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Joy Global (NYSE:JOY)

Q1 2014 Earnings Call

March 06, 2014 11:00 am ET

Executives

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

Edward L. Doheny - Chief Executive Officer, President, Director and Member of Executive Committee

Randal Wayne Baker - Chief Operating Officer, Executive Vice President, President of Joy Global Surface Mining and Chief Operating Officer of Joy Global Surface Mining

Analysts

Andrew Kaplowitz - Barclays Capital, Research Division

Robert Wertheimer - Vertical Research Partners, LLC

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

Timothy Thein - Citigroup Inc, Research Division

Matthew Rybak - Goldman Sachs Group Inc., Research Division

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Seth Weber - RBC Capital Markets, LLC, Research Division

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

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

Operator

Good day, and welcome to the Joy Global First Quarter Fiscal 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Jim Sullivan, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

James M. Sullivan

Thanks, Jamie. Good morning and welcome, everyone. Thank you for participating in today's conference call and for your interest in our company. Joining me on the call this morning is Ted Doheny, President and Chief Executive Officer; Randy Baker, Executive Vice President and Chief Operating Officer; and Sean Major, Executive Vice President and General Counsel. This morning, I will begin with some brief comments, which provide additional background on our financial results. Ted Doheny will then provide an overview of our operations and our market outlook. After Ted'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 refer to a number of non-GAAP measures, which we believe are important to understanding our business. For a reconciliation of non-GAAP metrics to GAAP, as well as for other investor information, we refer you to our website at joyglobal.com.

Now let's spend a few minutes reviewing first quarter results. Bookings of $861 million were down 16% versus the year-ago period, but in line with the company's expectations. Orders for original equipment totaled $250 million, down 43%, while service orders of $611 million were up 4%. Adjusting for year-over-year currency fluctuations, consolidated bookings were down 10% and service orders were up 11%. The decline in bookings, inclusive of currency effects, was comprised of a 14% decrease for surface mining equipment and a 25% decrease for underground mining machinery. The 14% decrease in surface mining equipment bookings reflects a drop from the first quarter of 2013 of 43% in original equipment orders and a 4% increase in service bookings.

OE bookings were down across all geographies, except South America and China, while service bookings increased in all regions, except Australia and North America. OE order activity from copper mines remained strong this period. The 25% decrease in underground mining machinery bookings was comprised of a 52% decrease in OE orders and a 2% increase in service bookings. OE bookings were down in every region except Eurasia, where we received the first order for our autonomous high productivity low seam longwall system.

The increase in underground service bookings was from higher component and rebuild activity, primarily in North America and Eurasia. Looking forward, although we expect some lumpiness across the year, we continue to project an average underlying quarterly bookings rate for fiscal 2014 of approximately $875 million, with OE at approximately $225 million and service at approximately $650 million. Backlog at the end of the first quarter totaled $1.5 billion, consistent with the level at the beginning of the fiscal year.

Now turning to sales. Consolidated revenue in the first quarter totaled $839 million, 27% lower than a year ago, with declines reported in both segments. Original equipment sales were down 49% and service sales were down 8%. If you adjust for year-over-year currency fluctuations, consolidated sales were down 24%. Underground sales were down 19% year-over-year, with original equipment down 32% and service down 8%. Underground OE sales were down in all regions except Eurasia, while service sales decreased in all regions except North America, Eurasia and Africa.

Surface revenues were down 34% year-over-year, with OE down 64% and service down 9%. Surface original equipment sales were down in all regions, while service decreased in all regions except Eurasia and China. Operating profit, excluding restructuring cost, totaled $88 million or 10.4% of sales in the first quarter. This compares to operating profit of $219 million or 19% of sales last year. The year-over-year decline in operating profit and operating margin was due to lower sales volumes, including the negative impact from higher unabsorbed fixed costs and unfavorable product and service mix, primarily in the underground segment.

The year-over-year decremental profitability on lower sales was 42%, higher than our 34% full year target, but in line with the company's expectations for the seasonally slow first quarter. Looking forward, we expect improvement in the company's operating margin driven by sequentially higher service sales and increased realization of savings from our cost-reduction programs.

For the year, we are on track to deliver approximately $75 million of year-over-year savings from the company's cost-reduction programs. Approximately 15% of these projected savings were realized in the first quarter. The cash restructuring cost associated with these programs is expected to be about $15 million in fiscal 2014, which is consistent with our guidance coming out of the fourth quarter of 2013.

First quarter net income from continuing operations, excluding restructuring cost, totaled $50 million or $0.49 per fully diluted share. This compares to $140 million or $1.31 per share last year. Excluding discrete items, the effective income tax rate in the quarter was 32.1% compared to 31.2% in the prior year. The higher rate in the current quarter was primarily driven by geographic earnings mix. The company continues to expect its effective tax rate in fiscal 2014, excluding discrete items, to be between 31% and 32%.

During the quarter, we repurchased 2.3 million shares of the company stock at a cost of $122 million. To date, the company has repurchased 6.4 million shares for $336 million, leaving $664 million available under the current Board authorization. These repurchases added a couple cents to earnings in the quarter and reduced the fully diluted share count at the end of the quarter to approximately 101 million. As previously noted, our first quarter is typically our seasonally slowest quarter of the year. And this year, that seasonality is even more pronounced. Looking forward, with respect to the phasing of earnings in fiscal 2014, we expect approximately 35% will come in the first half of the year and 65% in the second half of the year.

Turning to cash. Cash flow from continuing operations in the quarter totaled $65 million, down $27 million compared to the first quarter of 2013. Lower pension contributions and cash generated from trade working capital, in particular from advanced payments and accounts receivable, substantially mitigated the impact from lower earnings. Capital expenditures in the current quarter totaled $27 million, down $28 million versus the prior year quarter. Expenditures in the first quarter of 2014 were focused on enhancements to the company's service center infrastructure and general facility maintenance.

For the year, the company expects cash from operations, excluding discretionary pension contributions, to approximate 15% of sales, with capital expenditures of approximately $125 million. As is typical for our company, we expect our cash generation will be greater in the second half of the year. Let me stop now and turn the discussion over to Ted Doheny. Ted?

Edward L. Doheny

Thanks, Jim, and let me add my welcome to everyone on the call today. As Jim indicated, my comments will be focused on our operational performance, strategy and our current market outlook.

Our solid quarterly execution comes amidst continued market challenges, in what is expected to be our slowest and toughest operating quarter of the year. We continue to see our business facing challenges in global mining markets. While most major commodities remain oversupplied and prices depressed, we are beginning to see some signs of demand improvements. After trending below 3% in 2013, global economic growth is projected to exceed 3.5% this year, which should drive commodity demand. Growth in Eurozone gained further momentum in January as manufacturing conditions improved to nearly a 3-year high, with full year growth likely to exceed 1%.

In China, growth has stabilized in the 7% to 8% range which, growing off the current large base, will continue to drive demand for commodities. While demand growth rates for certain commodities will slow, there are signs that the urbanization and industrialization of China have more room to grow. If you look at electricity production in China, we saw growth of over 10% in the second half of 2013. We saw an improvement in Chinese export activity through year-end as well as the stabilization of industrial activity around the 10% level. Given the timing of Chinese New Year, it's hard to read into the January and February data, but we continue to believe that China will manage the shift to a less industrial-intensive economy that still has a healthy demand for commodities as per capita intensity data suggest.

Though macroeconomic indicators are moving in the right direction, commodity prices are still under pressure. We are beginning to see the signs of stabilization. But overall, soft market conditions continue to make customers cautious about spending on new projects. The deferment of capital investment for major purchases continues to be a challenge for our business. Our customers' focus on reducing operating cost has resulted in lower order rates for our products and services. Against the backdrop of lower activity in 2014 that Jim mentioned, we're driving our previously announced restructuring actions. We are confident that these efforts, along with the optimization of our global footprint, will lead to the achievement of our operating leverage targets.

We are seeing signs of improvement in our service business as commodity production picks up. While commodity prices remain range-bound, the ability to delay rebuilds and service in most regions appears to be nearing a conclusion. Our service bookings in the first quarter increased year-over-year by 4%, the first year-over-year increase since the third quarter of 2012. Our service performance remains critical to our customers and vital to our operating results.

You probably noticed Jim use the word service instead of aftermarket in his comments on the first quarter financial results. This is purposeful. Service excellence and growth is a core strategy for our business and the name aftermarket doesn't describe what we do and where we're going. Given the importance of our service business, we are continuing to invest in service centers globally that will support our installed fleet and provide world-class technical expertise to our customers. A great example of this is our new service center that we're building in Peru to support the high-growth market for copper. With global demand for copper expected to increase over 4% in 2014, production in the region will remain strong and will drive our service business.

Across the landscape of commodities in which we operate, we are seeing different conditions. For the first time in 2 years, we are seeing some incremental positive signs coming from the U.S. coal market. While production fell below 1 billion tonnes in 2013 for the first time in 20 years, U.S. coal production is expected to rebound by 35 million to 45 million tonnes this year. The continued normalization of utility inventories as well as the recent weather-driven spike that pushed natural gas prices above $5 should drive an increase in coal consumption in the U.S.

Given increased power demand and the expectation for natural gas prices to remain above $4, the Powder River Basin and the Illinois Basin are expected to see production growth in 2014 of approximately 20 million tonnes and 10 million tonnes, respectively. All of this activity, taken together, should support sequential improvement in service bookings through year-end, as the ability to delay rebuilds comes to an end. We see this evidenced by an increase in our same quarter book-to-bill and the higher level of critical field service requests.

China is also a market where we have confidence in our strategy to win. While current market conditions in China remain strained with the depressed prices and market consolidation, we believe that our local presence, superior technology and our ability to leverage our global supply chain provides us with a significant competitive advantage. We remain committed to our strategy to grow the new product development. While we recognize the need to reduce our cost structure early on, we are committed to investing in our products, processes and people. This commitment resulted in the booking of a new low seam longwall this quarter, which is a 40% improved production rate over competing technologies. We're excited about the new low seam longwall technology, particularly in China, where nearly 10% of the coal mined in 2012 was considered to come from ultra-low seams, where this technology could be applied.

Given the increasing need for energy in the world, we continue to monitor oil sands projects and believe that current oil prices make this an attractive investment opportunity. $100 per barrel sustained oil prices, along with improving technology, has resulted in oil sands becoming increasingly economical and recent mining projects have been announced. The oil sands operations present very difficult challenges for mining equipment, and our electric rope shovels are custom-designed to meet these demanding applications.

We expect seaborne thermal coal markets to remain well supplied in 2014, with fewer original equipment opportunities than the previous years. Strong seaborne demand is expected to grow nearly 3%, with most of this growth coming from the Pacific market, where both China and India set new record highs for coal imports in 2013. Strong demand, though, will be balanced by supply increases from Australia, Indonesia and Colombia.

After setting a record in 2013, global steel production is expected to increase over 3% this year, reaching 1.63 billion tonnes, as global demand remains healthy. Excess production capacity of approximately 200 million tonnes exists globally. Strengthening economic activity will support demand, although prices will remain weak. Weak steel prices will continue to put pressure on steel making inputs, particularly metallurgical coal. Seaborne met coal demand is expected to grow nearly 5% in 2014. Oversupply conditions persist and supply cuts have not been enough to balance markets. We've continued to see spot prices decline below $135 per tonne, and this resulted in the Q1 2014 contract settling at $143 per tonne, the lowest level seen since 2009.

After ending the year around $135 per tonne, iron ore prices have trended lower in recent weeks, a sign that the Chinese restocking cycle has reached completion. While poured inventories have swelled in recent weeks, this is typically the seasonal effect that we've seen in advance of the spring construction season. Taking all factors into account, we expect iron ore prices to average $115 per tonne in 2014. Given the expectation for steel production growth this year, we continue to see iron ore in our prospect list for orders for some of the major low-cost producing regions. We feel strong that this represents a continued investment opportunity for several major miners and expect to see this prospect activity materializing into orders in coming quarters.

As we look at the full year 2014, we still expect revenues to be between $3.6 billion and $3.8 billion, with earnings per fully diluted share, excluding restructuring and unusual items, to be in the range of $3.10 to $3.50. This compares to guidance at the beginning of the quarter of $3 to $3.50. With one quarter of fiscal year behind us and improved visibility, we are increasing the bottom end of our earnings by $0.10. Our strong cash generation through the cycle positions us well to continue to execute our share repurchase program and pursue other shareholder-enhancing opportunities.

We remain committed to our long-term strategy of expanding our reach beyond coal into industrial minerals and hard rock. Our focus remains on improving our customers' production, lowering their operating costs and helping them achieve 0 harm. We believe that solving mining's toughest challenges through world-class products and direct service will enable us to achieve these outcomes.

So with that, I'll turn the call over to the Q&A. And Jamie, back to you.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Andrew Kaplowitz with Barclays.

Andrew Kaplowitz - Barclays Capital, Research Division

Ted, you talked about your decremental margin being something you expected in the quarter given the first quarter seasonality. But the mix did trend in your favor, and it's been a few quarters now of the decremental being higher than 34%. So what do you need to do to get decrementals back to sort of that 34% level? And then, at what point do you need to say to yourself that maybe you need to do more significant restructuring again?

Edward L. Doheny

Well, Andy, I'll start with the end first. As we highlighted in both my comments and Jim, we still have further cost opportunities we need to take advantage of, especially as we work on optimizing our footprint. The other piece on the decremental is the absorption hit, and that's where we gave the guidance in the fourth quarter about the seasonal impact that we had on -- so we had a more -- a higher absorption impact in the first quarter than we're expecting in the rest of the year. Also, the big push will be for that incremental service growth for the year sequentially for the back half of 2014. So with that visibility still, the prices are out there that we talked to you about before, it's still going to be tough road, but we believe that we see more opportunity on the back half of 2014 than we do on the first half.

James M. Sullivan

And Andy, if I could just jump in. This is Jim. In addition, I would say, if you look at the cost reduction we expect year-over-year, it's about $75 million. We only were able to realize in the first quarter about 15%. So in addition to the higher absorption and the sequential improvement in service sales, we do expect to realize more from the cost actions that we've already taken.

Andrew Kaplowitz - Barclays Capital, Research Division

Okay. That's helpful, guys. And then I know we're only in the beginning of FY '14, but we're obviously all trying to figure out if '14 will be Joy's earnings trough. If I look at orders, the expected orders of $875 million, and I think about FY '15, I know cost-cutting and share repurchases help. But I think you guys might agree that we probably do a little better than $875 million in orders to sort of get '15 to be up over '14. So what kind of visibility do you have that, over the next few quarters, I mean, I know your guidance is that it's going to stay pretty constant here. But what kind of visibility do you have that, that order rate, we can get out of that sort of that range? And then how much do these sort of low seam longwalls impact that visibility?

Edward L. Doheny

Look, the key for us is going to be the service piece and see the service moving for us, Andy. As far as the low seam longwall, that's a smaller longwall than typically in the major projects that's $50 million, roughly in a range, but it's really getting the visibility to get that service business locked up and looking at some of the OE opportunity that we're starting to see move. Still the choppiness we're seeing in the business we described, the U.S., we see that moving on the rebuilds, which are larger numbers, that kind of actually feel more like OE. But we still haven't seen the comeback of China and Australasia. So seeing that visibility because we know they can't keep extending those rebuilds and those contracts much longer because, by even law, in Australia, every 4 years, they have to bring that equipment out from underground. So we see that delay happening. So we think we have pretty good visibility that we have some upside on the back end of 2014 looking into 2015, but still in the flat range.

Operator

We'll take our next question from Rob Wertheimer with Vertical Research Partners.

Robert Wertheimer - Vertical Research Partners, LLC

I wanted to ask, so the service orders ticked up year-over-year, which is nice. And I know there's normally seasonality and so, that's okay, too. I wanted to ask exactly what the drivers are of the service seasonality. If I can understand the sequential improvement that ought to happen to the seasonality, is that still the case or is seasonality more driven by U.S. weather and maybe that's less likely to rebound? I just wanted to see if you could explain why that's the seasonal pattern we see.

Edward L. Doheny

Well, part of this seasonality, and I know you're tired of hearing it, but we have the Christmas season and we have Chinese New Year, depending on where it hits, and as we recognize Chinese New Year and Christmas happens every year. The impact that was tougher this year is our customers took that forced vacation very different than when the markets were ramping up. So that seasonality impact and what actually flowed to our own factories in the orders that we had coming through was a lighter load on our factories. So the absorption hit us harder than the last few years when we had a pretty strong backlog that go through the seasonality piece of it. Relating to the order size that are coming in, we did see the seasonality pick up with the weather conditions in the U.S. So we're seeing that effect in the U.S., but that's different than what we talked about, the actual loading. As I mentioned briefly to Andy's question, we're still not seeing the seasonality impact on the orders from China and Australasia, but we're looking at our fleet data. And so we're anticipating that will come back in the second half of the year because we get -- even on our service business, we get pretty good visibility to what our customers are planning on the fleet. So that's what we're sharing with you, that we see that confidence on the second half to hit our full year guidance.

Robert Wertheimer - Vertical Research Partners, LLC

That's great. And are you willing to say if you've seen a bigger stretching and rebuilding roles at larger customers versus smaller, less public or independent customers?

Edward L. Doheny

Well, it'll be an anecdotal answer. But the larger customers, it all depends on what -- the customers that have still their own workshops of what they can take in. But the phenomenon that we're seeing specifically is the customers are stretching those rebuilds. Part of the effect that we had in our bump in the first quarter, some of the customers got in trouble by stretching the rebuilds too long and we actually had some very strong quick book and turn, anecdotally. But we had the inventory ready because we know from our data that the customers have stretched some of these rebuilds too long. So the bigger players look at that pretty closely. They know the cost of loss production. But I can't give you a general answer across the board other than the one specifically, we're looking at Australasia pretty closely, especially the -- all the equipment we have in Australia. We know that that's going to have to move within the next 6 to 12 months on the rebuild.

Operator

We'll take our next question from Michael Gallo with CL King.

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

Just a question on the cost side of things, obviously, you have the $75 million or so that you expect to get out in cost this year. I was wondering, as you look at the portfolio and if you assume things are going to stay pretty level in terms of the booking, if you start thinking about further cost that you can take out as you head to 2015 or you think you pretty much have scrubbed the portfolio and what you've taken out, you will have taken out by the end of this year.

Edward L. Doheny

Okay. I'll cover the first part, and I'll turn it over to Jim for some additional clarity. The real issue for us is to keep moving as we optimize our footprint. As we've shared with you over the last few years, we've been increasing our capacity expansion in China. So actually, in the last 3 years, we actually had dual capacity in place. So as we look to continually optimize our footprint, what can we leverage on our major manufacturing centers and unload some of our higher cost capacity. So we still think we have more opportunity to work that.

Operator

And we'll take our next question from Timothy Thein with Citibank.

Timothy Thein - Citigroup Inc, Research Division

Actually, I had 2 questions on the U.S. And first -- and I don't know if this is better for Randy or Ted, but just on the -- you mentioned the service orders down in the U.S. for the P&H business, and I'm just curious how you contrast that with -- you're starting to see production, as you mentioned, pick up in the PRB. So can you maybe just give a little bit more color in terms of just within by basin kind of what you're seeing or what you saw in the quarter and how that plays through for the balance of the year relative to the guidance that you've provided?

Randal Wayne Baker

Yes, this is Randy. To answer that question, it's very similar to what we see in the underground business. Most of the major mines around the world have been driving cost out by curtailing the remanufacturing of components and machinery. So in the North American market, that's been the case pretty strongly in the PRB because they're really trying to squeeze that cost margin mix. So in a lot of cases, what we're getting is breakdown maintenance requirements and receiving that call on very short notice since, in that case, same thing as in underground, we've positioned machinery components and people to react to that very quickly. And it has worked thus far. It's difficult to predict, but we have taken a very good survey of all of our operating shovels in North America, and we've got a pretty good idea what they're going to need over the next several quarters. And we think we're pretty well positioned to respond to that when it happens.

Timothy Thein - Citigroup Inc, Research Division

Okay. And then back to the comment on China. And you mentioned that in some of the fleet data you have, and you thought that, that's -- you're confident you that you'll start to see some pickup in service activity. Can you just kind of update us in terms of what you're seeing with respect to parts inventory at your -- some of your customer level?

Edward L. Doheny

Yes. The largest customers in China is where we've seen the bumpiness. They had -- as we continue to move our model and the strategy to go to our Life Cycle Management and Smart Services, the China model for our major customers, they actually consumed a lot of parts on the equipment and bought in large stock orders. So 2013, we had to burn that backlog down because they were oversupplied. I'll give you an example. In the quarter, we had a -- what we think is a significant event on the strategy. One of our major customers in China, one of our largest customers, purchased their first LCM contract. And it's a big deal for us because China had been a parts, basically, a break-and-fix-type market. So we think that supply will work its way down. And that's why, again, looking at our fleet and looking at our consumption modeling, we see some of that still needs to play out of being an oversupply of parts they actually had on the shelf to match their production, but we see opportunity. And especially as they get more sophisticated in China, we think that's strategically an opportunity to get more LCM contracts in place, which gives consistent visibility to both us and to our customers to take out those peaks and actually lower their total cost of ownership. So we see some opportunity on China on the back end. But what we're guiding is they're still going to be choppy in the first half of this year.

Timothy Thein - Citigroup Inc, Research Division

Okay. And just a quick one, Ted, on that LCM business in China. And I'm sure that will evolve over time. But what's kind of a realistic ballpark in terms of what percentage of your customer set in China could theoretically move to that kind of model over time?

Edward L. Doheny

Well, the full LCM, that's in that single, double -- single- to double-digits, which would be significant if we can move that. I'm actually surprised how quickly China is moving. It is similar to our service trade. We built the service center in China early before the Chinese even wanted it. They wanted to use their own -- their shops. So longwall that we sold last year, we actually had a full Smart Services contract on. So where that will move in China, I'd say typically 5 years to 10 years. But we keep getting surprised that China is moving very fast. So we have to put the data in front of our customers, we have to show that an LCM contract is going to save them money, take out their variability, take out their peaks and actually drive their lower cost of ownership. By putting the data out there, we have to show them. So we would say and our strategy would be to make that conversion in 5 years but China keeps surprising us how quickly they move.

Operator

[Operator Instructions] And we'll take our next question from Jerry Revich with Goldman Sachs.

Matthew Rybak - Goldman Sachs Group Inc., Research Division

It's Matt Rybak on behalf of Jerry. Can you just talk a little bit about which regions and commodities drove your orders this quarter and possibly rank order for us, which regions and commodities you expect to drive the orders in the coming quarters?

Edward L. Doheny

Okay. Well, we laid that out. I'll follow the -- our opening comments. And we talked about copper and copper being strong for us, and especially in the South American Peru market. So we gave you some insight, we saw that. Also, seeing the movements on North American coal being that stabilizing, so seeing some of that movement, again, driven by these winter conditions, and so see that as a movement there. Iron ore, we talked about concerned about the pricing that we think there's still a surplus in the market. And that market would put pressure on pricing. But we're getting some insight. We're still seeing the activity there strong on some of the reserves that our customers think they have a productivity advantage. Moving to met coal, met coal is the one that we still see an oversupply situation. And we still believe that there's pricing pressure on met coal. So that's got to work itself out. And there's still the high-cost producers are under a lot of pressure. We also know, because we're connected to this fleet, we put some significant longwalls into the U.S. and to Australasia -- Australia that are driving a different step function in that cost curve and making that met coal more productive. So that's going to put supply into the pipeline, again, putting more pressure on the high-cost. So again, that matches what you see in the commodity pricing, if that helps with some color.

Matthew Rybak - Goldman Sachs Group Inc., Research Division

That's great. And then just switching gears quickly to China. Can you update us on your market share progress in China and talk a little bit about new product adoption and what your order share is like at this point in the market broadly?

Edward L. Doheny

Okay. Well, remember, we break out China in basically 2 -- well, actually, now 3 segments. But the top segments, the imported equipment, the very high productivity equipment, we believe that we're maintaining, if not gaining, share there. And especially as the data, as I shared with you, as the customers Chinese customers realize the effect over the life cycle the performance of this equipment, we think we're still maintaining and improving. The problem, the China market is just down. The second segment that you're referring to is the local China market with our acquisitions there with our local China products group. And just so -- to highlight, we're not calling that IMM anymore, we're calling that our local China products. That market is also tough, oversupplied. Over 30% of the China producers are actually not meeting -- not making money. So it's putting pressure for better products, higher productivity, which is helping us. And as I highlighted, we got our first LCM. It was actually attached to one of the new products that we've introduced with the new AFC with Joy technology into the China market. We're excited about this type of example for 2 reasons. One, it's showing that the Joy -- interjecting the Joy technology can differentiate that local market and still be price competitive. But it also is an armored face conveyor product that we can put next to a Joy shearer. So as we bring those 2 markets together, those lines will start to blur. And so we're excited about that opportunity. But these are examples. We still have a lot of work to do in getting that business stood up and competing. So the long answer -- but the short answer is maintaining. We think with our new technology, we'll start gaining share.

Operator

Our next question is from Ted Grace with Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

So a 2-part question on services. The first thing, the orders that you realized in 1Q x currency being up 11%. Could you just maybe give us some flavor for what was parts versus rebuild? And then within the parts segment, what was consumables versus replacement parts? Just to get some flavor for that.

Edward L. Doheny

Ted, there's probably too much detail that we would go through. I do appreciate you mentioning consumables, but probably not that level of detail. The push to move the needle is to get the rebuilds number up. So we did see rebuilds up in the U.S. The parts we look at. And to give you a little bit of color, and if Jim wants to give more detail -- the parts tracks really closely to production. So if we see production up, we will see that in our parts. So that's what -- where we have a pretty much a direct correlation. The rebuild business is what we saw move. And that's the lumpiness part of the service business. So we did see that move up in the U.S. And as I mentioned, we're still waiting for that recovery in Australia and China.

James M. Sullivan

Ted, I was just going to add that in the quarter, I referenced some unfavorable mix, both in OE and service on the underground side of the business. And we talked about a higher percentage of the service in this quarter being around rebuilds and components versus parts driving some of that. So that gives you a little bit of color in the U.S. And Ted talked about China. China has historically been mostly a parts business, and China still hasn't responded the way the other world areas have. So there is, clearly, if you will, a little bit of mix away from parts and more towards rebuilds and components.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Got it. And that's really helpful. The second part I was hoping to ask is if you try to look forward 3 or 5 years and you get in a normalized environment, Ted, where do you want to take the services business as a percent of the total mix? How do you get there? Is that -- you mentioned some of the investments you've continued to make but, ultimately, where do you want to get that mix on a sustainable basis?

Edward L. Doheny

Well, obviously, the mix was where we make our money, it's to over half our business. And if you break that pie chart up, in where we are today, if we break our service business as we described it today, it's parts, components, rebuilds and then LCMs and Smart Services, so if we think of those segments. So the areas, the opportunities we have to grow is the consumables that you mentioned. Today, we have less than 10% of the consumable capture of our equipment. We believe and we know some of our other competitors have taken that over 20%. So we're aggressively working on branding, developing our own consumables, owning those consumables, tracking those with our LCM. So we think moving that from a low single-digit to 20% of our business is doable. And not only doable, but we're going to go make that happen. The rebuild component piece, we get a very high percentage of that rebuilds. We want to maintain that and continue to use our Smart Services to get better diagnostic and prognostics so we know when the customers rebuilds need to be done. So we tell them they better do it before the equipment breaks. So we -- that market share moving on rebuilds will be hard. The parts and the components, again, we have a pretty high market share maintaining that. So the real growth would be to get what we should, which we think is all of our service business. But really, the consumables piece, moving that from a low single-digits to 20% is the how we're going to get that, our Service business, be over half of our business going forward in the next 5 years. And that means to cover because we have new products coming out. So we have to grow the service side as aggressively as we're growing our OE. So that's the reason for the strong push on the service products as well.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay. And just maybe just to calibrate potential timetable. Is that the kind of process -- is that a 2- to 3-year project? Could it be done faster? Are you thinking a 3- to 5-year timeline?

Edward L. Doheny

I'll say, Ted, it's 3 to 5 years. And what we'd like to do is beat that.

Operator

The next question is from Daniel Politzer with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC, Research Division

It's actually Seth. So just going on the margin a little bit. I wonder if it's possible and you've kind of touch on this some but I want to try and drill a little bit deeper. The margins were softer than what we were looking for. If it -- can you talk about how much of that is absorption, how much is mix and how much is pricing? And in particular, on the mix side, as the U.S. coal market moves east to west, is this a structural change that's going to impact the business kind of in perpetuity going forward?

Edward L. Doheny

I'll jump in, and Jim could add any clarity. First, let me go after the pricing one, Seth. Don't believe it's pricing, we're holding our pricing and definitely not discounting. So I'll say the pricing side, we're maintaining. On the shift, there's definitely shift in there, as we talked on the structural shift in the U.S. We don't have the great Central App parts pricing we had before, where we had extremely high market share and a large portion of that Central App had continuous miners that we're going after that met coal business, and I talked about that's under tremendous pressure. The shift to the longwall, though, that we have been successful there in securing those longwalls. But those newer longwalls are just up and running, so not through that rebuild cycle. Part of our consumable capture piece is to get a significant larger portion of consumables on the longwalls that we've had in the past. So we think, structurally, that's how we're going to try to make up for that difference of the Central App going away -- or not going away, but reducing significantly. Onto your third point on the absorption, we tried to guide and we've talked to you about what was going to happen in this first quarter about seeing that mix and that seasonal adjustment of what was going through the factories. Some of the orders that we knew we had in the fourth quarter that we shared with a major longwall and the other longwall that we just highlighted, that's back-end loaded on the factories. We had to keep some of that factories idle. And I would say idle, but they have production capacity in place to make the back end of the year for that known production that's coming through. So the absorption will pick up on the second half of the year, but it hurt us, no doubt, in the first quarter.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. So on the service business. Do you feel like that during the downturn, you lost some of that to either great market or well fitters that may not come back or do you feel like it was just -- things just slowed down across the board and, as production improves, that should kind of get back to normal levels?

Edward L. Doheny

No. Actually, I think the downturn made us better, Seth. I think getting very aggressive to make sure we're not losing anything around our equipment has made us better, stronger, going after the consumables that I talked about. Offering more of a rebuild package, we've been quite aggressive, where we didn't do partial rebuilds. We're very open to do partial rebuilds. So I would say, the downturn actually has made us stronger. And I think we're going to spring back better with a higher service capture going forward. There was -- we did lose a little bit in the downturn, as you always do, to our customers. I just want to remind you and our other investors that our customers still have a lot of service shops out there around the world. It's not just China and South Africa and Australia, even in the U.S. So in the downturn, our customers are looking to save everything they can. So they're also leveraging their service shops as well. As far as the cannibalization of the idle equipment, that feels like that that's worked its way out in some of the equipment that may have been moved into cannibalization. But we -- the data that we're seeing, and we took a hit for this, and we kept the inventory up. And because we have such great knowledge of our fleet, we got worried that some of our customers -- and we're a direct service business -- weren't protected and were stretching their equipment too long. So we kept the inventory up and, actually, in the first quarter, we were able to save some of our customers with very, very quick turnarounds because we had the inventory available. So don't think we've lost share. Obviously, we're telling our teams to prove that to us. But we think this downturn is actually going to make us stronger on the service side as we spring back when the markets come back.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. If I could just squeeze in one last clarification. Your comments about expanding the portfolio, I guess, that's hard rock mining. Would that be organic or would you be looking at acquisitions there?

Edward L. Doheny

It's both. Our organic, it just takes such a long time. Part of our hard rock, obviously, over 17 -- almost 17% in copper. We're over 25% in total hard rock, but that's mostly on the surface. We do very little on the underground. We have a transformational technology that we've been working on for years. It just takes a long time to convert these markets. We think that there should be some bolt-on opportunities to accelerate our presence in hard rock. So the answer is both. We do need some portfolio additions, which would probably require bolt-on acquisitions.

Operator

Our next question is from Mig Dobre with Robert W. Baird.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

So I appreciate the commentary on the service business. I guess if we can maybe switch back a little bit to talking about OE. I've seen several industry forecasts that expect some kind of a rebound in 2015. And I'm wondering, is that a reasonable expectation from your point of view? And I'm also wondering, what sort of magnitude would it be reasonable for all of us to expect if commodity prices remain relatively subdued?

Edward L. Doheny

Well, your question had the answer in there. It all depends on what's going to happen with commodity prices. In a curve in our heads, and if you put yours, this is definitely -- it doesn't feel like the V bounce back that we saw in 2009. It's more of a U. And the question is, when does that uptick happen? And what is the shape of the uptick? As far as your first question, is it reasonable that 2015, we see the OE market come back? Yes. Sure, that's reasonable. We're looking out our quote log extremely closely working with our customers. But we're also being very transparent with you that our customers are really looking at the returns. And if it affects their productivity that they can drop their cost curve, if it affects their production or it's safety, those are the projects that will pull forward, not where it was in the past, where the markets bounced way back because the commodity prices were so high, that extra people were jumping in the market. So we do see the activity. And I tried to give you some guidance in the transcript, where we see those, where we see that activity. But we don't see it as a steep curve back as 2009. And that's why we're focusing so hard on the service growth in our service capture. But we do see the OE opportunity there, but just a different characteristic than it was in the previous cycle.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Sure, I appreciate that. And I guess, my follow-up would be, one of your large competitors recently mentioned that miners have something to the tune of 10% to 20% excess fleet capacity. And obviously, they have slightly different exposure than you do overall. But I'm wondering if you're sort of seeing the same thing directly for your exposure?

Edward L. Doheny

Don't know that percentage, but one thing that we did -- we saw this early, I'm not sure if the competitor that you're mentioning was direct or through dealer, the...

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

I'm talking about [indiscernible].

Edward L. Doheny

Yes. Okay, well then, I'd rather you didn't say the name. But our model, again, the direct model, we get to hear, good or bad, we hear from our customers immediately. And as you heard us talking about 18 months ago, when our customers said that they were cutting quickly, we took actions with them from those discussions. So what you're describing is what we saw probably 18 months ago with that idle fleet and took actions accordingly. And again, to size our service business for what they saw on the horizon. So that comment was probably 12 months ago that I think we've been pretty much acted on. Not saying that all that idle capacity is out there or has gone away. But I think we've adjusted for most of that. Other than what I shared with you, we still have China and Australia capacity to work through. Their -- the input on their capacity increase, I mean, they're -- it's not that they have idle equipment in Australia, it's just those new longwalls that have put in place are so much more productive and they're producing at a lower cost curve. Same thing with some of the new longwalls that have come in the U.S. China hasn't felt that effect yet, but we anticipate as well. As you put the newer equipment in place, it's just adding to the overhang of the supply -- of the oversupply in the market.

Operator

Our next question is from Ann Duignan with JPMorgan.

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

I just wanted to ask a follow-up question. I just wanted to clarify, on the -- in the aftermarket business, did you say that parts and components are higher margin than rebuilds?

Edward L. Doheny

Didn't say that, but parts are probably the highest margin, but we have good margins on the components. Rebuilds get close to the OE look. Rebuild in an OE is fairly fungible.

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

Right. So if rebuilds start to recover, wouldn't that put the pressure on your margins going into the back half of the year and into next year?

Edward L. Doheny

No, because it's good margin and it helps on absorption, so that we think the rebuilds should be okay. Plus the parts will come with the rebuilds. Don't anticipate, unless...

James M. Sullivan

And that mix was in our first quarter, Ann. So the rebuilds and components is a higher mix right now, and you're seeing that in our numbers. Certainly, we're not assuming in our forward-look that we're going to see a big mix change from what we have in the first quarter. But we do think, overall, service sequentially is going to be up across the second, third and fourth quarter.

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

Okay, that's helpful. I appreciate the color. And then a separate question. There was a lot of questions for Komatsu at your -- at Con-Expo about their recent news announcement with GE. I'm wondering if you could comment on 2 things. One, comment on that joint venture or alliance, whatever it is, and what that might due to the competitive environment, not in the near term, obviously, but in the longer term. And then, as I recall, Joy used to represent GE in the aftermarket. Do you still represent GE? And how is that relationship holding up?

Edward L. Doheny

Well, I'll answer the last one first. No, we don't represent GE in the aftermarket. And as far as the relationship, we've been asked that question already about the GE Komatsu. Obviously, the best person to ask is them on that. Both of them, the space they have and they've -- some of the commentary we've seen is they're looking at the underground hard rock. And obviously, we talked to you about that personally, where we are in the underground hard rock with our transformational technology, but also, some of the other products that we're bringing. Our customers are pretty much begging us to bring mechanized mining into hard rock. 20% of the copper mines are going underground in the next 10 years, so part of our new product development push is in that hard rock space. GE has battery technology. Komatsu has other technology, mostly on the surface side. So where that is going to be in the short term, don't know. Long term, they would probably want to be looking at our margins and our market share and coming at us. And they're 2 very sophisticated large competitors, so we take them very seriously that people are looking at our space. And what can we do? Drive our strategy harder. Move fast, move quick, take advantage of our direct service model and take care of our customers and know they're coming.

Jamie, we're wrapping up at the hour. I want to thank everybody for the call and I appreciate the support and look forward to talking to you again at the end of the second quarter. Thank you very much.

Operator

Thank you for your participation. This does conclude today's call.

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