Joy Global Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Joy Global (JOY)

Joy Global (NYSE:JOY)

Q4 2012 Earnings Call

December 12, 2012 11:00 am ET

Executives

Michael S. Olsen - Chief Financial Officer and Executive Vice President

Michael W. Sutherlin - Chief Executive Officer, President, Executive Director, Member of Executive Committee and Chief Executive Officer of Joy Mining Machinery

Analysts

Andy Kaplowitz - Barclays Capital, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Robert Wertheimer - Vertical Research Partners, LLC

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Michael W. Gallo - CL King & Associates, Inc., Research Division

Operator

Good day, everyone, and welcome to the Joy Global Inc.'s Fourth Quarter Earnings Fiscal 2012 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference to Mr. Mike Olsen, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Michael S. Olsen

Thank you, Augusta. Good morning and welcome, everyone. Thank you for participating in today's conference call and for your continued interest in our company.

Joining me on the call this morning is Mike Sutherlin, President and Chief Executive Officer; Sean Major, Executive Vice President, General Counsel and Secretary; Jim Sullivan, Executive Vice President; and Ted Doheny, Executive Vice President, President and Chief Operating Officer of the company's underground mining equipment business.

This morning, I will begin with some brief comments, which expand upon our press release and which provide some additional background on the results for our fourth quarter. Mike Sutherlin will then provide an overview of our operations and our market outlook. After Mike's comments, we will conduct a question-and-answer session. [Operator Instructions]

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 press release and other SEC filings. We encourage you to read and become familiar with these risk factors.

We may also be referring 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 other investor information, we refer you to our website at www.joyglobal.com.

Now let's spend a few moments reviewing the fourth quarter of the 2012 fiscal year.

In our press release, we include tables that provide information which makes it easier to compare the current-period results to the prior year on a consistent basis. These tables provide the results for the surface and underground mining equipment businesses on an historical basis and lists the LeTourneau and IMM results separately, along with unusual charges included in the calculation of operating profit.

My comments this morning will focus on the legacy historical results for the company's surface and underground mining equipment businesses, excluding unusual charges listed individually in the press release, and we will break out separately the LeTourneau and IMM results.

Legacy bookings in the fourth quarter were $1.1 billion and were 15% lower than they were last year. The decrease in bookings was a result of a 5% decrease in aftermarket orders and a 27% decrease in original equipment bookings.

Aftermarket equipment bookings for the underground mining equipment business were approximately 9% less than they were a year ago due to fewer rebuilds and parts in the U.S. coal market; and lower order rates in China, where parts orders are typically very large and sporadic in their timing; and in Eurasia. The decrease in underground market orders was partially offset as surface mining equipment aftermarket bookings increased 3%, with small increases from the prior year in aftermarket orders in South America, Australia and Africa.

The decrease in original equipment bookings was attributable to a 47% decrease in the surface mining equipment business from an exceptionally strong OE bookings quarter last year, which was partially offset by a 21% increase for underground mining equipment business. Surface original equipment orders were down in all regions except Africa and Australia. Underground original equipment orders were up in China, Africa and Australia, where an order for longwall equipment was received during the current quarter, partially offset by lower orders in the U.S. due to the soft coal market.

LeTourneau recorded $191 million of bookings in the quarter, a 65% increase from the prior year. This increase in new orders included a large order for loaders from a customer in South America. IMM recorded $40 million of bookings in the quarter, reflecting the soft demand for their products in the mid-tier market in China.

Approximately $23 million of the $70-million overall decrease in bookings in the current quarter compared to a year ago was due to the translation impact of fluctuations in foreign currency exchange rates. Our investor website contains 2 graphs which track rolling 4-quarter new order trends for our legacy businesses for both original equipment and aftermarket. The graphs reflect a continued increase in aftermarket orders for both businesses and the softness for OE bookings reported in the 2012 fiscal year.

Net sales for the legacy businesses in the fourth quarter were $1.4 billion and were 15% higher than they were a year ago. Both legacy businesses reported revenue growth, with the underground equipment business recording a 4% increase, while the surface mining equipment business had a 35% increase in net sales. The revenue growth trends for the aftermarket business continued with increased sales of 6% and 7% for the underground and surface mining equipment businesses, respectively.

Surface mining aftermarket sales were up in all regions except China and Australia, where the increase in underground aftermarket sales was associated with strong parts sales in China. Underground original equipment net sales were essentially flat with the strong quarter a year ago, while original equipment revenue for the surface equipment business was 90% higher than OE sales in the fourth quarter last year. Higher shipments of underground equipment to Australia and China were offset by lower shipments in the United States and Africa, while strong surface equipment OE sales were reported across all regions.

LeTourneau reported net sales of $129 million in the current quarter compared to $102 million in the fourth quarter last year, a 27% increase. IMM had net sales of $52 million in the current quarter and reported softness across 3 of their 4 product lines in a challenging Chinese mid-tier market. Foreign currency translation associated with changes in the foreign currency rates decreased total net sales by $7 million compared to a year ago.

Operating profit for the legacy business in the fourth quarter was $294 million, with a 21% return on net sales, compared to $282 million with a 23% return on net sales in the fourth quarter last year. Excluding the charges associated with restructuring initiatives and pension curtailment actions recorded in the current quarter, return on net sales for the legacy business would have been 22%. The $21 million of fourth quarter charges for restructuring and pension curtailment will result in reduction in the company's cost structure in fiscal 2013, and these charges were anticipated at the beginning of the fourth quarter.

The underground mining equipment business reported a 22% return on sales, 23% excluding restructuring and pension curtailment charges, compared to 25% a year ago. The underground results last year, as you will remember, were extraordinarily strong, with very favorable sales mix and favorable manufacturing overhead absorption.

In the current quarter, the surface mining equipment business had a 22% return on sales, 24% excluding restructuring and pension curtailment charges, compared to 22% last year. The surface business benefited from higher volumes and favorable sales mix, which was partially offset by unfavorable period costs, along with an increase in SG&A expense.

LeTourneau had operating profit of $30 million and a return on sales of 23% in the current quarter, compared to $24 million and 23% return on sales in the fourth quarter last year. The integration of the LeTourneau acquisition continues on schedule and is operating at a run rate ahead of the acquisition economic model.

IMM had operating profit of $4 million before the final excess purchase accounting charge of $2 million in the fourth quarter. The IMM results reflect negatively -- were negatively affected by the low level of revenue in the current quarter.

Net income from current -- continuing operations, including the unusual items I've mentioned above, was $212 million and $1.99 per fully diluted share for the fourth quarter compared to $195 million, or $1.83 per fully diluted share last year. Net income from continuing operations in the current quarter benefited from the increase in operating profit described above, partially offset by the increase in net interest expense from $11 million last year to $17 million in the current quarter.

The income tax rate was 31.1% this quarter to 31.7% a year ago, with the improvement in the income tax rate primarily due to an increase in beneficial discrete tax items in the current quarter. For the 2013 fiscal year, we expect the effective tax rate to be between 30.5% and 31.5%, excluding discrete tax items.

Cash flow from continuing operations was $211 million in the current quarter compared to $151 million a year ago. The increase in cash provided by operations was due to an increase in net income, a decrease in -- and a decrease in inventories. These benefits were partially offset by an increase in accounts receivable during -- due to the timing of sales in the latter part of our fourth quarter. There was also a decrease in accounts payable and a decrease in advanced payments associated with lower original equipment bookings.

Capital expenditures were $72 million in the current quarter compared to $35 million last year, with capital expenditures expected to be approximately $200 million in the 2013 fiscal year as we finish up some carryover projects from the 2012 fiscal year.

With that, let me turn the discussion over to Mike Sutherlin.

Michael W. Sutherlin

Yes. Thank you, Mike. And let me add my welcome to those on the call.

I think Mike's done a nice job of reviewing the fourth quarter and the full year, so I'll focus more on 2013. But before I do, I want to make a couple of observations. First, our entire team finished the year strong, and this enabled us to catch up on some customer commitments and to deliver overall exceptional performance for the year. In fact, it was a year of records for us and in many aspects.

Secondly, our markets continually degraded during the year, as we dealt with coal share loss to natural gas for power generation in the U.S., and a slowing of China that created supply surpluses and drove commodity prices lower. This was followed by flattening of global steel production and de-stocking of met coal and iron ore mills as a consequence. And finally, Australia began to unravel as rising costs approached weaker prices. These became cumulative impacts as the year progressed. We initially felt we could offset the drop in U.S. coal, but eventually the headwinds became too strong. This then defines the market conditions as we enter our 2013.

Our fourth quarter also included quite a bit of noise, as we cut production and started the process of reducing our cost base to adjust to lower volumes in 2013. Each of these items created some drag on 2012, but they will provide potential to 2013. So let me explain.

Let's start with the markets. We have already provided a lot of information on our end commodity markets in our press release, so I won't repeat that. However, I will emphasize that those markets have generally stabilized and now have potential for upside. In the meantime, we expect them to move sideways. For example, October's increase in power generation in China has continued into November. India's coal production is behind last year, and with stockpiles less than a week, imports will have to increase in their second half. China's import of iron ore is up 6 to 7% in August and again in September, indicating that destocking at the steel mills is ending. India has put restrictions on its export of iron ore, and this will flip India from an exporter to an importer, adding to seaborne demand. And copper is expected to complete a destocking phase in China by year end.

There are additionally some general trends that cross all of our markets and help define the overall impact on us. The slowing in demand we saw in 2012 occurred as additional production was coming online. This was often from mines that were put on hold in 2008 and restarted in 2010. In fact, this was part of the increase in orders we enjoyed in 2011, and these mines started coming into production in 2012.

Increasing supply and slowing demand created surplus that drove pricing down to the marginal cost of production. You add in investor pressure on capital returns, and customer CapEx has been reduced significantly during the year. This is reflected in our rate of gross income in new orders for our legacy businesses, which excludes LeTourneau and IMM for consistent comparisons. This order rate is down 20% year-over-year, comprised of original equipment down 40% and aftermarket flat. The aftermarket has offset the drop in U.S. coal, and we are pleased to see that.

A deeper diagnostic on the income and order rate is to separate out major projects since they are generally lumpy, and even more so under current market conditions. So if we call this base orders, that number has been pretty consistent throughout 2012. This gives us confidence to use this as a run rate going into 2013. And therefore, our 2013 outlook is set on the continuation of this base order rate plus major projects.

We had over $400 million of major project bookings in 2012, and these are defined as projects of $100 million or larger. The 2012 number includes $200 million in our fourth quarter. We've previously talked about 4 major projects that were in later stages. Two of these projects, a replacement Australian longwall and a large order for LeTourneau loaders going to Brazil, were booked in our fourth quarter. It's encouraging that we're finally getting these projects across the line. The remaining couple of projects are still in process. Other projects are also in process, but the predictability of timing diminishes as we look beyond our first quarter.

Although the commodity end markets have largely corrected and are poised to improve, the timing of this is uncertain. In addition, our customers do not sense urgency with the excess capacity that exists today. We believe our customers' actual CapEx spend peaked in the first half, with the year defined by more projects finishing than starting. As a result, we expect our customers' CapEx in 2012 to be roughly flat with 2011. However, the down trend in the second half indicates that CapEx spend will be down another 10% to 15% in 2013. Much of this decline started in the second half of 2012. Some of this is the result -- is also the result of caution and an expected delayed restart. With the cushion of excess capacity, our customers will wait until the improving trend is made clear and sustaining.

But with prices starting to recover, our customers have improved cash flows. And combined with the excess capacity depletion, we expect customer CapEx to stabilize at the 2013 levels. We also expect any improvement in CapEx to be back-end-loaded in 2013. However, we are not betting on timing, and our plans for 2013 are based on current market conditions continuing.

We have all heard that the current market is not like 2009, and it's not. However, the comparison is still informative. The rate of decline in original equipment orders in 2012 was only half that experienced in 2009. In the previous downturn, the order rate dropped suddenly and quickly from the fourth quarter of 2008 to the first quarter of 2009, and that simplified year-over-year comparisons. This time around, we have had decline in incoming orders beginning in the second quarter of 2012. And therefore, we are effectively 3 quarters into the current market weakening. As a result, we will not be able to use backlog depletion in 2013 like we did in 2012. This puts more emphasis on cost reduction and restructuring.

Alternatively, we carry equipment backlog into 2013 that covers about 3/4 of our production schedule, giving us confidence in our plan for this coming year. We are taking out costs to size our business to the lower market we see for 2013. We incurred $20 million in charges in the fourth quarter to restructure and lower our cost base. About half this was adjusting to lower production volumes and the other half to restructure some of our pension plans from defined benefit, defined contribution. The latter reduces our pension costs and makes them -- those costs much more predictable. In addition, we plan to incur another $25 million in 2013 to rebalance and optimize our manufacturing. This is a combination of adjusting to structural changes in the U.S. coal market, increasing our manufacturing capacity in China, consolidating certain satellite factories and dual-use facilities, and eliminating duplicate costs as we implement One Joy Global.

We have targeted decremental operating margins at 34%. This reflects the fixed cost in our manufacturing operations and allows us to retain our field service personnel and to continue funding key research and development projects that we expect to generate significant additional revenues in future years. Restructuring charges enabled this 34% decremental margin, but there's also $40 million dollars of 2012 cost that will go away, primarily excess first year purchase accounting charges that are over and above restructuring and not included in this decremental calculation.

I also want to address IMM, which has been disappointing in 2012, but which we expect to recover in 2013. The integration issues were always complex, but that was compounded by the slowdown in the China market. The hiatus around the regime change in China did not help. And in fact, this made our fourth quarter look especially bad.

But we are in the midst of technology transfers that will give IMM products that have a competitive advantage, and we are starting the diagnostic phase of operational excellence. More importantly, we are changing IMM from acting like a holding company to being an operating company. Our integration team, including IMM management, is digging into every aspect of the business, and we are finding more opportunity. Early indications are good, with order rates starting to return.

And finally, let me address cash flow. We expect free cash flow to increase in 2013 as lower volumes allow us to monetize working capital. There are additional sources that will favorably impact free cash flow. Cash flow was reduced in 2012 by increased CapEx and the continuation of elevated pension funding. CapEx will come down in 2013 as we, like our customers, finish more projects than we start. And we expect our U.S. pensions to reach our funding targets by the end of 2013.

With increased cash -- free cash flow, capital allocation becomes an issue. We continue to believe that strategic acquisitions provide the path to highest returns, but we recognize that timing is not predictable. And as a result, our default value is share buybacks. However, we will not make a definitive decision until we have accumulated cash balances that will enable us to have meaningful execution.

This then gives us the basis for our 2013 guidance. We expect and are planning for revenues to be between $4.9 billion to $5.2 billion in fiscal 2013. After capturing the benefit of completing the excess purchase accounting for both LeTourneau and IMM and applying our decremental target of 34% to the adjusted cost base, results in our expectation of earnings per fully diluted share to be between $5.90 to $6.50. This is before the cost of restructuring programs in 2013, which we said would be $25 million. Therefore, all-in EPS is expected to be between $5.75 to $6.35 per share.

So before closing, I want to remind you about the seasonality that impacts our first quarter. The disproportional number of holidays that fall into our fiscal first quarter adversely impact revenues. Fixed costs additionally impact operating profit and margins, and this needs to be considered and anticipated and evaluated in our first quarter.

And finally, this is Mike Olsen's final earnings call. I've never had a better, more capable and more dedicated CFO. Mike's work ethic is legendary, and no one is more committed to the best interest of this company. We all sleep better knowing that Mike has blessed the numbers. He has earned the respect of the entire Joy Global team, our Board of Directors, our investors and shareholders and most of you on this call. Mike, you'll be greatly missed but never forgotten. So thank you for 33 years of excellence. Yours will be big shoes to fill, but there's no one more capable of doing that than Jim Sullivan. So, Jim, welcome, and good luck.

Anyhow, with that, I'll turn the call to questions. So, Augusta, back to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Andy Kaplowitz of Barclays.

Andy Kaplowitz - Barclays Capital, Research Division

Mike Olsen, congrats on your retirement, again. Mike Sutherlin, if I could ask you about aftermarket. The aftermarket business was down 5% in terms of orders in the quarter, and it was flat for the year. Can you sort of reconcile for us what's in your guidance for '13 in terms of aftermarket? Is it still sort of that flattish growth that you expect? And what are the -- what's the visibility like into -- to flattish for 2013 in aftermarket?

Michael W. Sutherlin

Let me go -- just touch on 2012 for just a second, because I think it relates to what we see for 2013. The flattish aftermarket we had was largely the international markets growing year-over-year and offsetting the decline we've seen in the U.S. coal markets. So we've seen a pretty significant decline in the U.S. coal market, not unlike that which we saw in 2009. Different reasons, but the magnitudes are not all that dissimilar. So a fairly significant decline in a large sector for us, and we've -- saw the aftermarket in other regions around the world capable of offsetting that. We do have a pretty consistent aftermarket on an annual basis. On a quarterly basis, we could get some lumpiness for -- for example, from China, we'll get large aftermarket orders 3 or 4 times a year rather than monthly. So the fact we got a large order in our third quarter from China, that became aftermarket revenue in our fourth quarter as we delivered that order. So I think you've got to look at the year-over-year more so than the fourth quarter, just because the predictability of aftermarket, even on a quarterly basis, particularly with large parts orders, is not absolutely crystal clear and it's not always consistent. As we look at 2013, we've gone back and looked at our aftermarket business over long periods of time. And aftermarket has historically -- in worse conditions, was flat in 2009. We saw aftermarket flatten out, and I think it demonstrates the stability there. And we're looking today -- the aftermarket is generally aligned to production rates. So we're looking at some decline in production rates, but not massive declines globally in production rates. The U.S. is going to seem a little bit more severe because it's -- there are structural changes. The coal volume in the U.S. is not down all that much. It's like 5% or 8% or something in production, but much more in Central Appalachia, and we're seeing increases in Illinois Basin. So that structural dislocation is having a bigger impact on aftermarket in the U.S. And yet, through 2012, we were able to offset that out via international markets. Generally, those adjustments are more severe at the early stages as people destock inventories at mine sites and park equipment and things like that. And then they begin to move back up to a little bit higher level where we see stabilization. So in that regard, 2012 would represent what we would expect to be probably the worst year for U.S. underground coal aftermarket. So you put all the things together, and I think we still believe that the aftermarket is going to be able to stabilize over 2013, given what we see: new machines coming into the fleet, machines moving into their first rebuild cycle, production levels internationally coming off a bit but not dramatically. And you put all that into the equation, and we expect our aftermarket to hold its own in 2013.

Andy Kaplowitz - Barclays Capital, Research Division

Mike, that's helpful. Let me take a shot at a slightly longer-term question. You had relatively good awards in the quarter, and you guided to 2012 order rates carrying forward into '13. I know it's early, but one of the big questions that I think we have is whether earnings should stabilize at your '13 rate as you go into '14. I mean, I think you're kind of hinting that, at least at this point, you think that's possible, given the stabilization of the markets. But I don't want to put words in your mouth. How do you look at sort of '14 and beyond versus '13? Is this going to be sort of the bottom in earnings? And what confidence level do you have around that?

Michael W. Sutherlin

Well, we're -- I think, 2 sides of that. One side is the market side, and we certainly have seen our customers adjust CapEx to cash flow. And cash flow dropped pretty dramatically in 2012 as commodity pricing came down. And we've seen commodity prices in the second half stabilize. And in the fourth quarter, we saw the -- it starting to move up in commodity price. Certainly, iron ore has regained a lot of its loss, so we're starting to see some -- well, we're seeing rollover in met coal, but we expect the first quarter to be better as the steel mills go back to restocking of iron ore and met coal. And with those pricing up a little, we will see some improved cash flow, and I think that our expectation from that and talking to customers is that we'll see a stabilization of cash flow. We're not -- we don't expect to see multiyear significant declines in customer cash flow. Our customers generally believe that when they stopped projects in 2008, restarted them in 2010, that process was very inefficient. The push to catch up in 2011 created a lot of inefficiency and gave them projects that had higher costs than they had planned for. So this idea of starting/stopping big projects had some negative impacts on cost efficiencies. So I'm not -- at this point, I don't see multiyear significant declines in CapEx. So we really do believe CapEx is going to stabilize, that what we see is the 2013 level. And our customers are looking for the opportunity to bring new capacity back online. First, that will be their best projects with -- they'll come in low on the marginal cost curve, but they certainly don't want to be in a position where we massively undersupply the market. And when we start moving the difference between supply and demand, even though there's excess supply today, the difference is not a large-magnitude difference. It's a relatively small magnitude of difference. So that's why we talked about the CapEx. In 2013, when we start to see improvement, it'll be back-end loaded. So on our own earnings, we have been taking costs out to restructure our business. Some of this is to reflect current market conditions. Some of it is in line with our strategic plan. This is, for us, an opportunity to move forward on some plans that might have taken longer had we done them by the original planned time line. So this will allow us to accelerate what we plan to do anyhow. But those costs that we incurred in 2012 will help us -- are helping us to take cost out in 2013. The restructuring we're doing in 2013 will help us to take more cost out in 2014. So we -- under level revenue conditions, we would expect 2014 to be a better year than 2013, just as those cost improvements flow through. And we do believe that the market is on the cusp of starting to see some improvement. And we think that, that will have -- make a bigger impact on our 2014. Long answer to a short question but...

Andy Kaplowitz - Barclays Capital, Research Division

No, it's good. I appreciate it.

Operator

Our next question will come from Jerry Revich of Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc., Research Division

I'm wondering if you gentlemen can talk about the restructuring that you're planning for the back half of '13, just whatever level of color you're comfortable giving us on the nature of the efforts or businesses? And if you could, just help us understand the timing in the back half of the year versus earlier, considering the dynamics, Mike, that you just mentioned in response to the last question.

Michael W. Sutherlin

Yes. I'm going to push this over to Mike to answer, but we're not going to be able to give you a lot of specifics because this involves facilities, people and -- so we'll give you some general directions and sort of where we see that on broad terms. But we just -- it's not good for our business to go down into specifics on some of those plans.

Michael S. Olsen

Yes, Jerry, what you need to think about is as we go into 2013, there'll be 2 sorts of restructuring activities that will, in fact, take place. Earlier in the year, there'll be restructuring activities that will be a continuation of some of the activities that took place in the fourth quarter of 2012. These will be the more traditional cost reduction activities where, as we went through the fourth quarter and identified opportunities, we also identified some additional opportunities that would allow us to position ourselves to establish a lower overall cost structure. These actions will take place probably either at the very end of the first quarter or most likely in the second quarter. And these, as I said, would be the more traditional cost restructurings, the reduction of headcount. Then in the latter part of 2013, as a result of the timing that will be required, we would in fact look to accelerate the strategic actions that Mike had identified. If you recall, part of our strategy is to move our manufacturing capacity closer to those locations where the opportunities for growth exist. So we'll take advantage of the opportunity with some softness in the markets to downsize and possibly close those higher-cost facilities and migrate manufacturing footprint to the lower-cost locations. Those activities would take place in the latter part of 2013, primarily because of the timing and planning that would be necessary to successfully execute those. So you would be looking at 2 phases and 2 different types of cost reduction activities in 2013. We still anticipate that the cost of those activities will be in that $25-million ballpark and would still be looking at paybacks in that 9-month period. Most of that, of the facility restructuring, would be realized in 2014. Some of the more traditional restructuring activities would, in fact, benefit the second half of 2013.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. I appreciate the context. And then as a follow-up, I'm wondering if you could touch on where do you expect your proportion of outsourcing activities to stack up, exiting 2013 versus where it's at in the fourth quarter? And if you could, just update us in your low-cost facilities. What -- roughly, what proportion of material costs are sourced from low-cost areas versus the higher-cost areas that we've seen historically?

Michael S. Olsen

I guess there's a number of questions there. As far as the outsourcing is concerned, as we've indicated in the past, we typically have our outsourcing range from 15% to 35% of our direct labor hours. We'll never get to a situation where we will bring all of those outsourced labor hours in-house, because then that would in most instances, put those outsourcing partners out of business. And it takes years to, in fact, develop them. So over the last quarter or so, we've in fact begun to bring some of that outsourced work back into our facilities and would anticipate by the end of the 2013 fiscal year, we would be at the lower end of that outsourcing range. As we look at the low-cost manufacturing facilities, that's really an evolving process. As we look at those facilities, we initially start with utilizing material that we import into those facilities in order to maintain product quality. And then we have the supply chain organization developing the supply chain network that allows us to gradually increase the amount of local content that we incorporate into those products. So there really isn't any one percentage that I could actually give you, only to say that as we move forward, the benefits from moving to those low-cost manufacturing facilities will continue to increase as we source more of the material from those local supply chains.

Michael W. Sutherlin

Yes. Thanks, Jerry. Just a couple of probably amplifying comments. One is that the sourcing ratio, even in China, for us, the sourcing ratio today is probably less than half of our total supply is sourced locally. So we still are relatively low on that curve with a lot of opportunity. Some of the restructuring that we're going to do in 2013, I'll give you just an example, is we have -- in our Australian operations, we have increasing aftermarket requirements based on equipment we've been delivering over the last couple of years. It's not a low-cost country for production, so we'll start moving the manufacturing of original equipment out of China to free up capacity to increase our capabilities of doing rebuilds. And so that -- out of Australia, we'll probably move that to China and be building the machines in China for delivery to Australia, and then focus in on Australia capacity on aftermarket repairs and rebuilds. And there's a number of other projects that we have that are sort of similar nature, but it sort of gives you a flavor of -- so when we talk about optimizing our manufacturing facility, that's sort of what we're talking about doing, is -- and that is one example of several, but they're all fairly consistent in style and overall impact.

Operator

Our next question will come from Rob Wertheimer of Vertical Research.

Robert Wertheimer - Vertical Research Partners, LLC

So I wanted -- I know you touched on this at length, Mike, but I wanted to ask it in just a little different way. I know that industry CapEx is down in '13, but still hanging in there at a pretty good level. And you've talked about the stabilization, which is great. But one of the things that's a concern is that exploratory drilling. A couple of miners have talked about sort of the R&D of exploratory drilling in the longer-term projects has been sharply curtailed. And do you worry that you need to see a pick-up in overall willingness to spend soon in order for '14 and '15 to be okay? Or is that really not a useful framework in which to think about it?

Michael W. Sutherlin

Yes. It's a good question. I think that -- over the course of 2012, I think that our customers have refocused primarily on lower cost to execute projects, things that have quicker returns to production. We're seeing basically a -- taking off-line the megaprojects, the mega-greenfield projects, particularly those that had high-risk or high infrastructure investment requirements. So today, we're looking at projects that are brownfield expansions, greenfield expansions in adjacent areas where the costs are well known, where infrastructure is closer. You could even use existing infrastructure. The areas where we get into that broad exploratory drilling, I just don't see our customers right now having a huge appetite for that. We're certainly seeing that in places like Mongolia. Those projects keep taking longer and longer and longer as the Mongolians continue to renegotiate their share of the project revenue streams. And we see the same thing in Congo, the risk there associated with putting those huge amounts of infrastructure that are required. So exploratory drilling is going to go down, but I think probably, that's coming down because of the regions where a lot of that large exploration, looking for the next major project, I just think that those are too high on the risk profile for companies to look at right now. And as long as they can continue to expand in adjacent space, I think that they'll gravitate the preference for doing that, and that's a lot easier in terms of defining the reserves and doing the mine finding and permitting. So I appreciate what you're saying in the long term, but I think in the nearer term, over the next 3, 5, 7 years, I don't think that, that's going to have a huge impact on the ability of the industry to deploy CapEx and increase mining capacity.

Operator

We'll go next to Robert McCarthy of Robert W. Baird.

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

You've booked a couple of the large orders that you've been talking about for the last several quarters in the quarter, a couple of hundred million dollars. As I recall, there -- that leaves a couple of other large opportunities outstanding that cumulatively are larger than what you booked in the quarter. When you were talking about the outlook for projects and for bookings, you made a comment about not having a lot of visibility beyond the first quarter. Was that intended to convey that you have visibility of booking some of these bigger orders in the first quarter? Or are rather you warning us that it's not clear that they will actually go forward in 2013?

Michael W. Sutherlin

That's a really good question. I don't know. The intent of the comment was to say that we do have visibility and confidence in the projects that we've talked about, before including the couple of projects that haven't booked yet. But we do expect those to be closer-in bookings. And beyond that, there are other -- a number of other projects that we're working on. It's just not as clear that those projects -- the customers are ready to pull the trigger on those projects and start spending on them. So whether those next 2 projects book in the first quarter or early in the second quarter, we expect them to book sometime soon. And in fact, if they don't book sometime soon, I think the risk level of them booking at all goes up pretty high. So the nature of the comment was intended to say that beyond the remaining 2 projects that we've been working on, the visibility of timing on projects beyond that gets quite a bit fuzzy.

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Sure. Okay. That's very helpful, Mike. And then I wanted to ask about the 2013 full year revenue outlook for LeTourneau and IMM. In the release, maybe in your comments, you talked about reversing the 2012 trend at IMM in '13. Is that intended to convey that you believe you can get back to 2011 revenue contribution at IMM? And can you just comment on your expectations for LeT?

Michael W. Sutherlin

Yes. We're looking at LeTourneau to be roughly flat year-over-year. I don't have the specific numbers, but we're not -- we're seeing its market flatten out. The order we got from Brazil is a nice order, but it's deliverable over a period of time. So that's not necessarily taking the next production slots. It's spread out over the next 12 to 18 months. So we're looking at LeTourneau to be roughly flat year-over-year with what we saw in 2012. IMM is -- we had a period where their management was distracted with the approval -- MOFCOM approval process and tendering process. We were a little slow to get our hands on that business and really dig in. But over and above that, we saw the weaker market conditions affect them. Certainly, if we look at some of their customers, we've seen production declines in some of their customers, consistent with the slowing we've talked about in the China market. We're starting to see that coming back. We're seeing the early stages of electricity demand improvement, which will be a driver for coal production domestically. But we expect IMM to need to reverse its path. It's not going to be jumping up to prior levels. It'll be a climb out during the year, and we think that we'll see -- the first quarter of this year, we'll start to see that improvement, but it'll be on a trend that will get us back to where we were by the end of this year. So that's our outlook for IMM. Now some of that miss in 2012 was us and them, and some of it was just the market softening. I can't give you exact numbers, but probably 50-50 in that category. But we believe we can get IMM back to where we were in the first quarter of 2012. And then that resets the base that we will look at for other product line expansions in -- expansions to their product line, other ways to -- aftermarket. Other ways that have long-term growth potential.

Operator

Our next question will come from Ann Duignan of JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Can you talk a little bit more on IMM? Just a follow-on from the last question. Could you just talk a little bit about the competitive environment and what's going on there today versus what we've been hearing over the last couple of quarters? And is pricing an issue in the marketplace going forward?

Michael W. Sutherlin

Well, what we've seen with IMM is there -- we have had share losses in one of our product lines, and that's been the result of competitive pressure. We also believe that, that's somewhat due to us and the dealer distributor networks that they used. We haven't managed those as aggressively as we needed to, and we're getting those guys back in focus. And we're spending a lot more time in the dealer distributor network, rather than relying on them to work the market on their own initiative. I think that's a big factor. We certainly don't see -- today, we don't see pricing erosion, that we've got to go and do deep discounts to get that market share back. We think we can get that market share back on performance. So we certainly -- early on, we're starting to see the improvement in order bookings out of IMM, consistent with those expectations. So the bottom line is that, yes, there is some aggressive competition. We believe that we can hold our own and gain back market share on those product lines. And we don't believe that we need to do deep price discounting due to the fact that this industry continues to demonstrate that price elasticity is virtually vertical. So we just -- we don't have an interest in going down that path. And with IMM, there's no evidence today that we need to do that.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. That's good color. I appreciate that. And then just to follow-up on the outlook, I think you said you were 75% covered for your revenues for 2013. At what point during the year, Mike, will you be comfortable enough to either say, "Yes, full year is okay," or, "It's not okay, and 2014 is flat to a recovery" or it's not? What are some of the catalysts that you're looking for specifically? And how long do you think they will take to either demonstrate the recovery or not?

Michael W. Sutherlin

I think it gets down to the original equipment bookings and projects. We -- the projects that we've booked in our fourth quarter, the projects that we see closer at hand, are projects that have been on our radar scope now for 6 to 9 months. So those are projects that have been established early on, things that slowed down in our second quarter as our customers were under pressure to reevaluate their projects and trim back CapEx, excuse me. And in that process, all these projects were taken off-line for pretty intensive reevaluation. Customers are telling us that in that process, they found opportunities to improve project economics. They changed the engineering on some of the projects. That just took longer, but that's what we're dealing with now. I think the real test of 2014 will be the flow of projects that have been earlier in their status. And if our customers move from finishing projects that they've already had in process, to starting up the next round of projects, I think that's going to be a clear indicator on the strength or not in 2014. And we do see those projects. We're working on them with our customers. We're doing a lot of engineering and project management work. We -- as I said, we -- the visibility or the predictability of timing diminishes as we get beyond our first quarter, but we do need to see some of those projects come across the line in 2013 to give us confidence that 2014 is going to be a year to start to see the first stages of improvement.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. Is there any temptation to lower your own prices on some of these projects in order to make them more commercially viable for your customers? Or are you too small of a piece of the total cost?

Michael W. Sutherlin

Well, we're not too small of a piece of the total cost, but I can -- our belief and the way -- the work we do with our customers, I think it demonstrates that day in, day out, that on these projects, CapEx is relatively insignificant compared to OpEx. And we keep focusing on ways we can help our customer take operating cost down. For a 20-year-life mine, OpEx is much more important than CapEx. So we're not in an industry where lowering your price to book an order is the right thing to do, particularly with repeat customers. If you had a one-off project and that was -- the project was going to be done and gone, that would -- may be different. But we're not in that. We have repeat customers and multiple projects in the stream, and price elasticity is very vertical in this industry. So we just don't have an appetite to start reducing prices. We don't believe we need to, and we believe we'll just continue working on our value proposition, demonstrating that we can help them reduce operating costs, improve productivity. That has worked for us consistently over the years. I think it continues to work. Even more so, in tough times, I think it works even better.

Operator

Our next question will come from Michael Gallo of CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Congratulations to Mike on his retirement. Mike, a question. As you've seen costs and commodity price converge, I was wondering whether that's driven increased interest in some of your customers in life-cycle management strategies and how you can capitalize that -- on that again, just to come back to the OpEx versus CapEx question, in order to really move more people towards that -- structurally where you have, I think, a real advantage as you compete with some of your competitors.

Michael W. Sutherlin

Certainly in today's environment, operating cost is really key for our customers. As we look at our life-cycle management programs, we continually demonstrate that we can deliver better results for our customers. Those results are not necessarily lower cost, but we can deliver higher reliability in our machines, better productivity in the machines, better uptime. We have a better capability of judging the remaining life in components, the need -- the time to make those changes. Smart Services is formalizing that in ways that we can connect into our customers' business systems to order parts, to have those available at a mine site when we need them. All those kind of things improves the predictability and the productivity and efficiency of those mining operations. Our customers see that in -- where we have those programs deployed, we are seeing increased use of those programs by those customers. And certainly, there is upside in doing that. One of the things that we -- as we get into an environment where skill shortages could come into play, and we have an industry that's got an average age in the mid-50 years old, so skill shortages are a serious concern for the industry going forward. And being able to use more services to provide the capability of monitoring and detecting without having to have highly skilled individuals is a real plus. And so that's been a real positive for us. We've seen a lot interest in Smart Services. So it is top of our priority. Aftermarket right now is top of our priority, continued to build on our strength and capture more aftermarket. The program-based aftermarket is certainly the highest priority we have. There'll be more aftermarket in the programs. Other things we deal with our customers on is just responding to major rebuilds, shovel outages and dragline outages. It's easier for us to make those adjustments off of a steady work base than it is to start with 0 on a call-out basis and put a team of 50 people on a shovel outage project that may last for 3 months. So customers are starting to understand that having base-level work with them and then adjusting from that is a lot easier and more efficient than doing call-out on a case-by-case basis. So we are making progress. I think that's in the trend that we have in our aftermarket revenue growth. And I think you'll see that continue going forward.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Okay, great, Mike. And then just a follow-up question. What's the total -- when you look at the restructuring that was done in Q4 and some of the restructuring you're doing this year, how much in total costs do you expect to have removed by 2014? And if the overall demand environment picks up meaningfully, how much of that will you have to put back? Or will all of it be just structurally out of the business as you make some of those shifts from higher-cost to lower-cost regions?

Michael W. Sutherlin

Yes. I'll give you a general comment and let Mike talk about more of the specific numbers. As I said earlier, a lot of the things we're doing today are things that were in our strategic plans to do over the long term. There's opportunity now for us to accelerate some of those. As a result, we look at these as permanent adjustments to our cost base. There are some volume-based stuff in our cost reduction, but a lot of this is permanent reductions in our cost base that will stay there and will give us a lower cost base. The way we look at this, it's going to lower our cost base if we need it to be lowered. If the market picks up, we're going to have more leverage going into the up cycle. And so these are not cost -- the majority of these are not costs that we expect to come back. Particularly, this 2013 phase will be structurally permanent cost reductions. But Mike will give us a bit more on the numbers.

Michael S. Olsen

Yes. What we indicated in this call a quarter ago, that in the fourth quarter, we were going to have charges of around $20 million that would result in savings of $40 million in the 2013 fiscal year. And we, in fact, are on target to achieve those savings. During 2013, we're anticipating an additional set of actions that I've described earlier, 2 phases: one earlier in the year, one later in the year that's more facility-related. And we're anticipating that the result of those actions would be approximately another $40 million. We also think that there are some opportunities to continue to drive the efficiency of the business. We've initiated our operational excellence initiatives, and we're continuing to drive those. And we think that those will continue to provide benefits for the business going forward. And as a result of all these actions, our expectation is that when we get into the 2014 fiscal year, we would have in fact taken in excess of $80 million out of the cost structure of the business.

Michael W. Sutherlin

Yes. With that, I guess we're at the top of the hour, I think. And so we're at a point where I think we need to wrap up.

Just a few closing comments and I -- we are a company that performs better when we're chasing the market than when we're waiting on the market. And we're going to position Joy Global to be in position to go after the upside of the market. It's part of our cost reduction programs that we're doing, and the restructuring programs are designed to do that. We are taking these actions so that we can deliver industry-leading outcomes over a range of possible outcomes. And so that is our objective right now under the market conditions, which still have a fair measure of uncertainty in them, is to be able to deliver performance over a range of outcomes.

So with that, I thank everyone for being on the call. Thank you for your interest in Joy Global. And I look forward to talking to you again at the end of our first quarter. Thank you very much.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation.

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