures would be about $220 million this year and that free cash flow would be after a reduction for pension contributions of about $180 million. Now a significant portion of those pension contributions are voluntary. We have both U.S. and U.K. pension plans in very favorable funded position. We have a strategy to get the U.S. pension plan fully funded by about this time next year, once that takes place, they will be in the order of magnitude of $75 million plus worth of contributions that will no longer be required. So our free cash flow outlook for this year does in fact include the $220 million of CapEx, plus a $180 million worth of voluntary pension contributions.
Schon Williams – BB&T Capital Markets: Where are we adding just in terms of the CapEx spend, I mean, are we in the sixth or seventh inning in terms of some of the build out. I mean is Tianjin largely along, as far long as you would like and maybe some of the service center build out is that, are we 60% of the way there or 75% of the way there or is there still, I am just trying to get a sense of where we are in terms of the build out plans?
Michael W. Sutherlin – CEO and President: I think we are past the half-way point. We have got a couple of things, factors that are playing into this. If we looked at our business we have about $100 million worth of CapEx that keeps the business sustainable at a given level and there is some CapEx that is for normally priced, but there is also some CapEx to drive things like OpEx programs and things like that, but that have an improvement impact on the business. So as we get about the $100 million, that additional CapEx is in two categories one is catch-up. So under capitalizing that business historically and that’s largely in service centers that needed to be upgraded or expanded and then the other part of that is just on growth. As we look a slower growth environment, we’ll naturally begin to pull back our overall CapEx numbers to reflect that. We still have, we had to upgrade service centers in Mesa, Arizona, because guys were doing structure welding outside in 110 degree heat, we are putting a new service center in Minnesota, iron range because guys were outside doing structural welding and repeat as well. So we just have some – have had historically some facilities and our guys did it wonderful, a most amazing job of making those work despite the pathetic conditions of the facilities we’re in. So we have been systematically going there and cleaning those up and upgrading those to first class facilities in those region. So, some of it is growth, some of it is catch-up. The catch-up, I mean, we are getting probably in the – ending with something on the facility catch-up part of that and then it will be driven by growth. So, as we look forward in our business we expect CapEx to come down to probably 150 million on an average basis as we get to Tianjin complex completed and we got a couple more and the service center is finished that we have underway like in Russia and India and we will see – about 150 is probably more of an average CapEx level.