Joy Global 2Q15 Earnings Call Notes

Everything down a lot

“Bookings of $745 million in the current quarter were down 29% versus the year ago period. Orders for original equipment of $150 million were down 57% and service orders of $595 million were down 15%’

Operating profit down 28%

“Operating profit, excluding $24 million of restructuring and non-cash pension settlement charge, totaled $94 million in the second quarter, down 28% from the second quarter of 2014.”

We certainly have seen our end markets take another step down

“we certainly have seen our end markets take another step down. Compared to the first quarter, we’ve seen met coal prices drop 21%, iron ore fall 11%, thermal coal fall 8%, and natural gas drop 20%. The combined impact of these forces has created additional headwinds to our business and we’re seeing this in our bookings.”

Customers now projecting double digit declines in capex through 2017

“The extended downturn in commodities has put pressure on our customers under increasing pressure. Reduced cash flows and increasing debt levels are forcing our customers to shift to austerity measures, delay service work, and withdraw our original equipment expansion plant. Overall, our mining customers are now projecting double digit declines in Capex through 2017.”

China’s housing market is the driver of seaborne commodity prices

“Given the importance that China’s housing market plays for many seaborne commodities, including copper, iron ore and met coal, a healthy Chinese housing market would have an impact on demand for these commodities.”

Seeing improving copper production

“Over the last month, we’ve seen some improvements in global copper markets as the expectations of stimulus in China along with an improving housing market in the U.S. had driven expectations for increased copper demand in coming months. Additionally, we’ve seen improvements in global copper production as production rates have reached their highest level since last June, which we believe will help our service business over the coming months.”

Met coal markets have deteriorated significantly in recent weeks

“Met coal markets have also deteriorated significantly in recent weeks. Current spot prices are trending in the $85 to $90 range, although reduced spot market transactions are creating limited visibility into the market. The 25% decline since beginning the year has left met coal prices at levels not seen since 2006 and this has certainly impacted the project pipeline. ”

Global steel production has contracted

“Global steel production contracting nearly 2% year-to-date has reduced met coal demand, at the same time, the forecast for steel consumption had been reduced to just 0.5% for 2015.”

Currencies have offset supply curtailments

“While the nearly 40 million tonnes of supply curtailments announced since 2012 have begun to impact the market, the significant currency decline in major met coal producing regions has affectively muted the supply adjustment process, leaving the market oversupplied. ”

Our customers are definitely in a distressed state

“our customers are definitely into distressed state”

Bought Montabert

“Montabert offers an interesting opportunity for us in the hard rock space. If we look at the business, we’ve actually been looking at this for eight months to your point of an auction. We found about – we know a lot about Montabert, but we saw it pop out with our MTI acquisition, is a critical part of that business and this was a critical component where they had high margins and also a world-class piece or a component with their rock breaker, and we saw it in the MTI business for their drifters and the drills.”

We knew the business and we knew it was a bit of an orphan

“we know this business, but it was somewhat of an orphan child with Doosan. And with Doosan, they bought it with the bobcat, so Ingersoll Rand put it in the bobcat package, so 70% of the business was related to construction with the breakers.”

Tough markets forcing us to get better

“As far as the share, I do think these tough markets are really making us get better and going after all the business and as we highlighted, our investment right now is in service and we’ve talked about the Surface centers, but also on the product development. The previous question, investing in the consumables, investing in our Surface products, so do believe we’re gaining share in a tough market with the third party well fitters and the pirates that are going after that business, I think we are gaining.”

It’s tough to say we see things bottoming anywhere

“Boy, it’s tough for me to say seeing the bottom. We see where it’s bottoming, as I shared in the last quarter, we thought the U.S. was bottoming, and boy, it took another step down. We did highlight, we saw Australia take a bump up and we’ve been talking about that for a while and that where we seem to gain there within — in the service bookings and so that is optimistic. We’ve also seen our customers now talking about the delivery slots into 2016 in both in the U.S. and Australia, and what that means is, they start locking those in.

So, see Australia bottoming, see some positive actions, also see some China opportunities but then again, it’s taking share, so getting our service business growing in China. ”

I don’t see much optimism from our customers. They’re shutting down more mines

“I don’t see the optimism there. I think the customers who are out there are truly analyzing where they are in their costs and where they’re in their cost curves. If they have mines that are well above the cost curve, if originally those were taken out, I think that is their price goes down, takes another step, it’s going to knock more mines out.”

Looking for acquisitions

” as we look at our M&A or kind of the acquisition, we are looking at things that match our strategy. To accelerate our business into hard rock, we need critical components to make that go faster, because the new product development just takes a long time. So we’re looking at things in the hard rock space and still in that 100 to $2 million [ph] range. We are not looking at something big, we are always looking at service companies. ”

Headline EBITDA multiples obscure the value

“Obviously the multiples are going to go up when the EBITDA has gone down and so mining companies are being hit on an EBITDA basis just like we are. The good news is the acquisition. We bought a company that’s been very stable, and we do have visibility into how we are going to improve that business, integrate it into Joy. So it’s one thing to talk about the headline valuation, EBITDA multiple those are going to be in the nine to ten type of area, but with synergies, you buy that down to seven – six, seven over a pretty short period of time.’