Joy Global Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Joy Global (JOY)

Joy Global (NYSE:JOY)

Q4 2013 Earnings Call

December 11, 2013 11:00 am ET

Executives

James M. Sullivan - Chief Financial Officer and Executive Vice President

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

Edward L. Doheny - Executive Vice President and Director

Analysts

Vlad Bystricky - Barclays Capital, Research Division

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

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

Stephen E. Volkmann - Jefferies LLC, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Robert Wertheimer - Vertical Research Partners, LLC

Christopher Schon Williams - BB&T Capital Markets, Research Division

Nicole DeBlase - Morgan Stanley, Research Division

Alexander E. Potter - Piper Jaffray Companies, Research Division

Operator

Good day, and welcome to the Joy Global Fourth Quarter Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the call over to Mr. Jim Sullivan, Executive Vice President and CFO. Mr. Sullivan, please go ahead.

James M. Sullivan

Thank you, and good morning, everyone. Welcome. Thank you for participating in today's conference call and for your interest in our company. Joining me on the call this morning is Mike Sutherlin, President and Chief Executive Officer; Ted Doheny, Executive Vice President and CEO designee; and Sean Major, Executive Vice President, General Counsel and Secretary.

This morning, I will begin with some brief comments, which expand upon our press release and which provide some additional background on our results for the fourth quarter. Mike Sutherlin will then provide a few comments on the year, and Ted Doheny will close with the review of our markets and our outlook for 2014. After Ted's comments, we will conduct the 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 refer to a number of non-GAAP measures, which we believe are important to understand our business. For a reconciliation of non-GAAP metrics to GAAP, as well as for other investor information, we refer you to our website, joyglobal.com.

Now let's spend a few moments reviewing the fourth quarter. Overall, a solid quarter across the board as we ended the year in line with expectations. Bookings in the fourth quarter totaled $1.1 billion, 19% lower than last year. Original equipment totaled $365 million, down 38%, and aftermarket totaled $711 million, down 3%.

Adjusting for year-over-year currency fluctuations, consolidated bookings were down 17% and aftermarket bookings were flat. Original equipment bookings for the underground segment were approximately 11% lower than the year-ago period, as all regions experienced declines, except Australia, where we booked a major longwall system in the current quarter.

Surface mining original equipment bookings decreased 62% against the very strong comparable last year that included a major real low loader order in South America. All regions saw declines in the current quarter except Eurasia.

Versus the third quarter, the $270 million sequential increase in consolidated OE bookings spread across all regions except North America and China. Excluding the Australian longwall system, we believe the underlying OE order rate of about $225 million for the quarter, while lumpy going forward, is more indicative of the level we will see until a sustained demand catalyst emerges.

The 3% year-over-year decrease in consolidated aftermarket bookings was attributable to a 1% decrease in underground and a 5% decrease in surface. Increased underground mining rebuild activity drove improvements in the Americas, but was more than offset by declines in Eurasia and China.

Surface mining aftermarket bookings declined in all regions except South America, where copper activity remains strong. Looking sequentially, the 19% increase in consolidated aftermarket bookings was spread across all regions, except Africa, and reflected a combination of the seasonal uptick we typically see in the fourth quarter, as well as what we believe is further evidence of stabilization in this part of our business

Now if you look back at the second -- or the third quarter and the fourth quarter of fiscal 2013, aftermarket bookings over this period averaged just over $650 million. We believe this is more representative of the average level of aftermarket bookings we will see across fiscal 2014.

Now turning to sales. Consolidated revenue in the fourth quarter totaled $1.2 billion, 26% lower than a year ago, with declines reported in both segments. If you adjust for currency, sales were down 23%. Underground sales were down 16% year-over-year, with original equipment down 17% and aftermarket down 14%. Original equipment sales were down in all regions except Africa and Eurasia, while aftermarket revenues were down in all regions except Australia and Eurasia.

Surface revenues were down 36% year-over-year, with OE down 58% and aftermarket down 13%. Original equipment sales were down in all regions except Africa. Our aftermarket revenues were down in all regions except South America and Eurasia.

Operating profit, excluding restructuring costs and other unusual items, totaled $193 million or 16.3% of sales in the fourth quarter. This compares to operating profit of $349 million, or 21.9% of sales in the prior year quarter. The year-over-year decline in operating profit and operating margin was in line with expectations and was due to a combination of lower sales volumes, including the negative impact of higher unabsorbed fixed costs, and unfavorable product mix, primarily in the underground segment. These declines were partially offset by lower selling and administrative expenses.

To further reduce and align our cost structure with the expected lower sales volume in 2014, we took $19 million of additional restructuring actions in the fourth quarter. These actions, which included additional headcount reductions and facility closures, in combination with the actions taken earlier in the year, are expected to deliver incremental savings of $60 million in fiscal 2014.

We expect additional restructuring charges and savings of approximately $15 million in 2014, bringing the total year-over-year expected savings from all of our programs to $75 million.

Also in the quarter, we took $155 million noncash intangible asset impairment charge to rationalize our acquired brands and increase the visibility and focus on our core brands. We believe this is an important step in conjunction with our One Joy Global initiative that's focused on making our business more efficient, responsive and competitive.

We also recorded $28 million of income in the fourth quarter associated with the settlement of certain legal claims. We have excluded these onetime gains from our adjusted operating profit in the quarter. Net income from continuing operations in the fourth quarter, excluding restructuring cost, the impairment and the onetime gains, was $118 million or $1.11 per fully diluted share. This compares to $225 million or $2.10 per share last year.

Adjusted net income from continuing operations in the current quarter declined in the decrease in operating profit described previously and a higher tax rate, partially offset by a $4 million decrease in net interest expense from lower debt levels. The income tax rate for the quarter, excluding call outs and discrete tax items, was 34% and this compared to 32% a year ago. The increase in the tax rate reduced adjusted fully diluted earnings per share in the quarter by $0.04 and was due to a higher percentage of higher tax domestic income compared to lower taxed foreign source income in the current quarter. The tax rate for the full year, again, excluding call outs and discrete items, was 31.7%, which was on par with the rate experienced in 2012 and in line with the high end of our guidance.

For 2014, we expect the full year effective tax rate, excluding call outs and discrete items, to be between 31% and 32%.

During the quarter, we repurchased 4.1 million shares of the company stock for $214 million. This repurchases added a penny to earnings in the quarter and reduced the fully diluted share count entering fiscal 2014 to 103 million.

Now turning to cash. Cash flow from continuing operations was strong again in the fourth quarter, totaling $195 million. This compares to $211 million in the year-ago period. The modest year-over-year decrease was primarily due to lower earnings and timing of the income tax payments, substantially offset by lower accounts receivable from strong collections and a decrease in inventory associated with lower sales levels.

For the year, cash from operations totaled $639 million and included $166 million of pension contributions. Adjusting for pension contributions, cash from operations for the year was very strong at just over 16% of sales.

With the company's pension plans now approaching fully funded status, the go forward discretionary contribution rate is expected to be less than $50 million per year in the next few years. Capital expenditures were $36 million in the fourth quarter, compared to $72 million last year. The year-over-year decline in CapEx is primarily due to lower OE-related growth spending in China.

Looking forward to 2014, we are confident in our cash generation capability, as the impact from lower earnings will largely be mitigated by reduced pension contributions and lower working capital and CapEx levels. Overall, we expect cash from operations in 2014, excluding discretionary pension contributions, to approximate 15% of sales. And capital expenditures is expected to be approximately $125 million for the year.

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

Michael W. Sutherlin

Thanks, Jim. And let me add my welcome to those on the call today. For us, 2013 was a very challenging year, as we prepared for weaker market conditions. For the first time since I've been at Joy, commodities moved into supply surplus and this indicated that the correction would take longer and it has. Maybe actually more appropriate to say, "and it is." Early on, we realized the need to take out costs. We also saw this as an opportunity to make us a more efficient business by rationalizing our operations and streamlining processes in ways that lower the cost base. We started early and have been making very good progress with our restructuring programs. A significant portion of the cost being taken out are driven by our operational excellence program and our One Joy Global initiative. And these are structural, permanent cost outs. Operational excellence is creating realizable capacity within roof line that is allowing us to close smaller and less efficient operations and eliminate the associated overhead. And One Joy Global is eliminating duplicate processes, positions and cost, as we combine surface and underground into one business focused on the same customers.

It's not just about cost reduction and we've done an outstanding job of executing and delivering results all year, both financial and operating results. Cycle time improvements are enabling us to turn a higher percentage of orders into revenues in the same quarter. We have improved on-time delivery, while reducing inventories and this increases both customer service levels and cash flow. These efforts are not only lowering our cost base, but they are improving our leverage to the upside. And we've been able to achieve meaningful cost reduction while maintaining R&D programs that will add long-term value.

We are not done yet and the discipline that we have in cost control and process efficiency will carry forward into next year and that will serve us well as we address the challenges that continue into 2014.

With those brief comments, it's a good segue into the market and company outlook for 2014. And for that, I'll turn the call over to Ted Doheny, who is succeeding me as President and CEO. Ted?

Edward L. Doheny

Thanks, Mike. Let me add my welcome to everyone on the call today. As Mike indicated, my comments will be focused on our end markets and our outlook for 2014. Starting in 2012, we saw a shift in customer behavior in capital expenditures, as years of investment in additional production capacity finally caught up with demand. This resulted in most major commodities currently in a significant supply surplus.

We've seen commodity pricing declines up to 30% in some cases, which has led to increasing pressure on our customers' cash flow. We think the U.S. aftermarket is now through most of its correction period. Certainly, a lot of machines came out of the field, as high cost production in Central App was taken offline in lieu of lower cost production from the Illinois and Powder River Basins.

If we look at our Australian aftermarket, we're probably getting close to finding the bottom. If production follows the same 10% increase in 2014 as it did in 2013, then we could see that reflected in the order rates at the second half of our fiscal year.

In China, it's a little different story. First of all, there's a consolidation taking place in the industry, given the need to close many small and dangerous mines. Further, we've seen production down in China year-over-year close to 2%, as lower cost seaborne imports have created challenges for domestic producers. Many Chinese producers have cost above current seaborne price level, which should lead to further market consolidation. Producers will also need to improve productivity and we look -- and we'll have to look to more efficient mechanized mining methods to lower their unit costs.

During the year, we saw the Chinese economy slow in the first half and then return to 7.8% growth in the third quarter. Given the sizable base in China, growth today at 7.8% is equivalent to a 12.8% rate in 2008. Prices for seaborne thermal coal range between $75 and $85 per tonne across 2013, as supply increases from Australia more than offset demand increases.

While seaborne supply has increased throughout 2013, we've seen some of the supply balanced by continued demand coming from developing Asia. In China, we've now seen imports increase to 264 million tonnes through October or 18% above last year. Similarly, India's demand has remained strong, with thermal coal imports trending up over 40% through September.

During 2013, we saw the U.S. coal market remain under pressure, but we are now seeing some improvements. Coal consumption is expected to grow over 7% this year, as natural gas prices increased and have averaged $3.70 per million BTU throughout the year. Inventories have reduced from the production overhang in 2012, which should get a production response in 2014. Met coal has gone to a similar story, with years of supply investment hitting the marketplace in 2013 and prices reaching 3-year lows in the third quarter of this year. Again, we've seen some firming in prices of late, as China's import demand has increased nearly 50% from a year ago. And this has caused met coal prices to trend at $150 per tonne level. However, these increases have been marginal and they're still a significant amount of the global cost curve out of the money.

Iron ore prices have averaged $135 a tonne in 2013, as global steel production has grown 4% year-to-date. While the major producers will be expanding production in coming years, we expect the steep seaborne iron ore cost curve will result in a higher cost Chinese supply being displaced.

Global copper markets continue to see the strongest commodity fundamentals. In 2013, global consumption is expected to increase 3.6%. Pricing level should remain above the marginal cost of production and should attract continued investment in additional production capacity.

We've also seen inventory levels drop 30% since the beginning of the year. We continue to see the strongest OE activity coming from South America, Peru specifically, where copper mining companies are very interested in our shovels and loaders.

In the last 24 months, we've seen over 25 new CEOs at mining companies take over with a focus on cost reduction and returns to shareholders after years of focus on growth and investment. This has resulted in a reduction in CapEx spending of approximately 40% last year and has been reflected in our OE order rates, which were down 36% over the year.

Over that same period, we've seen customers stretching rebuilds, delaying regular maintenance and taking risk with equipment that they hadn't done in the past. We feel this is something that can only go on for so long and we're probably getting to the end of the miners' ability to stretch these maintenance intervals. We're beginning to see our process list stabilize. We're seeing selective projects moving forward that can achieve acceptable returns in the current pricing environment.

So despite the challenging markets, we are excited about some opportunities for creating growth. Even though we need to continue to reduce our cost structure in the near term, we will continue to invest in our products, processes and people.

We will focus on innovation in products and services that will drive improvements in safety, production and cost in the mines. We have some exciting new products, like our hybrid excavator, our low seam automated longwall, as well as new local China design products will create growth opportunities in 2014 and beyond.

For example, our low seam longwall system will allow customers to mine lower seams down to 1.3 meters at a 40% improved production rate over competing technologies, while reducing the number of people at the face by 70%. We'll use our latest in controls and automation and will be smart services-enabled. This has created some new growth prospects for 2014 with customers around the world.

This past year was certainly challenging. We believe we will see the headwinds that are facing our end markets and customers remain an issue in 2014. However, we are excited to partner with our customers to solve mining's toughest challenges with our world-class products and direct service leadership.

Market outlook gives us the basis for our 2014 guidance. We expect and are planning for revenues to be between $3.6 billion and $3.8 billion for fiscal 2014. With the cost savings from actions taken in 2013 and further actions planned for 2014, we expect to achieve our targeted 34% decremental margin and deliver earnings per fully diluted share in the range of $3 to $3.50 before restructuring cost and other unusual items.

Included in our EPS guidance is up to $0.15 of earnings accretion benefits from the continued execution on our share repurchase program. Our fiscal first quarter also has a disproportional number of holidays that reduces production volumes but not cost. And this should be considered in estimating how guidance is applied across the year. We're also expecting many of our customers to take full shutdown during these first quarter holiday periods to further balance supply and demand, which will add some additional pressure in the first quarter of 2014.

And finally, I would like to personally thank Mike Sutherlin, who is retiring from Joy Global this year. Mike joined the company in 2003 and for the last 7 years, has led the company to record growth and profit performance. Mike is well-respected externally by our customers, our investors and internally by our employees. I want to thank him for leading Joy Global to a stronger and better organization. I've certainly got some big shoes to fill, but we've got a great team and we're ready to take on that challenge.

Now I'll turn the call to questions. So Yolanda, back to you.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Andy Kaplowitz with Barclays.

Vlad Bystricky - Barclays Capital, Research Division

This is Vlad Bystricky on for Andy. Can you just talk about on the aftermarket side, how would you characterize aftermarket demand today versus actual parts consumption? In other words, are you seeing customers continue to work through their parts inventory? Are they able to cannibalize machines that have come offline? Or is aftermarket getting closer to the level at which parts are being consumed?

Edward L. Doheny

This is Ted. Probably more to the latter, that they've actually -- the cannibalization period started early and we see that working through. So we see the stabilization of the parts. The lumpiness that we're still seeing in the aftermarket in which will continue is the rebuilds. As Jim highlighted in his comments, we saw some of that tick up in the fourth quarter in the U.S. That's still the lumpiness we'll see. The parts usage, we think, is in that bottoming period. We do see some lumpiness that we've talked in previous quarters with large parts order. That usually hits in China, et cetera. But right now, the parts really matches production. So that's why we spend so much time on the market outlook, what we think production is, what we think production will be. And that's probably the highest correlation to our parts business.

Vlad Bystricky - Barclays Capital, Research Division

Okay. Great. That's helpful. And then, maybe just on the impairment charge you took in the quarter. Can you give us some more color on what drove that and if there are any particular brands that had an upside impact?

Edward L. Doheny

Well, I'll let Jim answer the impairment and I'll talk a little bit about what our strategy is with the branding going forward. Okay.

James M. Sullivan

Sure. This is Jim. And really, the charge was associated with all the acquired brands that the company has had over the last few years. So for example, Continental, Stamler, LeTourneau, some of the brands within IMM, we classified from lead brands to sub brands. When you do that, you have a different valuation process. So we had to take a little bit of value off the balance sheet for that. So our focus going forward is on the Joy Global brand. We'll continue to use within our segments the strong brands of the Joy mining machinery, as well as P&H. Those brands actually don't have value on our balance sheet. But this is really just kind of the next step, if you will, in the One Joy Global initiative to streamline the business, make it more efficient and focused. And so it's really focused on those 3 brands: Joy Global, P&H and Joy mining and machinery.

Edward L. Doheny

Yes. And our strategy going forward on the brand and as Mike have highlighted in the number of the calls and we actually introduced at MINExpo now 2 years ago, we are much more powerful in front of our customers as if we act as 1 efficient and effective company rather than 2 separate companies. Our customers have been asking for one point of sale at the point of view. So our service brand, we're definitely using the Joy Global, as we consolidate some of our service branches of the world and going to the customer with one face. And as Jim said, we don't have balance sheet value for the Joy and P&H brand, but those are iconic brands. The customers bet their jobs on our products. And those brands, the product brands, so they are important. But the Joy Global brand is a company brand, it's a service brand. And we're actually introducing it because one of the questions, I'm sure, out there is what are you doing with the brand strategy for China? We've actually -- at first, when we made the acquisition of IMM, we kept the business running separate. We're seeing how powerful that brand is in China, but we didn't want to put it in until we were capable of fulfilling that brand promise. So we have moved that forward the last call show in October. We actually introduced all of our products under the Joy Global umbrella. And we're now injecting that technology, using the Joy name, in partnership with our local Chinese products. But we had to make sure we had the products in place, the operations in place so we could deliver on that brand promise.

Operator

We'll move next to Ann Duignan with JPMorgan.

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

Can we talk about the outlook for revenue? If we look at how it closely correlated your revenues for this year with the industry CapEx declines and the fact that industry CapEx is expected to decline again in '14 by somewhere around 20%, should we be concerned that the revenue outlook that you've given today is a stretch as opposed to conservative?

Edward L. Doheny

I'll take that. Ann, this is Ted. If we look at the revenue guidance that we have out there, the $3.6 billion to $3.8 billion, it's roughly at 25% difference between this year. The difference for next year in the revenue guidance is we don't have that backlog coming in that we did in previous years. So it will be a challenge for us to turn orders quicker. We have that advantage that we didn't have in the previous year because we're able to turn and our cycle times now have been reduced. So we can't action those orders. We do need some market help in the first half of the year. So we'll have better clarity after the first and second quarter. Peeling that back on the aftermarket. Again, is the aftermarket relates to production, on the top end of the range, we do see the orders around the world bottoming, we would have some opportunity to keep that close to flat on the high end. But on the bottom end, similar to last year's comment, probably in that single-digit to high single-digit on the aftermarket decline.

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

Okay. That's helpful. And then, I know there isn't great visibility into 2015 as yet. But just knowing what you know about the industry, how long the cycles are, et cetera, can you talk about what would have to happen to the positive and/or the negative for 2015 to be either up or down?

Edward L. Doheny

Well, for 2015 to be up, we would need to get more of the OE. We're basically sized and set our cost in place to keep the aftermarket in that fairly flat. For 2015 to go up, we are working and I've highlighted some of our new products. We would need some market rebound to take 2015 appreciably higher than where it is. We are working on with our customers. We have prospects in place. As you've been witnessing now for the 12 to the last 24 months, there's a lot of pressure to move those right. Unless the economics are in place and with some of our new products where we can do something to help the customers with productivity, we'll need some of that upside catalyst to make that happen. On the downside, we stressed that pretty heavily. We've looked at the markets around the world. We looked at where the commodities are. And again, it's all about the aftermarket. And we believe we have the downside covered, but there's still lumpiness going forward.

Operator

We'll go next to Michael Gallo with CL King.

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

A question I have is, as you look to -- obviously, you've had the production declines in China, some of these high-cost mining companies come offline. I was wondering at one point you should start to see the benefits of the consolidation, as China and other places, as Joy becomes a part of bringing that global cost curve down. And then, also, if you come in on other markets where you start to see that production shifting or perhaps you've been hit by some of the higher cost mine closures. But over time, those will be replaced by other mines with a lower cost curve?

Edward L. Doheny

Well, in China, we think, as I mentioned, we're introducing some new products with our China produced and our local China. We think we have some opportunity there in 2014, but that will take time to convert that market. We also have some opportunities in the larger mines that are actually the most productive. If you look at China today, that top tier that we've been talking about for years, there's no over 100 mines in China that have production rates over 10 million tonnes per year, so that we'll see continued investment on the high productivity side there. We're excited what we can do with the consolidation of that mid tier. It will take time, but we think we have some growth potential in our 2014 numbers with our local companies.

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

And in terms of the rest of the world?

Edward L. Doheny

So we're actually looking to leverage our China cost structure. We're getting quite a lot of interest around the world for that second tier product in India -- not India, in Russia, Eastern Europe, et cetera. So we think we'll see some opportunities for that growth as well in 2014. But the high productivity mines around the world will still be looking for the Joy and the P&H equipment because what they're going to be looking for is driving productivity. Whether it's a safety issue for dust collection, proximity detection, new controls, smart services, they're really going to be pushing us for higher productivities, higher technical, higher quality type solutions that fits into our top tier product.

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

Okay. Great. And then, just a follow-up on where you see parts inventories in China right now and how many more quarters you think it takes to kind of work that down to the point where there might be an aftermarket opportunity?

Edward L. Doheny

2012, we saw that destocking quite heavy on our parts business in China. I think, 2014, we see that again leveling. We're giving you the same answer for China. It's bottoming. We -- again, the common story, we'll see, we believe, a second half uptick on that in 2014 and that's what we've modeled in our guidance.

Operator

Our next question comes from Steve Volkmann with Jefferies.

Stephen E. Volkmann - Jefferies LLC, Research Division

Mike, all the best for me, too. I'm a little bit jealous. I have a couple of quick follow-ups maybe for Jim. You sort of sounded a little bit of an ominous tone about the first quarter. But I wonder if there's any more granularity you'd like to provide us as we try to model that, given that we don't really have great visibility into these shutdowns and so forth?

Michael W. Sutherlin

Mike, I don't think we want to get into predicting quarters. What we can say based on how were looking at business is -- and we've got pretty good visibility into the backlog through the first quarter, we do see the revenue level in the first quarter being the slowest. I don't think that, that is too different than what we have historically experienced. But this year, certainly, it's going to be lower. Ted talked about the extended shutdowns. We do have a fixed cost structure. While we've been attacking that fixed cost structure over the last 1.5 years, there is structure there that will get uncovered as the production volumes and factories go down during the holidays and then we have that kind of the weaker sales top line. So we ended kind of the year in that mid-teens operating margin. I would expect the margin, because of the overhead cost, coming through in that first quarter to drop again. And we will get a little bit of the benefit entering the year, as we did with about 4 million lower shares. So there's a little bit of benefit there. But hopefully, that will give you a little bit, Steve, to work with.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay. Great. That's helpful. And then, maybe a broader question. I'm curious what you guys are seeing and thinking about pricing generally and maybe a couple of things about that. I mean, there's been some discussion with some of your competitors about things being a little bit weaker sequentially. And then, some of the mining folks that we've talked to seem to be a little more open to looking at other ways to cut costs, like maybe using parts from other suppliers or even OE from some of the emerging market suppliers, where they're saying maybe it's kind of good enough. So I guess I'm just curious what your thinking about pricing is against that backdrop?

Edward L. Doheny

This is Ted. The pricing issue for us, we, again, we have said this before, we have a highly differentiated product. When we're quoting these orders and we've mentioned the longwall order in the fourth quarter, it took longer to come through, but the pricing is still good. We're selling highly differentiated product, consistent throughout our product portfolio. So we believe that we're still going to hold the pricing. As far as the aftermarket, customers, where we've seen them internally using some of their service shops, we'll always have competition from will-fitters, third-parties. But we continue to lead in the aftermarket. Being first, fast, flawless is the most important thing because the capital cost, whether it's the operating -- the CapEx of the new project or the parts, it's really insignificant to the operating cost in the life cycle of this equipment. So we really, really drive that hard. We do have disciplined competitor out there. And in China, what we have to work on is just getting that product differentiation in place, because there's no secret, there's multiple competitors in China. And so we're working very hard to differentiate with our technology and with our service model. As far as someone using someone else's part in our equipment, that's something our customers would have to be very cautious about doing.

Operator

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

Jerry Revich - Goldman Sachs Group Inc., Research Division

And Mike, congratulations and best wishes in retirement. Gentlemen, I'm wondering if you could talk about just the sales force rationalization maybe in a bit more context, to what extent will you consolidate and provide a single point of contact? I guess, we've seen those efforts drive pretty material SG&A savings when we see them in the past. And I just want to understand that may be in front of you.

Edward L. Doheny

Yes, most of that on the SG&A savings that we have done. And basically, Jerry, what we're looking to do is one face in front of the customer. I just want to be really careful. That's more of a back-office, administrative office look in front of the customers. We have highly differentiated and even focused support, whether it's a -- someone selling a long well is very different than a shovel or a loader. In the service, even higher differentiations. So I just want to make sure that's clear. It's really acting as a company storefront where the consolidation opportunities are. We do still see some opportunities in leveraging the footprint, continuing to move it closer or further eastward. So that's some of the opportunity on the manufacturing side as we continue to drive the One Joy Global.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And in terms of your market outlook, you're very clear on copper. I'm wondering, can you just talk about how you feel about other commodities in your surface new equipment business over the next 12 months? And can you touch on iron ore prospect in particular?

Edward L. Doheny

Probably not to that level of detail. But if we just look at what's driving a lot of the investment and where that pricing levels are, the commodities, I highlighted specifically copper having the strongest fundamental. But also, iron ore, holding at that $135 a tonne, as you know quite well, it bounced around. But we're seeing the pricing level of iron ore holding. But a lot of capacity has been added. So again, cautious on that in our outlook. But we do see some prospect opportunity in the iron, especially with our loaders. And as we're looking at introducing our hybrid excavator, probably 2015 and beyond, but that we see. Thermal coal is what we talked about is bouncing around the bottom. We see some opportunities probably more in thermal coal in the second half of the year. And then, met coal, as I highlighted, we still see some production has to go offline. We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost production coming online in 2014.

Operator

We'll go next to Robert Wertheimer with Vertical Research.

Robert Wertheimer - Vertical Research Partners, LLC

Mike, let me just add my congratulations on your retirement and on your stewardship of a great company and best wishes in the future. So I wanted to talk a little bit about your fleet and about the closures you mentioned. I mean, maybe most of the potential reduction in capacity in global mining is in high-cost iron ore and coal in China. But do you see a rising trend of your own equipment being idle? Do you have any significant portion that's idle? And do you anticipate that any of the closures you may or may not expect will lead to any more equipment being idle? In other words, is it a headwind for aftermarket?

Edward L. Doheny

It's a great question. It's Ted again. We've looked at that closely looking at our fleet. And again, the direct service model were embedded with our customers, so we look at the fleet quite closely. We actually look at the aging of the fleet by product and by geography. So we definitely see the aging has increased with customers delaying. So that is an upside that we're looking. Balancing the cannibalization, taking equipment offline, that would hit, on the underground, pretty hard, now almost 2 years now where we've been in this downward cycle. So we think that cannibalization has moved. And so the fleet aging should be an upside for us. Again, we're looking probably at the second half of 2014 for that. On the surface side, lots of equipment being put. Lots of shovels and loaders. The debt cycle time should have the same effect as customers have stretching, idling that equipment. Our equipments are primary vice in the mind, primary piece of equipment. So I would say, in general, we think the cannibalization period is probably through and we think we might have some upside with the age of the fleet.

Robert Wertheimer - Vertical Research Partners, LLC

That was very helpful. Can I just ask to clarify. Are you able to save if 5% of your surface equipment are underground? And I know the continuous miners. But what percent is idle and is it continuing to have more equipment being idled every quarter or not? I'm not sure I understood that from your answer.

Edward L. Doheny

Yes, probably, I would say less being idled. Probably, that fits probably too much detail to share. But I would say, if I had to give you an answer, it'd be less being idled than where we are today.

Robert Wertheimer - Vertical Research Partners, LLC

So in other words, there's not incremental on balance with some on and some off. You're not seeing incremental idling of equipment right now?

Edward L. Doheny

Correct.

Operator

We'll go next to Schon Williams with BB&T Capital Markets.

Christopher Schon Williams - BB&T Capital Markets, Research Division

My congrats also to Mike as well. Very excellent job done. I just wanted to touch base on the buyback. Should we expect that to be kind of more back-end loaded next year, just kind of along with normal cash flow generation?

James M. Sullivan

Yes, it's a good question, Schon. And maybe we can say a few more words about the repurchase just to kind of help you with our thinking and kind of levels set the sell side on that. As Ted said, our guidance does contemplate up to $0.15 for the year. Based on our opening cash balance, which was pretty strong at over $400 million and the cash generation expectations that I outlined in my comments, in 2014, this would imply with the high end of that range, that we'd be repurchasing up to 5.5 million shares roughly. I guess, where we land in that range of accretion will be dependent on the level of excess cash at any given quarter, share price and the timing, of course, at the end of the day, when the timing -- when the shares are brought in. As I said earlier, we opened the year with 103 million fully diluted shares. In order to get to that $0.15 accretion we talked about, we're going to have to average about 99 million shares. So that would imply that we're going to have to tilt the repurchase to the front end of the year, so we can get the rating more there. And it really will depend on the cash generation of the company. We have historically been back-end loaded. We see that again this year. The difference is that we've got pretty strong cash balance as we enter the quarter. So we would likely be involved in every quarter.

Christopher Schon Williams - BB&T Capital Markets, Research Division

All right. That's good color. And then, I wanted to touch on the new products, whether it's, I don't know, the hybrid shovel or hard rock miners, something along those lines. I mean, are you willing to quantify how much of the $3.6 billion to $3.8 billion is coming from new product introductions? I'm just trying to get a sense of is this something that moves the needle in 2014 or it helps and then maybe build upon itself as we go into 2015? Any color there would be appreciated.

Edward L. Doheny

Probably can't give you the specific numbers. But we highlighted in the opportunities and the reason why I highlighted the low seam longwall, that's when we're getting activity with and we do see some upside in 2014 for that. That's going to be on top of a tough market. A low seam longwall, just to frame it up for you, somewhere in the $40 million to $60 million. The market pull from that around the world is the customers are having -- in all over the world, are having to go after these lower seams. And to do that effectively, they're having to go through automation and some of the competing technologies are just not as efficient as you've seen this year. So we see some upside. Specifically in China, where we're looking at that as well, by law, they have to take out those thin seams to get to the very high seams. So we're seeing that in connection with some of the work we're doing in China getting access to those high seams. On the hydraulic excavator, you've said hydraulic shovel, the reason we're calling it an excavator is we're really getting a lot of push from the market bring the best of both worlds, bring the reliability and the durability of an electric rope shovel, the flexibility and mobility of a hydraulic excavator and bringing our switch reluctance technology, the fuel-efficient savings we have with the LeTourneau loader. We see that as an opportunity, probably a booking in 2014, probably something in over 5 years roughly $9 million a piece. We see that as $100 million opportunity for us. That's later on in our planning period around that 2018 timeframe. So that's to give you a frame, short-term and long-term within your product. China product development, though, we do think we have a quick return on that. We're impressed with our China team. That 5 new products were introduced, they're not the big dollar value, the 2 that I just highlighted, but they will help us with our differentiation as we move and try to consolidate that local China market. So we think we'll have some upside to 2014. Just wanted to stay away from quantifying that. But that is part of how, we believe, we're going to create growth even in a tough market for 2014.

Operator

We'll take our next question from Nicole DeBlase with Morgan Stanley.

Nicole DeBlase - Morgan Stanley, Research Division

So I just wanted to piggyback a little bit on Steve's question on pricing. Can you give us a sense of what you're assuming in your 2014 guidance for pricing?

Edward L. Doheny

Well, we actually put a target out there to try to get price realization above flat. We're actually, in our numbers, putting a flat price realization, even though we're going to always be pushing for a positive number there. Our competitor announced a price increase, I believe, of 1% out there. But I'll let Jim, if you want to get more clarity on what we have in our models.

James M. Sullivan

No, clearly, when you're looking at a range, $3.6 billion to $3.8 billion, an EPS of $3 to $3.50, Nicole, it won't surprise you that there are number of different assumptions that vary across the range. And so certainly, our focus is continuing to drive price. As Ted said, we think we have a differentiated offering and we think that the industry structure supports that. But at the bottom of the range, clearly, there would be level of risk that we would assign to that and we believe we've covered.

Nicole DeBlase - Morgan Stanley, Research Division

Okay. Got it. That's really helpful. And then, just a question on margins. Decrementals in underground were, I think, 46% this quarter, which is above your previously stated 34% target. I just wanted to see what happened there, what drove that? And then, if you guys can just confirm that 34% is still the target for 2014?

Edward L. Doheny

Yes, I'll give it because we're obviously running the underground, part of that fourth quarter was a mix issue. And we had a longwall go through very different margin levels than the room and pillar was displacing in the previous year. So it's more of a mix issue.

James M. Sullivan

Yes. And to confirm, Nicole, the company, Ted said in his comments and I've said it in many times, I know Mike has drove this in culturally in the organization, we're very committed to that 34%. Quarter-to-quarter, there's always going to be fluctuation there. I think we had some one-off items in the second quarter. Ted talked about it, if you look at the underground BV, that's the PV that has been higher than our target, really, all year long. And it really is a combination of the one-offs, higher period costs that we didn't anticipate in addition to that mix. Ted talked about -- and as well, if you look underneath the aftermarket side of that business, that's a composite of a number of different services, if you will. And I would say that there's little bit of a negative mix there from what we see -- what we saw the previous year. I don't think that we think that we're dealing with anything long-term structural there that prohibits us from achieving that target next year.

Edward L. Doheny

And just a little bit more color on the 34%, we take that pretty seriously. That's been out there for a while and driving through that. This also highlights when we did talk about more cost to be taken out as we go forward. So in our planning, we're driving. And just like our equipment, we want that to be reliable and you can count on it. That 34% is something that's in our DNA going forward in 2014. So we have cost actions to make that happen. And also, product actions. So making sure that we're introducing products that are higher margin. So when we -- we don't have that mix issue in the planning period.

Operator

We'll take our next question from Alex Potter with Piper Jaffray.

Alexander E. Potter - Piper Jaffray Companies, Research Division

I had a question though. Somebody had asked earlier about what it would take to potentially have 2015 be up. And the first response was that it would take some help from the market to turn around in OE CapEx and things of that nature. But it also sounds like, obviously, China is a big opportunity. And there's a lot of, I guess, growth opportunity there that's not tied to the underlying market dynamic. You potentially were talking about market share gains here. So is 25 -- is China big enough to do something for you to get growth in 2015 or is it still too early?

Edward L. Doheny

It's a big piece of that. The -- we do think, China, the growth potential, China is not the largest part of our business. So we would need growth from other areas. But definitely, China to help on that.

Alexander E. Potter - Piper Jaffray Companies, Research Division

Okay. Fair enough. And then, the cadence of the $15 million in restructuring in 2014, is that going to be front-end loaded? And then, I guess, qualitatively, what you're going to be focusing on?

James M. Sullivan

Alex, I would say that it certainly will be front-end loaded. The accounting rules around recognizing restructuring associated with the actions nowadays is challenging. Used to be when you announced an action, you could account for it all upfront. Rules have changed. Now you kind of got to take it as you go. So certainly, as we sit here today, our posture is to be aggressive on that '15. And I would expect that we will be front-end loaded.

Edward L. Doheny

Alex, let me just -- it's our last question, so let me just add a little bit more color. Because just looking back at how we recovered from the last downturn, this one a little bit different. We had the downturn in 2008, 2009. We had dead fee recovery. This one looks more on U. Looking at it, it was led by China and what came back quickly was China that not only as buying our equipment, but the imports that we look at so closely that China demand driving activity out of Australia, driving the seaborne market. So we look to China for a number of reasons to signal that. So we'll be looking really closely at the first quarter of 2014 because that will also let us know what's happening in 2014, but that will be real strong signal for 2015. So China's huge to our strategy going forward, both as in the equipment, but what the macroeconomics mean for China throughout all of the regions and products we serve.

So with that, we're wrapping up the hour. And I'd like to close and thank everyone for the time. And again, to thank Mike Sutherlin. Tremendous influence on the business to all of us here in the company. So we wish our congratulations to Mike. We are a company that performs better when we're chasing the market and then when we're waiting on the market. And we do believe we've got Joy Global positioned to go after the upside of the market and win.

So I'd like to thank everybody for being on the call and we look forward to talking to you at the end of the first quarter. Thank you.

Operator

That will conclude today's conference. Thank you all, once again, for your participation today.

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