MILWAUKEE Dec 17, 2015 (Thomson StreetEvents) -- Edited Transcript of Joy Global Inc earnings conference call or presentation Wednesday, December 16, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jim Sullivan Joy Global Inc. - EVP & CFO * Ted Doheny Joy Global Inc. - President & CEO ================================================================================ Conference Call Participants ================================================================================ * Nicole DeBlase Morgan Stanley - Analyst * Robert Wertheimer Barclays Capital - Analyst * Joe O'Dea Vertical Research Partners - Analyst * Kwame Webb Morningstar - Analyst * Ted Grace Susquehanna Financial Group - Analyst * Joel Tiss BMO Capital Markets - Analyst * Jerry Revich Goldman Sachs - Analyst * Ann Duignan JPMorgan - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Joy Global Inc. fourth-quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jim Sullivan, Executive Vice President and Chief Financial Officer. Please go ahead, sir. -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [2] -------------------------------------------------------------------------------- Good morning and welcome, everyone. Thank you for participating in today's conference call and for your interest in Joy Global. Joining me on the call this morning are Ted Doheny, President and Chief Executive Officer, and Sean Major, Executive Vice President and General Counsel. This morning I will begin with some brief comments which expand upon our press release and provide additional background on our results for the quarter and the year. Ted will then provide an overview of our markets and our outlook for fiscal 2016. After Ted's comments we will conduct a question-and-answer session. During the call today we will be making forward-looking statements. These statements should be considered along with the various risk factors detailed in our earnings release and other SEC filings that could cause actual results to differ from the forward-looking statements. We encourage you to read and become familiar with these risk factors. We will also refer to a number of non-GAAP measures which we believe are important to understanding our business. For a reconciliation of non-GAAP metrics to GAAP, as well as for other investor information, we refer you to our website at joyglobal.com. Now before we get into commentary on our underlying results I would like to take a few minutes to discuss the significant accounting charges we took in the quarter. On our third-quarter earnings call we highlighted the potential of a goodwill impairment charge in the underground segment based on our step one testing procedures which were triggered by the significant decline in global commodity markets and the corresponding impact we saw on our incoming order rate and our market capitalization. During the fourth quarter we completed a step two analysis involving third-party valuation experts which resulted in a $1.2 billion non-cash write-down of goodwill on the underground reporting units. Although we concluded there was no impairment of the $355 million of goodwill on our surface reporting unit as of year-end largely due to the more diversified nature of end markets served by this segment, with a further decline in our market capitalization since October 30 we will continue to closely monitor and evaluate the recoverability of this asset as conditions evolve over the coming quarters. Also, during the fourth quarter again driven by deteriorating market conditions we performed testing procedures on the recoverability of certain other tangible and intangible assets. This testing resulted in additional non-cash impairment charges of $118 million and $21 million on the underground and surface segments respectively. The majority of the additional impairment charges on the underground segment were related to oversupplied conditions in the domestic China coal market and the refinement of our strategy in this region to focus on top-tier customers who value our technology and service differentiation and that were also better positioned to benefit as this market continues to consolidate. Related to these difficult conditions in China and our strategic focus on the top-tier customers, while not treated as a callout item, we recorded $19 million of bad debt charges in the quarter. The overcapacity in the China market has led to severe liquidity issues with certain former customers. While we continue to pursue collection on all of these accounts, including available legal recourse, we believe the increased bad debt reserve taken in the quarter is appropriate under the circumstances. Furthermore, this quarter we adopted mark-to-market accounting for recognition of expense under our pension and post-retirement benefit plans. Given these plans are now fully frozen and well-funded, 92% funded in our US plan and 96% funded in the UK plan, we believe the immediate recognition of gains and losses provided under mark-to-market accounting more clearly depicts the impact of current economic conditions in our consolidated results of operations. As required under US GAAP, the change to mark-to-market accounting was retrospectively applied to all periods presented. Under the prior accounting methodology, differences between the Company's actual results and its actuarial assumptions in the pension and post-retirement plans were deferred and amortized over time. With mark-to-market accounting these prior-period losses, which totaled $20 million in fiscal 2014 and $26 million in fiscal 2015, were eliminated and replaced with a mark-to-market adjustment of $57 million and $10 million in 2015 and 2014 respectively. On a go-forward basis we will record non-cash mark-to-market gains or losses versus actuarial assumptions each year in the fourth quarter as a callout item. Now let's move to our fourth-quarter and full-year results. Bookings in the quarter totaled $617 million, down $166 million or 21% versus the fourth quarter of 2014. Orders for original equipment were down 27% while service orders were down 20%. Sequentially, original equipment orders were flat and service orders were down 3%. After adjusting for foreign currency exchange movements, original equipment orders were down 14% and service bookings were down 13% with the decline in the value of the South African rand and the Australian dollar relative to the US dollar providing most of the currency headwind. Underground mining machinery bookings for the quarter totaled $364 million, down 10% versus the year-ago quarter and surface mining equipment totaled $294 million, down 27%. The 10% decrease in underground mining machinery bookings was comprised of a 15% increase in original equipment and a 16% decrease in service. Original equipment bookings in this segment were up in Eurasia and Australia, partially offset by declines in all other regions. Service orders for the underground segment decreased in all regions with the exception of Eurasia. Although our Eurasia region continues to feel the effects of the geopolitical issues in Eastern Europe and Russia, our newly acquired Montabert product line added $17 million of orders in the quarter. North America, which accounted for about 55% of the quarterly service order decline in the underground segment, continued to be pressured by low natural gas prices and the follow-on effect of customer idling and deferred maintenance on our installed base of equipment while China continues to struggle with excess capacity which has limited service opportunities for us in the region. In the surface segment the 27% decrease in bookings versus the year-ago period was comprised of a 53% decrease in original equipment and a 22% decrease in service. Original equipment bookings were down in all regions except China and Australia where we saw modest increases. Orders for a shovel, drills and loaders into copper globally in the prior year were not repeated in 2015 as the decline in copper prices has slowed equipment investment by our customers. Service orders were down in all regions with the exception of Eurasia and Australia with the most significant declines coming in the larger surface mining markets of Latin America and North America. For the full year consolidated bookings were $2.7 billion with service at $2.18 billion, down 16%, and original equipment at $521 million, down 49%. Our backlog decreased to $873 million from $1.3 billion at the beginning of the fiscal year. Now turning to sales. Net sales of $865 million in the fourth quarter were down 24% from the prior year with the underground segment down 16% and the surface segment down 33%. Sales of original equipment decreased 46% while service sales decreased 12% from prior-year fourth quarter. After adjusting for foreign currency exchange movements sales were down 17%, original equipment down 38% and service sales down 6%, again with the weaker South African rand and Australian dollar providing downward pressure. Original equipment sales for the underground segment decreased 25% with all regions down except Australia and Africa. The largest decline was in Eurasia followed by China and then North America. Surface original equipment sales decreased 79% compared to the prior year with decreases in all regions with the exception of a small increase in Eurasia. Latin America and Australia accounted for most of the year-over-year original equipment sales decline in the surface segment. Fourth-quarter service sales in our underground and surface equipment segments decreased year over year 10% and 14% respectively. The underground segment experienced service sales declines in North America, Africa and China, partially offset by increases in Australia from higher rebuild activity and Eurasia from the addition of Montabert to the portfolio. The surface segment had decreased service sales in the Americas partially offset by a modest increases in Africa and China. Operating profit excluding callout items totaled $75 million in the fourth quarter, down 63% from the year-ago period. For the full year adjusted operating profit was $326 million, down 43% from fiscal 2014. Return on sales in the fourth quarter was 8.7%, down from 17.8% in 2014. And for the full year of 2015 the adjusted operating profit margin was 10.3%, down 480 basis points from fiscal 2014. The decrease in adjusted operating profit in the quarter and the full year versus the year-ago periods was primarily the loss of margin on lower sales volumes, unfavorable product mix, underabsorption in our manufacturing and service centers and increased bad debt expense, partially offset by savings from our cost reduction programs and decreased incentive compensation expense. In the fourth quarter of 2015 we incurred restructuring charges of $14 million resulting from further actions taken to reduce staffing levels and optimize the Company's global manufacturing and service footprint. For the year we incurred $33 million of restructuring charges and realized $62 million of cost savings, slightly higher than our $60 million full-year target. Notwithstanding good success in delivering on our cost reduction target, the decremental margin for the year was 40%, which is above our 34% target. This represents a $37 million shortfall for the year and was primarily driven by bad debt charges and unfavorable product and service mix. For fiscal 2016 we expect carryover savings from the cost reduction actions taken in 2015 to be about $45 million. In addition, we will continue to take actions in 2016 to optimize our workforce and global manufacturing assets for lower levels of demand and we expect to incur restructuring charges in the range of $30 million to $40 million across the year. These new actions are expected to drive additional cost savings in 2016 of $40 million. So in total we are planning for $85 million of cost savings in 2016 compared to 2015 with 35% and 65% of the savings expected in the first half and second half of the year respectively. We believe this higher level of cost reduction will position us to achieve our 34% decremental margin target on downside sales risk in 2016. The income tax rate for the quarter excluding callout and discrete benefits was 32.2% compared to 32.7% a year ago. For the full year, again excluding callouts and discrete items, the effective tax rate was 29.5%, down from 32.6% in 2014 and at the low end of the Company's guidance. The decrease in the tax rate from the prior year was due to a shift of earnings to lower rate jurisdictions. For 2016 we expect the effective tax rate excluding callout and discrete items will be in the range of 35% to 40%. Projected losses at certain subsidiaries for which no current benefit is available is expected to pressure the tax rate for the year. Income from continuing operations before callout items totaled $42 million or $0.43 per fully diluted share in the current quarter, down from $128 million or $1.29 per fully diluted share in the prior-year fourth quarter. For the year adjusted fully diluted earnings per share totaled $1.95, down from $3.44 in 2014. Cash provided by operating activities in the quarter totaled $187 million, an increase of $122 million compared to the fourth quarter of 2014. For the full year cash provided by the operating activities was $355 million, just $8 million lower than fiscal 2014. For the quarter improved cash generation from trade working capital and the collection of a long-term customer receivable more than offset the impact from lower earnings. The change in trade working capital in the fourth quarter of 2015 resulted in cash generation of $49 million compared to cash usage of $125 million in 2014. This $174 million trade working capital swing your over year in the quarter was due to a combination of factors including the sales profile at the end of fiscal 2015 versus the year-ago period and underlying improvements with our inventory and receivable metrics. In 2015 sales in the fourth quarter increased 9% compared to the third quarter whereas in 2014 sales in the fourth quarter increased 29% sequentially. The year-over-year change in the sales profile resulted in receivables decreasing by $10 million at the end of 2015 compared to an increase of $153 million at the end of 2014. Overall, the Company's days sales outstanding at the end of 2015 was down 10 days sequentially and flat year over year. From an inventory perspective we were able to drive $155 million decrease in the fourth quarter ahead of the $75 million to $100 million reduction target discussed on our third-quarter earnings call. We delivered the expected reduction on OE inventory with the additional gains in the quarter coming from service inventory declines which brings us in closer alignment with current service order levels. Partially offsetting cash generation from accounts receivable and inventory in the fourth quarter were a reduction in accounts payable and advanced payments. Accounts payable decreased with lower income and material purchases while advance payments decreased in line with lower income and original equipment orders. Cash from operations for the year excluding pension contributions of $13 million was 12% of sales, well within our strategic target range of 10% to 15% of sales. As we look forward to 2016, we expect cash from operations excluding pension contributions of $10 million to be about 10% of sales. While we continue to carry a higher than normal level of service inventory as we optimize our footprint and mitigate the impact of customer destocking at mine sites, we do expect to monetize another $100 million of inventory in 2016. Capital expenditures in the fourth quarter of 2015 totaled $14 million, down $8 million versus the prior year. Expenditures in the quarter were focused on manufacturing optimization and general facility maintenance. For the year capital expenditures totaled $71 million, down $20 million versus 2014. For 2016 we expect capital expenditures to be on par with 2015. Our priority is to continue to do what we can to protect our investment grade credit rating. Accordingly, during the fourth quarter we elected to redeem the $250 million aggregate principal amount of our 6% senior notes due in November 2016. While this redemption was just modestly positive from a net pricing value basis considering the make whole premium, the transaction improved our leverage metrics under the credit agreement and with the credit rating agencies as gross debt was reduced by more than $180 million from the end of the third quarter. The redemption was funded with a combination of cash on hand, which was bolstered with the strong cash generation in the fourth quarter, and borrowings on our unsecured revolving credit facility which had a balance of $59 million at the end of the year. The $14 million make whole premium on the senior notes redemption, which is the net present value of future interest payments, is classified on the income statement as a loss on early debt retirement. While we ended the year with a net debt to EBITDA level well below the current 3X covenant in our credit agreement given the step down in the order rate in the back half of 2015, and considering the lower bound of our 2016 guidance, we felt it was prudent to proactively seek an amendment to provide increased financial flexibility for an extended downturn. Under the terms of the amendment we increased the leverage limits in the credit facility for eight quarters beginning of the second fiscal quarter of 2016 and extending through the first quarter of 2018. We believe the new leverage limits provide adequate cushion on our downside projections. We also announced today that our Board of Directors declared a quarterly dividend of $0.01 per share which is a reduction from $0.20 per share in fiscal 2015. This lower rate reduces the annual dividend outlay by approximately $75 million and will enhance our ability to continue to reduce debt and strengthen our balance sheet in 2016. Let me stop there and turn the discussion over to Ted. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Jim. And let me add my welcome to everyone on the call today. During the year our Company continued to battle severe conditions as oversupply commodity markets faced weaker than expected demand. Commodity prices have fallen to decade-low levels. Our customers' cash flows have come under increasing pressure, maintenance cycles have been deferred and major capital expenditures have been significantly reduced. These conditions clearly impacted our order rates for the year. Despite these market headwinds we focused on what we can control, delivering strong cash generation and a 10% adjusted operating profit margin on almost half the volume from just three years ago. Jim has done a good job on the financial review so I will focus on our ends markets and how we are driving our strategy in what is expected to remain a very difficult market in 2016. While current order rates have fallen, trending around $625 million with approximately $100 million in original equipment and $525 million in service, we were able to realize some strategic successes during the year and plan on building on these successes in 2016. These include the delivery of our new hybrid excavator which is now operating in a US copper mine and our new underground hard rock loader and mechanical cutting system which are both now underground in Australian gold mines. These new developments are being watched closely by miners all over the world as critical game changers for mining operations. These innovations will lower our customers' cost and the automation potential will take safety to new levels in mining. During the year we continued to diversify our portfolio of equipment and the markets we serve. In 2015 we realized over $100 million of new equipment orders into industrial mineral applications: in salt, potash, trona, gypsum and other and a host of other materials. By introducing new mechanized mining technologies in automation we were able to demonstrate the ability to substantially lower our customers' production costs from previous drill and blast operations. Additionally, we delivered seven of our exclusive high angle conveyor systems which are now operating in tunnel applications. Significant savings are realized when taking material out of the ground vertically compared to traditional long slopes or batch haulage systems that use small trucks and trains. We've also been proactively taking our JBS OpEx principles and teams to the mines to help lean out our customers' operations. Our trademark practice of eliminating waste, simplifying the process while removing people from harm's way help to secure an order for a $30 million truckless conveying system in a US coal mine. Though we have now gone three quarters without a shovel order in our service business we have been able to generate over $100 million in new crushing and conveying equipment orders in this past year. Expanding our service business remains a strategic imperative and one in which we realized several successes during 2015. In addition to opening two new service centers to better serve our customers and drive improved service capture rates on our installed base we took to market many new service products and consumable offerings. Austerity cost measures driven by the following commodity prices resulted in a current run rate for service bookings of $2.2 billion, falling 16% below last year's level. However, we had nearly $300 million of consumable business in 2015 of which nearly $40 million was attributable to our new Joy branded service products and consumable initiatives. The $300 million represented almost 12% of our total service sales and nearly 9% of all sales. As we execute our service strategy and move more customers to lifecycle management programs our new service products and JoySmart Solutions business will grow. As we look ahead into 2016 we expect difficult conditions to persist as oversupplied markets are expected to further pressure commodity prices. Although global growth is projected to improve slightly commodity prices are not expected to see any material improvement until supply and demand become more balance. The mining industry in 2016 will be defined by strained cash flows, further austerity measures and asset consolidation. The net effect will be the third consecutive year of double-digit declines in capital spending. We are seeing increasingly responsive behavior from our customers as they continue to battle volatile commodity prices. An example of this is in global copper markets. While we continue to believe in the medium- to long-term outlook for copper, the 27% drop in prices during the year elicited strong responses from some of our major customers. Service intervals were stretched and in many cases new projects were frozen as our customers initiated full project-by-project reviews. Clearly this impacted our service business throughout the year and will likely continue to do so for the next several quarters. Our current bookings run rate for service work in Latin America is trending approximately 13% below peak levels seen at this same time last year. While this is largely driven by delayed service work, copper price is trending at $2.10 per pound currently with little improvement expected in 2016 will continue to impact our bookings profile in the region. In recent months we've seen some potential positive developments in refined copper markets. Original estimates expected refined coppers markets to be in surplus until 2017. However, the production curtailments that have already been announced could shift the refined market to a deficit as early as next year which could support improved pricing and drive project investment. One of the largest headwinds we continue to face is in US coal markets. The combination of regulatory forces and a seemingly unlimited supply of abundant low-cost natural gas is transforming the US electricity industry. Although coal continued to play an important role we now expect that coal burn in the electric power sector could decline nearly 100 million tons in 2015. The expectation for natural gas to remain well below $3.00 per million BTU next year along with additional coal power plant closures and a warmer than expected start to the winter season will likely drive an approximate 50 million ton reduction in coal burn. The combination of reduced coal burn along with declining export opportunities will continue to weigh on the production profile of US coal producers and clearly impact our business. As we look at next year it is likely that we will see a approximately 40 million tons come off-line in addition to the 100 million tons this year. And expect to see some continued pressure on our service order rates. Although headwinds persist in North America coal business further industry consolidation along with the realization of deferred maintenance will help to stabilize our incoming order rates over the next 12 to 18 months. The expectation for coal to account for approximately 30% of US power generation should support a baseline level of activity for our business. While we expect the mining industry capital spending to decline nearly 20% next year we remain focused on controlling the things we can as well as driving our growth strategies and operational excellence initiatives. This focus will position us to build upon some of the strategic successes we've realized during 2015. In addition to the focus on our service and consumable business we continue to drive our hard rock strategy. Acquiring Montabert this year gave us a solid product portfolio of industry leading rock breaker and drill products to build on as we seek to generate a critical mass of equipment. In 2016 we will seek to continue to leverage investments made in our service infrastructure and new product development to gain market share. Our ability to lower -- our ability to leverage our lower-cost manufacturing position remains a key to our China strategy. Although the domestic China coal market is challenged we continue to focus on products and systems where we can clearly differentiate our technology advantage. During 2015 we sold our largest share ever, 7.2 meters, or 24 feet high, and delivered several of our exclusive localized Chinese continuous miner bolters. As we turn these new developments into reference sites other mining companies will want that improved productivity too. In a CapEx strained environment developing new products that lower customers' production costs is critical to driving new revenue streams. Our ability to leverage our unique high-quality low-cost manufacturing position in China enables us to deliver these products to new growth markets and geographies such as India, Southeast Asia and Eastern Europe. We continue to drive our JBS operational excellence principles throughout the Company. These lean principles have allowed us to streamline processes and realize tangible benefits with more to come. In addition, we will continue to work with our customers to take our JBS operational excellence principles to their minds to reduce costs, improve production and drive to zero harm operations. As we noted in our earnings release we expect the markets to remain challenged in 2016 as commodity markets continue to rebalance and our customers reduce capital spending plans. It is this market landscape that provides us the basis for our 2016 guidance. We are planning on revenues to be between $2.4 billion and $2.6 billion with earnings per fully diluted share for the year in the range of $0.10 to $0.50. Many mines around the world have announced extended care and maintenance holiday shutdowns for the months of December and January. These reductions will take tonnage out of the market but will also impact our service business in the first quarter. We expect to generate a loss in the first quarter and then breakeven in the first half of 2016. The combination of our full 2016 cost reduction program along with the realization of deferred maintenance service orders on an installed base will benefit the second half of the year. While 2016 will mark the fourth consecutive year of this unprecedented downturn in mining we remain focused on controlling the things we can. We have exceeded our cost saving targets for the past three years and we will do it again in 2016. We have plans to deliver $85 million in cost savings in 2016 as we optimize our staffing levels and footprint. We will also structurally reduce inventories and have a relentless focus on continued strong cash generation. We will continue to prudently invest in our growth strategies, especially where we can bring technology to the market that significantly improves the short-term and long-term cost position for our customers. Our global leadership in service, technology and operational execution in these tough times will position us for the future. We remain committed to exceeding the expectation of our customers and positioning the business for long-term value creation for our shareholders. So with that I will turn the call over to Eric for Q&A. Eric? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Nicole DeBlase, Morgan Stanley. -------------------------------------------------------------------------------- Nicole DeBlase, Morgan Stanley - Analyst [2] -------------------------------------------------------------------------------- So my first question is around the revenue guidance. The low end is in line with the annualized 4Q bookings. But I guess bookings have been kind of in flipping sequentially for some time now, so I am just trying to calibrate the risk that $2.4 billion could be overly optimistic. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [3] -------------------------------------------------------------------------------- Well, similar to what we shared or what I shared with you at your conference, what we looked at was basically what is coming in in the second half of this year. And if you take a look at the back half of 2015 and annualize that we get to about a $2.5 billion, so that hits right at the midpoint. Well unpacking that, looking at what is happening to the service in the OE, the service at about $2 billion that is down about 15% for the year. And if we look at the OE at roughly $500 million that is down 40%. So we wanted to stress test that on the bottom side. The OE we got pretty good visibility to, Nicole, it is the service that we really wanted to make sure that we had that covered. So the downside we looked and said, okay, probably the downside 25%. So that is what we pressure tested the downside. So also then taking it to the midpoint on the guidance on the EPS that is where we said we were going to have to get that $85 million in savings. So and if you look and as I made my prepared comments the first quarter we know is going to be tough by what is going on in the mining market right now. We have better visibility to scheduled rebuilds in our back half of the year. But we looked at that stressing on the lower end and we felt pretty confident with that and again with the OE that is where we have the visibility. It is a little number. And then we looked at our initiatives that we have coming through. On the service side we've got the consumables, the new service products. I know that is still a small number. But we see visibility on that. Then we looked at also the hard rock, we are going to have a -- we only had a half a year or less than half a year on the Montabert, that coming through. So that is where we have felt good about the midpoint but we did, just as you asked, we wanted to definitely pressure test the back end. We are also we feel pretty good with our new service centers, the capture rates, we're all over that. So, does that help? -------------------------------------------------------------------------------- Nicole DeBlase, Morgan Stanley - Analyst [4] -------------------------------------------------------------------------------- Yes, that is really, really helpful, Ted, thank you. And then my second question is just around capacity utilization. So I know the plan with -- what we have talked about throughout this year with restructuring is to get to 75% by 2017. Is that still the plan based on your outlook for 2016? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [5] -------------------------------------------------------------------------------- Yes. And that hit us also in the fourth quarter where we saw the absorption with these different models. So you also see that raising our targets for next year. So we are going to have to do more on the cost out and that is tied into facility optimization. But the answer is, yes, those targets are still what we are driving to, that 75%. -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [6] -------------------------------------------------------------------------------- Nicole just as a follow-on, maybe to give you a little bit more, is we were kind of talking like we were about 50% utilized. And that is the rate we were running at the front end of the year. We exited the year closer to 35%. So with orders falling off the and we are pulling back obviously production to drive inventory in cash. So the exit rate for the year is now around 35%. So we are having to step up the level of reduction in terms of location and staffing in order to achieve those rates by mid-2017. -------------------------------------------------------------------------------- Nicole DeBlase, Morgan Stanley - Analyst [7] -------------------------------------------------------------------------------- Okay, thanks, Jim, for that color. I will pass it on. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Robert Wertheimer, Barclays. -------------------------------------------------------------------------------- Robert Wertheimer, Barclays Capital - Analyst [9] -------------------------------------------------------------------------------- My question is a little bit on cost cutting which you have obviously done a lot of. It is more of a philosophical thing. You mentioned some of the growth approaches and the room to grow that you have. If you looked at scenarios in the other way, in other words did the goodwill write-downs and some of the write-offs that you did come accompanied with actual exiting of the operations of certain parts of the business? If things get much worse from here do you have large chunks of the business that you are subsidizing that you could actually if you need to and bring profits back up or is this sort of a near the end of the cost-cutting? I just wonder if you could scenario out a little bit more of the downside on that for us. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [10] -------------------------------------------------------------------------------- Definitely we're looking at all cost but we did look pretty hard at non-core assets. We are looking at our footprint, part of how we can get to this footprint optimization is we really are looking hard at what we do really well and make sure we own that, where we make great margins make sure we own that. But we also looked at manufacturing for certain things that maybe some of our suppliers can do better. In some parts of our business we might be a little bit vertically integrated and that is part of the cost reductions that we are looking at to make actually exit some of those manufacturing processes that we don't believe we need going in the future. So I hope that helps. Without giving you the specifics is what is in there. But we are going to be exiting some core manufacturing processes that we believe others can do and part of our savings is we think we can sell some of that part of our business off and monetize that. So that is also in the plan for 2016. -------------------------------------------------------------------------------- Robert Wertheimer, Barclays Capital - Analyst [11] -------------------------------------------------------------------------------- Okay, maybe I will follow up after as well. And then just a quick one. Why does that debt covenant renegotiation start in 2Q? Is that because you figure you are clear through then no matter what? Or is that because the lenders wanted some leverage in case not or do you mind mentioning that? -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [12] -------------------------------------------------------------------------------- No I think, we just looked at our downside case and felt like probably just to cover ourself that we should bump it a bit in Q2. It goes from 3 to 3.5 times in Q2 and then we will actually peak out around 4.5 times for three quarters at the end of this year, early next year. And then it will trail back down to 3.5 by the first quarter of 2018. We also added a little bit of a benefit in terms of how we are thinking about cash restructuring. Under the prior arrangement we were to deduct from EBITDA cash restructuring charges. Because we want to continue to do what is necessary to take cost out of the business we were able to get a basket of $40 million for restructuring which will not be deducted from our EBITDA. So that does give us some flexibility to continue to reduce our footprint in line with what we think demand is going to go here over the next few years. -------------------------------------------------------------------------------- Robert Wertheimer, Barclays Capital - Analyst [13] -------------------------------------------------------------------------------- Great, thank you. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Joe O'Dea, Vertical Research Partners. -------------------------------------------------------------------------------- Joe O'Dea, Vertical Research Partners - Analyst [15] -------------------------------------------------------------------------------- Ted, you talked about some anticipated step down in service activity in both LatAm and North America related to copper and coal where we have seen orders over the past couple of quarters at roughly about 625 million. When you bake in that expected step down, what is the impact to sort of a run rate or level of order activity? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [16] -------------------------------------------------------------------------------- Well if you take that $2 billion number we are looking at at the midpoint for next year from the last two quarters run rate, it is definitely below that 600. It is just probably north of the 500 million per quarter. -------------------------------------------------------------------------------- Joe O'Dea, Vertical Research Partners - Analyst [17] -------------------------------------------------------------------------------- Okay. And then you have talked about some decontented product to go out and compete where there is price competition. Could you talk a little bit about just in recent order activity that mix, how much of that would be toward the decontented product and whether you are saying that primarily in developing markets or whether that is getting some traction in developed markets as well? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [18] -------------------------------------------------------------------------------- Probably two pieces to that question. The first when we talk about the mix is where I highlighted if we look at our service business over $100 million has come in through crushing and conveying. Three quarters now in a row without a shovel, the OE hasn't gone to zero. So it has got a different product -- a different mix profile with that crushing and conveying. Now I know you probably hate to hear the mix excuse on the margin, but we don't make the same margins as we do on our P&H 4100 shovel so that is what we are working on there. The other part of the mix on the decontented product, that is what we are developing with our China operations where basically we have the different segment and products, we import a product and then with our acquisition we bought local companies that have just a very, very different cost structure. So as we inject our technology, as we expand and improve their operations capability we are improving the quality of that business significantly. So right now we have actually are quoting and we have taken orders in this past year what we call our segment two and segment three product that has Joy injected technology that actually is now exportable from China into some of those other high-growth markets that identify. So what we are doing which we think is unique as we are able to get an expanded gross margin on that product because the cost base is significantly lower than the Western products going into those markets. And -- but we do have the differentiated technology to differentiate our product versus what they may be competing with in those local markets. -------------------------------------------------------------------------------- Joe O'Dea, Vertical Research Partners - Analyst [19] -------------------------------------------------------------------------------- Got it, thank you. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Kwame Webb, Morningstar. -------------------------------------------------------------------------------- Kwame Webb, Morningstar - Analyst [21] -------------------------------------------------------------------------------- Number one, just on the 75% facility utilization target. At one point there was some conversation about a $2.8 billion revenue figure that you had in mind. Could you kind of update us on what is that sort of normalized revenue figure that you have in mind? And then I had a follow up on free cash flow. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [22] -------------------------------------------------------------------------------- For long-term run rate? -------------------------------------------------------------------------------- Kwame Webb, Morningstar - Analyst [23] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [24] -------------------------------------------------------------------------------- Make sure we answer the question. Yes, so, if we take a 75% and this is a rough numbers. So if you take -- we roughly had a $6 billion capacity when we peaked in 2012 and now let's say that $3 billion, somewhere in between at that $4.5 billion, $4 billion, $4.5 billion. And that is what we are using because to size the organization for the recovery what does that look like. So that is the rough number that we are using. -------------------------------------------------------------------------------- Kwame Webb, Morningstar - Analyst [25] -------------------------------------------------------------------------------- So, okay so at 100% you'd able to support about a $4 billion revenue line item? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [26] -------------------------------------------------------------------------------- Correct. But it is not an exact science because if we work with our operational teams we are leaning out facilities, plus we will be depending on the supply chain. So we have flex capability. But we had to pick a lower number because to take the cost out we picked a lower number to drive the efficiencies of our optimization plan. And we believe we could react quick. If the markets come back quicker than we expect we believe that we can respond, but we actually picked a lower number to drive our cost out. -------------------------------------------------------------------------------- Kwame Webb, Morningstar - Analyst [27] -------------------------------------------------------------------------------- Okay, great. And then free cash flow for 2015, very impressive. As we look to 2016 just kind of curious to know your initial thoughts and then also have there been any sort of changes in accounts receivables terms with customers clearly as the environment has taken a step back here? -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [28] -------------------------------------------------------------------------------- Kwame, this is Jim. Thanks for the comment on 2015. Yes, we are focused on driving cash flow and we will continue to do that in 2016. As I said in my comments to range that for you we are thinking about cash from operations at about 10%. So if you take our guidance on sales that would be about $240 million to $260 million cash from operations, about $10 million of pension contributions and let's call it $70 million-ish of capital spending. So you are going to get to a number close to that $150 million at the bottom and probably $175 million, $180 million at the top. So somewhere in that range is what we are focused on and hope to beat it. -------------------------------------------------------------------------------- Kwame Webb, Morningstar - Analyst [29] -------------------------------------------------------------------------------- Okay, great. Thank you so much. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Ted Grace, Susquehanna. -------------------------------------------------------------------------------- Ted Grace, Susquehanna Financial Group - Analyst [31] -------------------------------------------------------------------------------- Jim or Ted, I was wondering if you could just maybe step us through the cost savings a little more granular clique, how we should think about maybe COGS versus SG&A, fixed versus variable, underground versus surface and even regionally. I know you talked about in the fourth quarter kind of North America, Latin America, China I believe. But any handholding you can give us on just how to think about where those benefits are going to accrue on the income statement? -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [32] -------------------------------------------------------------------------------- Well, Ted, yes, that is a lot, you know. And we could probably spend time off-line doing some detailed modeling that will help you with that but I would rather just kind of give you some high-level direction and hopefully that is helpful. So $85 million of cost savings, now that is year-over-year cost savings. Let's think about maybe $50 million of that a little higher than it was when we were talking last quarter is coming from the facility optimization. So largely that is going to fall in COGS. And that will be tilted a bit to the underground segment given the more decentralized nature of that business versus the surface business. And then the remainder is going to come largely in SG&A. And I would just say both businesses are on a kind of same pressures externally, so we will be continuing to hold down our spend in SG&A and quite honestly in the overhead accounts and cost of goods sold. Does that help? -------------------------------------------------------------------------------- Ted Grace, Susquehanna Financial Group - Analyst [33] -------------------------------------------------------------------------------- Yes, that is very helpful. The second thing I was hoping to ask is I know you've talked a lot about the service business next year. Can you just touch on kind of the competitive environment you are seeing both domestically and as well out of China kind of will-fitters or the like? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [34] -------------------------------------------------------------------------------- Yes. The competitive environment is probably the toughest issue is the customers just don't have money. So a lot of our customers have their own service shop, so that is probably still where we are having to prove our value is competing with the local service shops. From last quarter to this quarter nothing has really changed other than again the continued deferment in running the equipment harder and longer and also what they are idling is the older stuff. So no real change on that, that competitive landscape on the service. We are pushing our new service products pretty hard. So we did see gain there with some of our consumables and our new service products. But it is still just a very, very tough environment where they just don't have the money. As far as losing it to a will-fitter or a third-party, that pressure is always out there. But again this equipment, especially in our proprietary stuff, is so highly differentiated and the cost from using someone else and what it can mean if the customer has a problem is significant. So I am not saying it is not out there but that is not something that we are seeing we are losing share to will-fitters in this environment. -------------------------------------------------------------------------------- Ted Grace, Susquehanna Financial Group - Analyst [35] -------------------------------------------------------------------------------- Okay, that is really helpful. Best of luck this quarter, guys. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Joel Tiss, BMO Capital Markets. -------------------------------------------------------------------------------- Joel Tiss, BMO Capital Markets - Analyst [37] -------------------------------------------------------------------------------- So just two things, one on the inventories you know the value of the inventories are now pretty much equal to the equity value of the Company. And I just wondered if you could speak very quickly about how you feel about those inventories? And I guess you have taken some small actions to make sure that everything that is in there is as good as it can be. But I just wondered any color you have around whatever deep dive you have taken on looking at that? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [38] -------------------------------------------------------------------------------- Sure. I appreciate the comment of small. We inventory, as you have highlighted, we have we took it down $100 million year over year, but that is still not enough. We still inventory roughly at $1 billion. For this volume we are looking to take another $100 million out. But similar to what we shared with people our internal targets are higher than that. The service that we said we kept it out there to support our service rates we still think we have too much inventory because especially with the service now looking to potentially take another 15% at the midpoint down next year, we have an opportunity to streamline that . What we had to do, Joel, is we just had to cut the inputs off. And our service and our on-time delivery we monitor that extremely close. Our on-time delivery went up last year. So we think we have an opportunity to beat that $100 million number. The other issue that we have to deal with on the inventory, though, is some of these new products is where I have talked to you about we are introducing significant part of our OE now is new products that we don't have history. And so when we put a new product out there we have to have the inventory to support it. So I just want to share with you we do have inventory adds for the new stuff but we think we have enough in that $1 billion pool that we have out there to take that down. So more work to monetize that in 2016. We think that is part of how we are going to beat our cash flow targets for next year and we are all over that. -------------------------------------------------------------------------------- Joel Tiss, BMO Capital Markets - Analyst [39] -------------------------------------------------------------------------------- Okay. I was thinking more about the collectability of that. And also I wondered just any color on what you are hearing from your customers about service and really just sort of an obtuse way of asking any feeling at all when the service business might start to bottom out? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [40] -------------------------------------------------------------------------------- Well, as I put in my guidance we see in US coal which we have now been following for three years, we see that in the next 12 to 18 months the data we look at is what our customers' CapEx has been out there. And we saw that that is pointing down to bottoming at 2017 in public data. So we just have to be prepared for that to take another step down in 2016. And so the service will probably take another hit. Will 2017 actually be down? Don't know that because we really are pushing the equipment to extend the life. So there should be a service bump. Just can't tell you exactly when that is going to happen. On the inventory monetization we actually the collections on the inventory from the third quarter to the fourth quarter were pretty good. We did long-term receivables pull-in, but we believe the collection on the inventory should be okay. We did have with its environment we saw the days with our customers paying, we are watching that. And we did have I don't know if, Jim, if we went through the our obsolete inventory. -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [41] -------------------------------------------------------------------------------- Yes, we watch that very closely, Joel. It is just kind of fundamental to this kind of a business. Industrial, you have to always watch what you are putting in in inventory and we are pretty strict procedures around inventory that is not moving. And we don't talk about that. But every quarter we are seeing some obsolescence that is flowing through. I wouldn't say that there is a material change in that. Over the last year or two maybe it has upticked just slightly. But with the new rigor around focusing on cash and especially with respect to the materials coming in and really making sure that we are not overstepping the inbound materials and we really did a lot of correction in the fourth quarter on that and we will continue to maintain that discipline as we move into 2016. I think from an obsolescence perspective I think we feel pretty well covered. -------------------------------------------------------------------------------- Joel Tiss, BMO Capital Markets - Analyst [42] -------------------------------------------------------------------------------- Okay, thank you very much. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Jerry Revich, Goldman Sachs. -------------------------------------------------------------------------------- Jerry Revich, Goldman Sachs - Analyst [44] -------------------------------------------------------------------------------- Ted, I'm wondering if you could flush out for us the $400 million in annual run rate in OE orders, can you just give us a flavor for what end markets are driving that on a go-forward basis? And then just update us around the timing of the Canadian oil sands shovel shipment that I believe is in the works for 2016? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [45] -------------------------------------------------------------------------------- Sure. If we look just at the OE for our last year, actually it is a little over $500 million, Jerry, for the orders that are coming through. The mix on that has changed pretty dramatically if you looked at OE as we drive our strategy to growth beyond coal. We have the industrial minerals now has moved to double digit in the last -- and that $500 million we had close to $100 million or over $100 million in salt, potash, large order into bauxite, bauxite is used ex the conveyor system in aluminum smelter plant. So you can see that moving on the incoming orders quite a bit. Coal in that was at 59% and if you just went back two years ago coal was close to 70% of our business. Quite a bit of moment on the incoming. The hard rock we now have a run rate coming in getting close to that $200 million of the underground hard rock. So the hard rock is our -- in the last 12 months is getting close to 20% of our business and that includes our surface. So the incoming order mix has changed quite a bit. And even on the surface on coal it has been over three years since we have got a shovel on coal, 23%, over 20% of our business on the surface was in coal but that was in that truckless mining system that I talked about for surface coal mine. So the mix is changing pretty quickly. Tunneling now has reached a couple of percent for us. So our mix is changing quite a bit from a predominant coal Company -- or supplying products for coal. Still not moving fast enough because all commodities are under pressure which leads to your second part of your question is on the oil sands. Oil sands, last year we got that large order and moved the oil sands business into close to 3% to 5% of our business. No new oilsands orders but that order still looks in place, the progress payments on it are coming in, it should have a few of those shovels should be completed and shipped this year. We are working aggressively on that one as well to get our service products on it. We definitely want ground engagement tools on that, very severe application in the oil sands. So we are watching it closely as all commodities oil has taken another kid down, so we are watching that one. But right now it is still on plan, payments are coming in and still on target. -------------------------------------------------------------------------------- Jerry Revich, Goldman Sachs - Analyst [46] -------------------------------------------------------------------------------- Okay. And, Ted, can you talk about, though, how your service business is tracking in the areas that are increasing production? So Australia coal, what has the performance been like over the past couple of years, has your service business been stable there? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [47] -------------------------------------------------------------------------------- The service has been pretty good in Australia. We have had the last quarter we had a pretty strong rebuild going through our Australian operation. It was actually rebuilding an entire roof support system. It shows up on our mix line because it is not the same as selling continuous miner parts but it is a pretty large service order. The rebuilds and if I had to give you any glimmer of green, Australia service we are hoping that that has hit the bottom there. I hate to say that because I could be wrong. But we see our service penetration in Australia being pretty good, that rebuild cycle that keeps being delayed we have some visibility because they schedule those so we have some of that visibility in the second half of 2016. So we see the Australian opportunity is good. The problem with Australia is their heavy longwalls. So that is where we are really, really working on growing our share of armored face conveyors, we have a brand-new pick design on the shearer that loads an AFC and so we are introducing that new pick technology, we have already had that proved and referenced one of our largest customers. So we see opportunities in Australia. -------------------------------------------------------------------------------- Jerry Revich, Goldman Sachs - Analyst [48] -------------------------------------------------------------------------------- Thank you. Perfect, thank you. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [49] -------------------------------------------------------------------------------- Eric, I see we have push, we probably have a chance for one more call, we are a little bit over our time limit. We will take one more call though, Eric. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Ann Duignan, JPMorgan. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [51] -------------------------------------------------------------------------------- A question on your guidance. If I go back to this time last year your bookings were $1.3 billion and you delivered $3.2 billion in sales. So that is a multiple of about 2.4, maybe 2.5 if I round it up. This year your backlog is $873 million but you are calling for $2.5 billion in sales which would be a multiple of nearly 3 times, which sort of suggests that you are anticipating an acceleration in sales at some point. Simplistically why wouldn't you have just used the same multiple going forward taking that $873 million and used a 2.5 multiple as did materialize this past year? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [52] -------------------------------------------------------------------------------- We will probably need to digest how you did it. We looked at the run rate as I shared and of what is happening, the most current information we have of what came in in the third and fourth quarter. So that is -- and that was actually a lower number. And we did look at the backlog but we looked at it pretty specifically quarter by quarter, what do we know was coming through. Similar to what Jerry just asked a question of the order coming through on the oilsands that we know that is real, that's a pretty large order that is flowing through the system. So the real question we had, so we felt that the OE we had disability to it, that is a low number that we put in at that $500 million. So real question was the service. And as I shared with you the first half -- the first quarter actually is going to be tough because we know the care and maintenance that is going on in the mines right now. But we do have decent visibility to those rebuilds that are out there. And the rebuilds are the big numbers. We did look at, as I mentioned, we got some of the hard rock that wasn't in the run rate, so that is added back in in some of the growth initiatives that we have. So we looked at that at the midpoint at the 2.5 and as always we have a higher number internally. But the real issue that we wanted to pressure test was that 2.4 on the bottom side, which is going to be tough. That would assume that we will have a drop of 25 -- or 20% or more on the service. So that is where we pushed the envelope on our cost savings which we are going to go get. So not sure that that helps but that is how we thought about it and to lay it out and to have a target out there that we think we could make for 2016. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [53] -------------------------------------------------------------------------------- Okay, if it is healthy to understand the thought process. And then on the Q1 loss can you just give us a little bit more color there, what customers were shutting down for extended periods and what are the risks that those shutdowns get extended into fiscal Q2? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [54] -------------------------------------------------------------------------------- It actually ties to a little bit to your note, some of those majors. But where their equipment is located we have pretty good disability on the mines that we service in the first quarter. And it is more of just the shutdown periods versus that being extended through the year. We don't think that will go past second, third and fourth quarter. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [55] -------------------------------------------------------------------------------- Good. But just for clarity would you expect to deliver a loss in both surface and underground or is it going to impact one more than the other? -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [56] -------------------------------------------------------------------------------- Well, probably not to give you that clarity. -------------------------------------------------------------------------------- Jim Sullivan, Joy Global Inc. - EVP & CFO [57] -------------------------------------------------------------------------------- Probably a little bit weighted, the loss will be a little bit more weighted to the underground segment, Ann. We are going to have to leave it at that though, okay? -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [58] -------------------------------------------------------------------------------- Okay, no, that is great. I appreciate the color. Thank you. -------------------------------------------------------------------------------- Ted Doheny, Joy Global Inc. - President & CEO [59] -------------------------------------------------------------------------------- Okay, I want to thank everybody. Really appreciate everybody's participation on the call today and we look forward to speaking to you at the end of the first quarter. So thank you. And, Eric, we have concluded our call for today. Thanks. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- This concludes today's call. Thank you for your participation.
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