Joy Global, Executive Insights: The International Market, PRB Order Weakness
On Thursday, Joy Global, Inc. (NASDAQ:JOY) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
The International Market:
Ann Duignan – JPMorgan: Mike, could you talk a little bit about what would have to happen – in what scenario could you envision revenues being down year-over-year in fiscal 2013 and in what scenario would revenues be up? What has to happen between now and the end of the year in your mind?
Michael W. Sutherlin – President and CEO: I think to that, I think we’ve got – based upon the experience of 2009 we’ve got a pretty good feel for what to expect in U.S. coal markets. The downside and upside all translates into the international markets and we have customers that are going a little bit more cautious. They feel they have enough stuff in the pipeline and they have time to ramp up, and therefore are waiting to see a little bit more certainty out of the global economy. So, downside would occur if we continue to see slowing in the international markets and upside would come from that as well. Right now though, we continue to see signs and evidence that there is some strength in the international markets. Like I said, steel production is up and we’ll go through a restocking phase for met coal and that will create some upside demand there. Iron ore imports look really good. China production costs are exceptionally high and iron ore in fact despite some really high levels of iron ore imports, the stockpiles at the ports in China are starting to come down. So, we believe that there is more risk in the international markets to the upside than there for the downside. I think the variable here is the timing. Is the upside going to be later or is it going to be near in and that’s the unknown. But certainly, we believe that the international markets have more upside than downside at this point.
Ann Duignan – JPMorgan: So, in your view we could perhaps have a quarter or two of bit of a vacuum based on whatever the macro data signals send us?
Michael W. Sutherlin – President and CEO: Yeah. The international markets tend to be lumpier with original equipment demand just on the timing of projects. We saw that in our second quarter order rate. It wasn’t projects that were put on hold or indefinite deferral, it was just permitting delays and other kind of things, infrastructure build delays and they were just a little bit behind on the projects. As those projects are still moving forward, we expect those to become orders in the second half for example, so we are not seeing this put-on-hold kind of mentality among customers. We have seen that with some of the major diversified mining houses, but those are mega greenfield projects. If you look at the economics those didn’t have overly compelling economics and slowing those things down is different than what we see in most of our other markets. Most of our customers are continuing with their projects. We don’t see any evidence of slowing and some of the stuff we are hearing from the major diversified is a little bit to appease shareholders that they want some returns rather than spending all the money on this mega greenfield projects. Some of that is rhetoric to deal with the increased cost pressures coming from Australia from taxes in different forms and fashions. So, at first that looks more like an exception to the norm than the trend in the international markets.
Ann Duignan – JPMorgan: Just as a quick follow-up, could you talk a little bit about the one Joy program that you mentioned. Could you give us a little bit more color on what you are doing there and what kind of savings we might anticipate?
Michael W. Sutherlin – President and CEO: Yeah. That program is recognized the fact that running two business units that operate in the same region as the same customer base, you incur some duplication of costs and it results in inefficient service and support levels to our customers. So, we are realigning our focus there to get more focused on delivering better service, more consistent levels of service to our customers. It will translate in some cost savings. Right now in the early stages we are focusing more on performance improvement, better service support, better parts availability and those kind of things. Through time we expect the savings in costs to occur by a more leverage than the growth as we see revenues pick up. We’ve got a cost structure that will support a higher revenue base at existing cost structure levels. So, we are not expecting a lot of costs to come out here in the near term, but we are expecting more leverage to the upside as a result of what we are doing.
Ann Duignan – JPMorgan: Was that undertaken as a direct result of the new competition between (indiscernible) and then I’ll get back in line.
Michael W. Sutherlin – President and CEO: This has been a program that we’ve been working on in concept in developing the foundation for some time. It goes back a couple of years. We’ve been waiting a little bit. We’ve wanted to get further through our operational excellence program before we took this on and we’ve done that, we’ve sort of transitioned more recently from operational excellence which is focused more on our factories to service excellence which is focused on our service centers. That was a natural progression for us. And as we get into the service center excellence program, the alignment with customers and their minds operating in different regions around the world becomes a focal point. So, this is sort of the normal evolution of a program we’ve had underway. It’s just now getting at the part where we are ready and prepared to take on some of the alignment issues in the regions.
PRB Order Weakness:
Henry Kirn – UBS: Could you talk a little bit more about the orders in Surface? How much of a order weakness there was PRB?
Michael W. Sutherlin – President and CEO: Well, PRB for our Surface business is – from an original equipment standpoint, PRB is not a big market. It’s typically like a shovel a year or something like that on average. So, it hasn’t been a big market for the original equipment. It does provide some reasonable market for us. In the aftermarket (supported) equipment we have been working out there and we did see decline in that aftermarket business in the PRB in our second quarter. At the same time, a number of those customers see the current conditions as opportune to do some major outages for drag lines which are major rebuild and repair programs and the same for shovels. So, we’re talking to them about better use of the time while demand is not strong to get machines ready for the future. So, there are some pluses and minuses here in the near term. We’ve seen a little bit of a decline in the aftermarket out of PRB but we think that that will pick up a little bit as we get into these major machine outages and rebuilds.
Henry Kirn – UBS: With the backlog, do you see any deferral or cancellation risks, orders in the backlog outside of underground U.S. coal?
Michael W. Sutherlin – President and CEO: Let me finish off with one thing on the PRB. Our Surface revenues from U.S. coal is only about 3%. So, you’ve got to factor – when I give you those comparisons, you got to factor that in and that’s mostly PRB. So the cancellation risk, we looked at our backlog, we looked at what’s in backlog for Central Appalachia underground where we see probably the highest risk. We had discussions with customers. We all know in the press that some customers are struggling more than others to get their financial balance sheets in order. But in the meantime, we think there is going to be some deferral of equipment deliveries going into Central Appalachia. Some of that is stuff that we had in backlog. The uncertainty around all that was just – we felt it was better to recognize and now when we did a risk assessment, it’s not necessarily equipment for any one customer. We just looked at customers’ applications, thermal versus met coal, a lot of different factors and we believe that that represents what we believe is the risk we have for U.S. underground. Other markets we test, so we just don’t have the risk in the other markets. We continue to deliver machines. We don’t see any pushback and we have pretty tight contracts, particularly in the international markets. The issue with the Central App and sometimes you have to just – we have long-term relationships with customers, so we try to work with them and in some cases they may or may not have the wherewithal to take the deliveries that they have on schedule. So, we’re trying to be rationale and prudent about that, but we’re also trying to get ahead of the curve with this issue rather than letting it slip up and create headwinds later in the year.