Joy Global's (JOY) CEO Ted Doheny on Q2 2014 Results - Earnings Call Transcript

Jun. 5.14 | About: Joy Global (JOY)

Joy Global, Inc. (NYSE:JOY)

Q2 2014 Results Earnings Conference Call

June 5, 2014 11:00 AM ET

Executives

Jim Sullivan - Executive Vice President and CFO

Ted Doheny - President and CEO

Randy Baker - Chief Operating Officer

Sean Major - Executive Vice President and General Counsel

Analysts

Steve Volkmann - Jefferies

Andrew Kaplowitz - Barclays

Ann Duignan - J.P. Morgan

Ted Grace - Susquehanna

Chad Dillard - Deutsche Bank

Adam Uhlman - Cleveland Research

Nicole DeBlase - Morgan Stanley

Rob Wertheimer - Vertical Research Partners

Michael Feniger - Bank of America

Operator

Please standby, we are about to begin. Good day. And welcome to the Joy Global Incorporated Second Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jim Sullivan, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Jim Sullivan

Thanks, Stephanie. Good morning and welcome, everyone. Thank you for participating in today's conference call and for your continued interest in our company. Joining me on the call this morning are Ted Doheny, President and Chief Executive Officer; Randy Baker, 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 results for the second quarter of fiscal year 2014. Ted will then provide an overview of our operations and our market outlook. After Ted's comments, we will do a Q&A session. During this session, we ask that you limit yourself to one question and one follow-up before going back into the queue. This will allow us to accommodate as many questioners as possible.

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 move to the second quarter financial results. Bookings of over a $1 billion were down 7% versus year ago period, orders for original equipment totaled $351 million, down 27%, while service orders of $697 million were up 8%. This is our second consecutive quarter of year-over-year growth in service bookings.

Adjusting for year-over-year currency fluctuations, orders for original equipment were down 30% and service orders were up 10%. As anticipated, current quarter service bookings rose 14% sequentially from seasonally slow first quarter.

Bookings this quarter were comprised of 34% increase for surface mining equipment and a 31% decrease for underground mining machinery. The 34% growth in surface mining equipment bookings reflects an increase in original equipment orders from the second quarter of 2013 of over 100% and included a multiple shovel order received for the Canadian oil sands for delivery in 2016.

Service bookings in this segment were also strong in the quarter, up 13% versus a year ago period. Service OE bookings increased across all geographies except Africa. While service bookings increased in the Americas and Eurasia, partially offset by declines in other regions.

The 31% decrease in underground mining machinery bookings was comprised of 60% decrease in OE orders and a 2% increase in service bookings. The OE bookings declined compared to the second quarter of last year is primarily due to a large longwall system order received in North America last year, but did not repeat in the current quarter.

The increase in underground service bookings was led by high rebuild activity in all regions. Backlog increased modestly to $1.6 billion from $1.5 billion at the beginning of the quarter.

Turning to sales, net sales of $930 million decreased 32% in comparison to the second quarter of last year, while surface mining equipment revenue down 38% and underground mining machinery down 24%.

Sales for original equipment decreased 58%, while service sales decreased 8% from a year ago. When adjusting for foreign exchange, sales were down 29% compared to the second quarter of last year.

OE sales for surface and underground mining decreased 66% and 47%, respectively, with declines in all regions. Service sales of surface mining equipment decreased 11%, while underground mining machinery service sales decreased 5% compared to last year.

Service sales in the surface segment decreased in all regions, while the underground segment saw surface sales decreased in China, with increases in all other regions partially offsetting.

Operating profit, excluding restructuring and acquisition costs totaled $131 million in the current quarter, down $153 million from the prior year. Return on sales in the current period was just over 14%, down 680 basis points from 2013, but up 370 basis points from the first quarter.

The decremental profitability on the year-over-year volume decline was 36%, modestly below our full year PV target of 34%, but improved from the 42% level realized in the first quarter. The decrease in operating profit versus a year ago period was due to lower sales volume, unfavorable product mix and lower manufacturing cost absorption. The unfavorable product mix was driven in large part by the underground segment with fewer room and pillar products and lower parts volume.

The incremental PV on more than $90 million second quarter volume increase compared to the first quarter was 47%, driven by the strong sequential increase in service sales and continued solid execution on our cost reduction program. In the quarter, the company realized year-over-year cost savings of approximately $20 million, which puts us on track to deliver full year cost savings target $75 million.

Similar to last quarter, sequentially increasing service sales and full realization of savings from our cost reduction program will be key drivers of the projected second half fiscal year earnings improvement for the company.

The effective income tax rate excluding discrete items was 34.4% in the current quarter and that compared to 31% in the second quarter of 2013. The increase in tax rate from the prior year is due to the projected shift in income from lower rate jurisdictions those with higher rate and a change in the net operating losses of certain foreign subsidiaries without a currently recognizable tax benefit. The company now expects its full year effective tax rate in 2014 excluding discrete items to be in the range of 32% to 33%.

Income from continuing operations excluding restructuring and acquisition costs totaled $77 million or $0.76 per fully diluted share in the current quarter, down from $186 million and a $1.73 per fully diluted share in the prior year quarter. The year-over-year increase in the previously mentioned effective tax rate reduced adjusted fully diluted EPS in the current period by $0.03.

Cash from continuing operations in the quarter totaled $142 million, an increase of $141 million compared to the second quarter of 2013 as the drag from lower cash earnings in the current period was more than offset by cash improvements from lower trade working capital and lower pension contributions.

The strong cash generation in the quarter positions us well to achieve our full year targets for cash from continuing operations, excluding discretionary pension contributions of approximately 15% of sales.

Capital expenditures in the current quarter totaled $18 million, down $14 million versus the prior year quarter. Expenditures in the second quarter of 2014 continue to be focused on the company's global service center infrastructure and general facility maintenance. The company now expects full year capital expenditures to be in the range of $100 million to $125 million.

During the quarter, we repurchased 138,000 shares of the company’s stock for $7 million. Year-to-date, we have repurchased 2.4 million shares for $130 million. This represents over 80% of the company's year-to-date free cash flow.

Our strong cash flow through this cycle which is currently largely driven by our service business has enabled us to execute nearly 35% of the $1 billion repurchase program in the first three quarters since announcement last September, as well as increased our quarterly dividend.

In addition, we also recently announced the closing of the strategically important MTI underground hard rock acquisition. While we expect minimal earnings and operating cash impacts from MTI in our current fiscal 2014, we do expect the acquisition will be modestly accretive to our fiscal 2015 results, excluding transaction costs and excess purchase accounting charges.

So let me stop there and turn the discussion over to Ted Doheny. Ted?

Ted Doheny

Thanks, Jim, and good morning to everyone on the call. First, I would like to take a few minutes and review the current and medium-term market landscape as it remains the driver of our business. Then I will walk through our operational performance, admit this backdrop, as well as speak to some of our longer term strategic objective.

As Jim highlighted, we had strong quarter performance, despite challenging market conditions. While sales were down 30% year-to-date, we continue to expect a stronger second half performance weighted towards the end of year as it’s typical for our business.

While global commodity prices remained at multiyear lows in many cases, we remained cautiously optimistic that a global economic recovery should drive increase demand that will help the balance oversupply commodity markets.

We saw mixed economic signals in the second quarter, as Eurozone growth hit three-year highs, while U.S. growth faltered due to weather-related disruptions. However, we expect U.S. growth to rebound from the first quarter and see annual growth rate at 2.8%, Chinese growth at 7.3% during the first quarter with the lowest level since 2009.

However, Beijing, recently announced small targeted fiscal measures aimed at rail infrastructure and housing program that should aid economic growth in the second half of the year. Further, targeted monetary policy aimed at provincial loan creation should help to stabilize growth.

Despite the slowdown in Chinese growth and temporary headwinds in the U.S., we continue to expect global growth to register its strongest performance in several years and believe this should drive commodity demand and help stabilize commodity market.

As we look at our end markets around the world, we see a number of different conditions playing out. When we look at U.S. thermal coal, we see several encouraging improvements in the fundamentals of the market.

Depleted power plant inventories approaching 100 million ton, along with a nearly 20 million tonne increase in coal burn during the first quarter had set the stage for production improvement in the second half.

However, our North American underground service bookings were essentially flat year-over-year in the quarter. We do expect sequential improvement in this region as coal production will need to increase to replenish depleted inventories.

Of our major end markets, global coal markets have seen the toughest headwinds during the first five months of 2014. Despite seaborne thermal coal prices that have recently re-tested 2013 lows around the low to mid $70 per ton, immediate supply reductions continued to be slow.

While prices of these levels put 20% of global production underwater, an additional 20% under pressure, we’ve actually seen increases in thermal coal exports from Russia, India and Australia when compared to last year's level. This is especially true in Australia, where cost reductions and foreign currency movements have help to keep Australian exports more competitive than their counterpart.

The existence at take or pay contracts, as well as long-term sales contracts with fixed prices have also been blamed from marginal mines continuing to produce even while operating at losses.

Strong seaborne demand from China, India and Japan continues to provide some support in market, while content with oversupply. However, these conditions resulted in the most recent long-term thermal coal contract settling around $82 per ton, a 14% decline from last year.

Met coal markets had drifted lower during 2014 with the recent $120 per tonne contract for met coal representing the toughest pricing environment since 2009. At these levels we believe over 50% of global production is a loss and even a higher production of U.S production is underwater.

However, in recent weeks, we begun to see the number of met coal production curtailments materialize. Today, there have been upwards of 10 million tonnes of announced reductions or idling that will help to bring balance to the market.

While these cuts are a start, more high cost supply rationalization is needed to balance the market is expected to see a seaborne demand increased 5% this year on the expectation of 4% growth in global steel production.

These early stages of supply rationalization along with the strength in global steel production and economic activity should provide some level of support at the current pricing levels we see today with an incremental upside later this year and into 2015.

Global iron ore prices have drifted lower in the last several weeks approaching the $100 per tonne level. New supplier from Australia, as well as weak perceived demand from global steel production has driven the price decline.

However, several factors should be considered when viewing this market. First, iron ore inventory to Chinese ports remain elevated at nearly 105 million ton, but in terms of weak demand remain over 17% below their peak level set in 2011.

Additionally, Chinese steel production through April of 270 million metric tonne implies imported iron ore demand of nearly 300 million ton. Year-to-date, China has imported 306 million ton, suggesting stable demand and a marginal inventory build.

While prices may temporarily bounce around the $100 per ton, there seems to be a support level between $100 and $110 per ton, which will continue to drive investment from the major producers and low cost producing regions. We’ve seen activity related to this in our prospect log and expect to see this materialize into orders in the coming quarters.

Turning to Chinese coal market, production is flat through April of this year but robust seaborne supply has kept pressure on domestic prices in China. Through April, electric production in China was up 7.5% and this was driven by 3% increase in coal imports reaching 111 million tonnes through April.

While this demand has helped to support seaborne market, it has put significant pressure on domestic prices and many producers are under water and struggling to remain open. The consolidation and mechanization in the China market is an industrywide positive development in one that we see is beneficial to our China strategy.

We’re continuing to invest in our domestic Chinese product line by injecting our technology to increase safety and optimize our customers’ mine performance. We remain committed to bringing our technology and service-driven solutions to market where half the world coal production is produced and believe this strategy offers us a competitive advantage.

We are starting to see some success with our strategy to inject Joy Technology into our local China products. We have shipped and started our first China manufactured Joy powered AFC complete with our first LCM contract in China. We’re now offering road headers with Joy patented dust suppression technology and are currently working on our first Joy Continuous Miner Bolter built by our [geometry] (ph) team.

Each of these new developments is linked to our service strategy to lower customers’ lifecycle cost and designed to capture the full-service content, including consumables. While macroeconomic indicators continue to provide reason for optimism, current commodity prices are pressuring many global producers and as such remain a headwind to our original equipment business.

Given the increasing need for energy in the world, we have remained diligent in working with our customers in developing unique solutions in the Canadian oil sands. As Jim mentioned during the quarter, we received a large order for several electric mining shovels for delivery in 2016.

The economics of oil sands continues to improve as sustained $90 per barrel oil prices exceed the average cost of production in the $50 to $80 range in the driven investment in the industry. Importance of the Canadian oil sands as the largest source of unconventional oil drives our focus to continually provide world-class service to our fleet of machines already operating in the region.

I would like to add a few comments on our service business, which is a personal passion of mine. We are encouraged booking have increased once again in the second quarter. However we remain cautious as challenging market conditions persist. Continued strength in service came from our Latin American region where year-to-date bookings were up over 13% from last year.

This growth comes from the continued strong fundamentals in the global copper market. While the global copper market is expected to ship in surplus this year, inventories remain nearly 30% below their peak levels from last year in global demand, particularly outside of China beginning to improve.

We expect global copper prices to average $3.10 to $3.20 through 2015 which leaves 95% of global production in the mine. As we continue to drive our strategy in the optimization of our global footprint, we remain focused on supporting our global fleet of equipment for our customers.

We realize as we navigate through the trough to the cycle, the need to provide greater service capabilities is even more critical than ever as customers struggle with compressed margin and condensed lead times on service request. During the quarter, we opened our new Joy Global Service Center located in Hunter Valley in Australia, complete with our latest smart services technology.

Not only is this a showcase state-of-the-art facility but during the quarter repairs on Surface and Underground Mining Equipment were taking place at the same time in the same facility. I saw this when I was there in March and I’m excited as our one Joy Global strategy will enable the optimization of our global footprint and improve service performance to our customers.

As we expected business activity 2014 to be nearly 30% below level seen last year, as Jim mentioned we’ve continued with our previously mentioned restructuring action. These actions have resulted in $30 million of savings realized thus far in 2014 with the expectations of an additional $45 million of savings in the second half of 2014.

As we navigate this downturn, we remain focused on optimizing our global manufacturing footprint in taking advantage of the unique capabilities we have in China. As always, we remain diligent in our use of cash and seek to maximize returns to our shareholders with all decisions.

Not only will these actions help us navigate this mining cycle, but we are confident that we will realize additional efficiencies in our growth in coming years from these actions. Finally, we’re excited about the addition of MTI to the Joy Global family and with the closing a few days ago, we've begun in earnest the integration process.

This acquisition represents the next step for us in one of our key strategic growth areas, the extension of underground product portfolio into the hard rock mining space. This acquisition along with our own internal NPD project in hard rock will allow us to leverage our global service capabilities and our own engineering expertise.

As more mines move underground, this acquisition will help us offer unique mechanized mining solutions to our customers. With around 25% of our current portfolio already operating in hard rock between copper, iron ore and other mineral, we feel this acquisition will increase our presence in hard rock mining.

We feel strongly that marriage of MTI with Joy Global will bring significant value to both our existing and new hard rock mining customer base as well as our shareholders. While the MTI acquisition aligns with our hard rock growth strategy, we remain focused on our other strategies, including operational excellence, new product development and our China sourcing and supply strategy. All of these strategies will continue to drive profitable growth for our company and allow us to effectively deliver results that our shareholders expect.

Given our performance during the first half in what is typically our slower half, we are on page to deliver both our full-year guidance as well as continued strong return to our shareholders. As noted in today's press release, we are maintaining our EPS guidance of $3.10 to $3.50 per fully diluted share, excluding restructuring and unusual items. However, as we mentioned last quarter, the timing of earnings in the back half of the year will be weighted to the fourth quarter with the seasonally slow third quarter expected to be on par with the second.

So with that, I'll turn the call over to Stephanie for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Steve Volkmann with Jefferies.

Steve Volkmann - Jefferies

Hi. Good morning guys.

Ted Doheny

Hi Steve.

Steve Volkmann - Jefferies

Hey Ted, I was just wondering if I could just push you a little bit on some of your discussion about restructuring. And I think you said in the release that you remain focused on balancing further actions with market conditions. And I guess, I’m just trying to sort of square all this up because it feels like market conditions might be sort of bottoming. Would that mean you would need further actions or are you not convinced they are bottoming and maybe there is further actions pending or just how do we kind of square that up?

Ted Doheny

I’ll give you a thematic answer, Steve and if Jim needs to add some color on the details. What we’re looking at what's going on with the market we first to start see what’s happening with the service. We're going to execute and deliver the restructurings we have in place that we've given you the savings for 2014 and 2015. We are looking continually though at what opportunities we have on cost and moving our manufacturing footprint.

So we have other things on the shelf that we’re looking at. But right now we think the actions we have in place should meet the earnings for this year and also should be in place to let us come back in 2015.

Steve Volkmann - Jefferies

Okay.

Jim Sullivan

Steve, yeah, obviously, I was just going to add to that just a touch, Steve. We’re pretty proud of the focus on the delivery that we've executed on so far. We do believe we’re going to bring on the $75 million. The company has a culture of always trying to say a step ahead with contingency plans ready to be triggered if market conditions dictate.

And I think the market knows that we’ve carefully balanced the need to take cost out of business and keep productive capacity in place, keep the new product development programs going forward so that we can position the company for growth in the future. And I think today we’ve done a pretty good job of balancing those priorities. While as Ted said, we have got unique capability in China and I think there’s a great opportunity to continue to optimize beyond the stated restructuring program that we have over the last couple of years.

Steve Volkmann - Jefferies

Okay. That’s helpful. I appreciate it. And then once again, Ted, it sounded like you were sort of happy to see some of this service stuff trying to kick in but it didn’t sound like you were convinced that it’s going to continue. Am I reading too much into that or you had a little bit of a note of caution on that? I’m just trying to figure out what you are trying to say there?

Ted Doheny

Yeah. I’m trying to balance that, Steve. Yes, I’m pleased with how we are performing on the service and I think we're executing, especially on strategy, bringing some of our new service products even to line. What I'm concerned with is what are the pricing on the commodities out there? And what still in, customers especially in met coal are under margin compression, reducing production, taking some of that offline. That’s where we spent a lot of time on that to say, there still should be some correction out there. But as far as, we are happy that the service business, two quarters in a row and exceeded our expectations so. And again, we use that probably cliché, cautiously optimistic, we see it stabilizing. But the commodity prices are still at a pretty depressed level and putting major margin compression on our customers. So we need to see some movement on the commodities.

Steve Volkmann - Jefferies

Okay. That’s helpful. I will pass it on. Thanks, guys.

Ted Doheny

Thank you, Steve.

Operator

We’ll go to our next question with Andrew Kaplowitz. He is with Barclays.

Andrew Kaplowitz - Barclays

Good morning, guys. Solid quarter.

Ted Doheny

Hi, Andy. Good morning.

Andrew Kaplowitz - Barclays

Maybe, I could follow-up on Steve’s question for service in the sense that you said in the beginning of year that you would average $650 million in aftermarket bookings per quarter and you have in the first half of the year. But you also said that you expected Australia maybe to ramp up in the second half of the year and maybe China. And you also said on this call that North America could get a little better in the second half of the year. So if you put all of those things together, can you -- how much visibility do you have in sustaining that pretty good 2Q number that you just had of around $700 million in service bookings?

Ted Doheny

Obviously, we feel better, we felt better. We saw this coming in and that’s why we raised the lower end in the first quarter. In the second quarter, we see it coming through. We don't see Australia right now hitting like we thought it would. I think last time, we talked Andy about we thought our rebuilds in Australia would be putting pressure for some backend. Actually, we thought we could even get some of that in the first half. So we still think there's opportunity for Australia to come back, but still at that pricing level, there is still some caution there. The U.S. being flat, it was up in the first quarter. We’ve seen it now flat in the second quarter. So it is bumping along.

We get some real strong performance in our Latin America and specifically Chile, but that's also being lifted by cooper which is stronger fundamental. So we think there's some opportunity in the second half and as you know in the second half, we have more of a hockey stick in the fourth quarter. So we feel pretty good that we are going to make that. The comment on China is we’ve been sharing with you, now for the last few quarters, we’ve had some lumpy service and specifically large parts orders that come in and out of China. So we think the comparables will help us on the second half, so we think we have some upside in the second half in China as well.

Andrew Kaplowitz - Barclays

Okay. That’s helpful. So, I’m going to take a shot at ‘15, so you’ve got quite a few cross currents in your end markets and you have averaged something like $900 million in bookings over the first two quarters, excluding the oil sands order, if I am doing my math right. And if you eliminate these bookings, obviously it looks like you can get a little bit of revenue upside in ‘15 versus ‘14 if I just -- again, if I am doing the math right. Are you gaining any more confidence that 2015 could be an up year versus 2014? Again, I understand that -- where commodity pricing is but as we sit here in the middle of the year, do you have any more confidence that 2015 is an up year versus 2014?

Ted Doheny

Yeah. You are very good about keep trying to give us that guidance for 2015, so I think you’ve thematically answered your question. It all starts with service again, Andy as you know. So we are feeling better confidence with our service. So building on that service and getting that to stabilize, we still have some lumpiness even in service but we are feeling better about that. So that's why we gave you so much commentary on that piece. Then, we don't know what is going to happen on the commodity prices. So what can we do differently to create growth? So that's why we've been talking about some of our NPD that we think should be additive in 2015. So we talked about some of that.

We think we are going to make some progress, so we can beat the market with our new product development and our penetration on market share, specifically in China. Though it's still a very-very tough market, we are going aggressively to gain share so. Add that growth on top of a flat market. So, I’m giving you a thematic guide, so we think we can build off of where we are in 2014, but you did the math. We’ve got to get some bookings and we've got to have a book-to-bill. We've had a book-to-bill now of two quarters in a row over one, but not an aggressive book-to-bill that you can start seeing it in 2015.

I also want to highlight, we did talk about we are excited about the oil sands, but we are very clear to highlight that order is for 2016. And just to give you a relative feel on that, that’s again in a $100 million range. So that is for 2016. So summarizing, building on our service, driving our strategy on new product development, we think we can gain. And then third, we still think there is share to be gained and we want to go get that, no matter what the market, no matter what the market gives us. So that’s kind of our outlook for 2015.

Jim Sullivan

Andy, this is Jim. Just to add a couple more puts maybe. We have, I think we’ve been executing pretty well on costs. There is a carryover benefit in ‘15 from the actions that we’ve been triggering in 14, where we haven’t realized the full potential of those actions. So that should give us a little bit of a tailwind as we go into ’15. The other thing is clearly with the share repurchase program, the share count with respect to earnings should be a help as well.

Andrew Kaplowitz - Barclays Capital

That's helpful, guys. Sounds good and thanks.

Jim Sullivan

Thanks, Andy.

Operator

We’ll go next to Ann Duignan with J.P. Morgan.

Ann Duignan - J.P. Morgan

Hi. Good morning, guys. It's Ann Duignan.

Ted Doheny

Hi, Ann.

Ann Duignan - J.P. Morgan

Hi. Just a nothing, just a follow-up on that. I presume, then, that you will be building the electric shovels through the course of next year for delivery in fiscal 2016. Is that the way we should think about it and maybe that helps a little bit with the gross margin with absorption?

Ted Doheny

Yeah. It’s actually, Ann. I will be probably more specific than Jim would want me to be. It’s probably going to be closer into all of 2016, maybe just a little bit in 2015. So if that helps in your model?

Ann Duignan - J.P. Morgan

Yes, it does, actually. Thank you. And then, can you talk a little bit about any pricing pressure, some color around the aftermarket? What are your customers asking you to commit to? Are they asking to lower costs? Are they looking at insourcing some of the labor themselves? What are the dynamics like out there in the aftermarket?

Ted Doheny

Sure. I will give you some color. First, I'm trying hard to get you to change that name with me to service from aftermarket. So, I will start with that. Consistent with the question, we're seeing our pricing holding in the service side of the business. I can't claim price realization but we see our pricing holding. Some of the dynamics that are being pushed, our customers are under tremendous cost pressure. They were working with them quite hard on some of the productivity enhancement we can do. We are leveraging different things we can do with the install base. But right now, specifically in the parts pricing, the answer -- reduction, no, we have not seen it. But we are working on other actions of what we can do to lower their cost, whether it's a new product that can lower their cost curve.

We see that happen already with Australia quite a bit. The new productivity long hauls that we put in place over the last couple years are coming in line really strong. And so we've done a lot of work with our LCM programs to work with our customers, even bringing in our operational excellence team to see what we can do to lower the cost in the mine. That's really where our focus has been on the service side. What we can do to get in there? And sometimes it’s actually additional parts business or service program because some of the customers are actually running into trouble. They’ve extended the maintenance a little bit too far and we saw some of that bump up in our parts business in the quarter. So we are working on that quite closely, lots of work there.

Ann Duignan - J.P. Morgan

Okay. So nobody in the big scheme of things and kind of insourcing their own labor or their own service at this point?

Ted Doheny

Yeah. Sure. Many of our customers as you know have their own service shops. So they're also doing the same thing. They are trying to do as much as they can internally. So we’ve been seeing that now that trend over the last 18 months, 2 years. So we hadn’t seen a change in that behavior where customers will try to do as much as they can themselves.

Ann Duignan - J.P. Morgan

Okay. That’s a good color. I will get back in line. Thank you.

Ted Doheny

Thank you.

Operator

We will take our next question from Ted Grace with Susquehanna.

Ted Grace - Susquehanna

Hey, guys. Congratulations on the quarter.

Ted Doheny

Thanks, Ted.

Ted Grace - Susquehanna

Either Ted or Randy, I was hoping we could maybe walk through the U.S. coal market in a little more granularity and maybe separate thermal versus met. Just it would be great to get your perspective, one, on those two markets separately because I know thermal is improving given the dynamics you laid out. It would be great to understand kind of what you are seeing on the metallurgical side. And then just get an appreciation for kind of order of magnitude what those two commodities represent. In the U.S., I guess, I have been under the impression that met is about a third, but if you could help calibrate me there, that would be helpful.

Ted Doheny

Yes, let me try it and then Randy could add some more color. Let’s do it by basin, Ted, to help give you a feel and I will start with thermal and how that’s -- how we are reacting to the thermal market. First of all, we’ve talked a while about what’s happening with natural gas. With natural gas coming a little bit below $5, it puts various basins in play.

Now first is the PRB. The PRB is in play and we are seeing some fairly strong activity on the service side with our fleet of shovel in the Powder River Basin. So we’ve seen that strengthened. We’ve also seen the Illinois Basin in play, and we’ve seen some activity there. So we feel pretty good about what that means to our fleet in the Illinois Basin as we talked to you about last year even increasing our longwall presence there.

Then moving up, you go into Northern App, which is now in play, and we’ve seen activity in Northern App and we feel pretty good about that, and that’s also showing up on service business. The areas that’s still under strain is Central App, the highest cost area and then that actually segues into your second part of the question on what’s going on with met coal, because the Central App is where we see most of the met coal production, some of those that’s in Canada, but primarily that’s the one that hurt the most.

And why we are still seeing the U.S. relative flat because as you know we have a very, very strong presence with our room and pillar operations in that area. So segueing into met coal from that, we still see a large portion, especially with met coal pricing dropping now below $120 a ton, that’s putting significant pressure in the met coal market. So again, the discipline that’s in the market, as I highlighted, is going to be more idling and actual reductions going down. Our guess of that we’ve already seen $10 million, probably needs to come offline. So the met coal is still going to be stressed in the U.S. Randy, do you want to anything?

Randy Baker

Ted, you covered it really well there. The major things that talking about the strengths in the markets that are moving, certainly PRB is still one of the areas that is increasing production. And on the met coal market, the only area where we do see some activity is in the Western Canadian lines where they typically have a higher quality coal and some -- in some cases a lower operating cost. But generally speaking, the inventories are the things we are watching very closely on the power plants and they are historically low. So as Ted said in the earnings release, we are hoping to see some movement on pricing in the second half.

Jim Sullivan

And Ted, this is Jim. Just let me try to wrap your question up. You asked about met coal in the square. We don’t disclose that detail, but I think the number that you referenced was about a third, and I am pretty sure that that number is an old number. So if we take a picture of the business as it sits today, the met coal number as a percentage of our total coal in the U.S. would be down certainly from that number.

Ted Grace - Susquehanna

Okay. That’s really helpful. And if I could just squeeze one more in. I think you talked about $1.6 billion of backlog. I was just wondering how much of that gets delivered by year end, how much of it extends to 12 months, and what’s beyond that? I know you mentioned that $100 million of shovels get delivered in 2016, but can you just maybe help us understand what the delivery schedule looks like on the disclosed backlog?

Ted Doheny

Ted that might be a little bit too much detail. We can probably go through some of that to help you as a follow-up call if you would like. But the issue that we have on backlog for the quarter or for the back half of this year, the challenge is we don’t have the backlog that we’ve had in previous years. So in our guidance, we are taking a look at what we see, what we can book in turn, so we still feel pretty confident we’re in the guidance level.

Randy Baker

Yes, Ted, we did report that number in the 10-K, the backlog at year end, what we expect to come out. Now I think if you remember Ted in the fourth quarter of our last fiscal year, we booked a longwall in Australia and we indicated that that was going to be coming out until ’15. We just talked about the oil sands order not coming out until ’16. So you can take those two fairly sizable orders and get a feel for it.

Ted Grace - Susquehanna

Okay. That's really helpful, guys. Thank you very much. Best of luck this quarter.

Ted Doheny

Thanks, Ted.

Operator

Okay. To our next question from Vishal Shah with Deutsche Bank.

Chad Dillard - Deutsche Bank

Hi, this is Chad Dillard on for Vishal. Thanks for taking my questions. I just want to get back to your commentary on coal by basin. Could you give us a sense of how you are positioned in the form of either market share or revenue contribution, if there are meaningful differences in the margin across each basin?

Ted Doheny

I will give you a general overview, boy that level of detail might be too much. But roughly if you look at the underground business, we’ve been talking about a transformation that’s going on from the room and pillar to the longwall. So historically two years ago 60% of that was in the room and pillar in the Eastern United States, 40% of longwall. We see that shift happening. Is it 50-50 now? It’s moving in that direction to go 40-60 the other way.

The other major presence we had is in the Powder River Basin. The Powder River Basin, we have a strong presence with our electric mining shovels in some of our loaders. So as far as the market share to that part of the question, we’ve pretty strong market share in every thing we do. We don’t declare what that market share is, but we feel pretty comfortable, and that’s why we follow the market so closely because having the strong market share we move with the market.

Jim Sullivan

Chad, this is Jim again. We commented over the past year in the underground business about the mix being unfavorable and what we’ve talked about continues a bit into this quarter. If you look at the OE in the underground, less room and pillar to Ted’s point moving out of Central App and then longwalls in Illinois Basin. Now on the original installation costs, the longwall, you have the roof supports which have a high structural steel component and that tends to carry -- if you’re just looking at the OE installations, it tends to carry a little margin in the room and pillar products. We’ve talked about that in the past and we’ve seen some of that continue inti the quarter.

Chad Dillard - Deutsche Bank

Got it. That's helpful. And just maybe a broader question. Could you give us a sense of how much overcapacity exists for your products at the various mines that you guys service?

Ted Doheny

I mean, for all the products or our particular products?

Chad Dillard - Deutsche Bank

Yes, your particular products?

Ted Doheny

Well, I will give you a global number. As you know, our sales were up to $5.6 billion, just a couple of years ago. So we’ve been having a capacity of a $6 billion business. So we’ve been rationalizing that capacity. So that would be a general description. But as far as mine capacity, by mine, now that’s probably too specific.

Randy Baker

Well, I think that what you’re referring to, if I just reiterate your question is are our customers fully utilizing their fleet, is that what you’re asking for?

Chad Dillard - Deutsche Bank

Yes, that’s what I am looking for?

Randy Baker

So generally speaking, most of the mining companies, that’s their big effort right now is that they know if they utilize more of their fleets effectively and take their utilization from an average of say 65% back up to where it should be at 80%, it does a couple of things. It pushes the equipment harder, which generates better parts revenue and service revenue for us, but it also impacts our cost structure significantly. And most mines have a three-pronged effect. Number one is they took general SG&A cost out, which they did last year. Number two, they are driving expenses, which in terms of maintenance as far as they can. And number three, and the high hitter, is they are driving operational efficiency and utilization, and that’s where they are at right now. And you can see it in most of the mining house numbers is they have shifted gear from short-term cost cutting to let’s get efficient and make money. And in a sense, essentially that’s what they are doing.

Jim Sullivan

And if they can’t hit that, they are going to idle or shut down the mine.

Chad Dillard - Deutsche Bank

Thanks, Jim. Great. Thanks for the color.

Operator

We will take our next question from Adam Uhlman with Cleveland Research.

Adam Uhlman - Cleveland Research

Hi, guys. Good morning.

Ted Doheny

Hi, Adam.

Adam Uhlman - Cleveland Research

I was wondering about back to the service business. I guess we've been talking about rebuild activity starting to pick up. And I guess I am wondering if we are still expecting the second half to see a stronger rebuild schedule. And then, I was also interested in the parts business being a bit softer, is there still risk that that could mitigate the pick up in rebuild demand?

Ted Doheny

Well, part of our second half pick up, we have part of that in there, that’s part of to make the year and to make our guidance. We have some of that in the fourth quarter specifically to see some of that come back. As I shared in the commentary where we’re seeing it, it’s still flat in the U.S. We do think, as I highlighted, there should be a pick up on the inventories, especially in utilities being at such a low level that we’re anticipating that.

We have a little bit better visibility to your question because the rebuilds are scheduled on our facility so we see that. We work very closely with the customers to schedule those rebuilds that we have visibility for those in our planning with our facility. So we have pretty good visibility six months out on the rebuild, and that’s globally around the world. So we have hits or miss that come in when customers have extended their maintenance too long, which we’re seeing that continually to happen. But we think we’ve pretty good visibility in the second half of year and part of that to answer to your question is yes, we see a little bit of an uptick in 2014.

Adam Uhlman - Cleveland Research

Okay. Got you. Thank you. And then I was wondering if you could just give some broad comments on your thoughts on the emissions proposal that was discussed this week. It’s obviously been out there for a long time, but maybe how you are thinking about that, if it was better or worse than your internal planning and how we should be thinking about that going forward?

Ted Doheny

Right, there’s no question. We’ve been working with our customers on this for quite some time. A lot of that’s already been programmed in, not only to our stock price but programmed in from the actions and the orders. And my personal view, I think clarity always help in knowing what's out there and so we can design to what our customers can design to it will help.

But looking at the worst case scenario, what that would mean to electrical production on coal and all way out to 2030, we calculated what that would mean, roughly taking 180 million tonnes out of the U.S. Now the part that is also in there is the export market will continue to increase as the U.S. continues to export its energy in the form of coal, so we continue to see that increase.

So a net effect on that, which is 15 years out now, is probably a net 80 million tonnes differential. But obviously here is us pushing into growing beyond coal with a hard rock strategy etcetera. So it's not good for coal. I don’t want to give any color to that. But it’s been out there, it’s been planned on. And again, what can we do to make coal more safe, more effective for our customers. And really those more efficient plants, those coal burning plants are the ones that are going to be loaded up.

So not good news for the coal industry, but we think that’s already been planned in and the more clarity we get, I think that’s going to help everyone.

Adam Uhlman - Cleveland Research

Okay, great. So no big surprises?

Ted Doheny

No.

Adam Uhlman - Cleveland Research

Thanks very much.

Operator

Thank you. We’ll go next to Nicole DeBlase with Morgan Stanley.

Nicole DeBlase - Morgan Stanley

Yes, good morning, guys. I just wanted to piggyback on Ann's question for a second on aftermarket. Are you guys seeing any increased competition from third-party parts manufacturers or not?

Ted Doheny

Well, I’ll describe it generally what’s happening is we highlighted with Ann the competition out there with our customers as well, with their service shops. The third-party providers are actually quite aggressive. They're getting hit quite a bit. They grew when the markets were really strong and we didn't respond quick enough, the first call was to us for the OEM for the part.

If we don't respond or don't have the right value proposition, the customer will look for the third party. This is a very aggressive time for us to continue to talk about our service. We’ve gone quite aggressive to get that business that we’ve lost. And so part of our service growth is new products we’re bringing into service as well as capturing share that we believe we should have always gotten in the past.

So there is a pressure from those third-party suppliers. But we think that such a value sale that we have, the first call, the second call is to us and we want to be there with the right part at the right time and we believe that’s an opportunity for us.

Nicole DeBlase - Morgan Stanley

Okay. Understood. That makes total sense. And then my second one is just on Surface margins. I mean, you guys had pretty strong decrementals, 31% this quarter. Can you just comment -- was there anything special or do you think that level of decremental margin is sustainable going forward?

Ted Doheny

Let me give that one to Randy because he has got a big smile on his face because the first quarter he wasn’t smiling and in the second quarter, yes. So let Randy take that one.

Randy Baker

All right. In the call, we always have an objective to have decremental margin around 34%. That is our internal target. And we’ve managed this company hard to get there. On the up cycle, we go for 25, on the down cycle we go for 34 and more. And so we’ve managed this business, we’ve taken cost out. We’ve looked at our factories hard on where we can take cost out. And we believe we’re doing the right thing.

Nicole DeBlase - Morgan Stanley

Okay. Got it.

Jim Sullivan

Quite honestly, I mean, just full transparency. We didn’t have the best of quarters on the services side from a manufacturing operational perspective in the first quarter. The good news is that Randy and the team have straightened that out. And we feel good about where we are today, along with the additional reduction that we’ve schedule to take in the back half of the year.

Ted Doheny

And one last thing Nicole is again relating to the market. If we look at our Surface business and in service of Surface, behind that is what’s going on the coppers. We highlighted the Latin American business and also the PRB. So you see the markets driving some of that as well. Getting good aftermarket, getting good service business really helps our PVs.

Nicole DeBlase - Morgan Stanley

Okay. Perfect. Thanks guys. I’ll pass it on.

Operator

We’ll go next to Rob Wertheimer with Vertical Research Partners.

Rob Wertheimer - Vertical Research Partners

The first question -- I’m not sure it is an easy one to answer but obviously there is fewer big deals in the industry and you got a good one with the shovels in the oil sands. Are you able to comment on how industry pricing has held up as the deals have gotten scarcer? On the OE side, you talked about aftermarket. I think our service squeezed it before?

Ted Doheny

Yeah. No, it’s a very good question and they keep coming up as you know on each of these calls because the real issue is out there. There is a lot of capacity in the marketplace. So you know that, you’re asking the question. So, on the large orders that are out there that we’re fighting aggressively for. It’s really about the product differentiation and competitive advantage.

We’ve been working this oil sands order for over five years. It has really helped on the oil sands orders. You hear me talking about our strategy is to create references. The best sales force we have is our fleet. We have done extremely well in the oil sands, have very strong market share, very-very tough application. So our engineers, our service technicians have been all over that.

Now this is a greenfield, it’s somewhat mixed. It’s a hybrid greenfield because they’re leveraging their current infrastructure but it's really a differentiated product. And so is the market tough right now? There's no question. But we are selling something that the customer really wants and we believe the competitive advantage is supporting very good pricing for us on the OE.

We have other OE contracts that are potential, that are out there. I don’t want to get caught up in talking about those major projects that you will hold me to every quarter. But we are pushing some significant projects that are out there. But those are mostly tied to our new product development because we’re working hard with the customers, talking about life cycle cost? Can we move their cost curve?

Some of the new products that we put out, especially on the longwall, especially with better shovels, better loaders, have our customers look at what everybody else is doing. Those that have move down to cost curve are making money right now and they’re all asking each other, how are you doing that? And which is right into our strategy that every customer is a reference and so that’s what they are looking for, how are you getting your cost curve down? What are you doing to make that happen? So that's where we think, that’s what we are trying to sell to? And that’s how we believe we’re going keep our value up on the major projects.

Rob Wertheimer - Vertical Research Partners

That was a great answer. Thank you very much. And by the way, thank you for all the detail you provide in the press release. It does help to -- it is a volatile trough, so it helps to understand that. Could I ask just one quick accounting question? I should know the answer, but what is the threshold for doing percentage completion accounting on a thing like a shovel? Is it dollar-based or cycle time-based or do you not use it on shovels anymore as you cut into cycle time?

Jim Sullivan

Yeah, we do percent complete accounting on our shovels. There isn't a dollar threshold but the shovels are pretty large as you know.

Rob Wertheimer - Vertical Research Partners

So on all of them? Okay. That's great. Thanks.

Ted Doheny

Okay. Thanks. I think we have one more -- time for one more question.

Operator

Okay. We’ll go next to Michael Feniger with Bank of America.

Michael Feniger - Bank of America

Hey, guys. Yes, it's Mike Feniger filling in for Ross Gilardi at Bank of America. Just curious that what you guys talked about last quarter, there was definitely a mixed impact on the aftermarket side. I mean, you guys were talking about a pickup in rebuild relative to the parts. How do you guys see -- how did that trend in Q2 and how do you see that trending for the rest of the year?

Ted Doheny

The same answer we give each time is the lumpiness. We had a rebuild stronger in the second or in the first quarter. We saw some uptick in the U.S. on the rebuild. We saw some lumpiness that we’ve kind of peeled back and said, we didn’t get some large parts order year-over-year, so that was an issue. So going forward, we think the rebuilds as we talked a lot about.

We think there should be a stabilizing and potentially an increase on rebuild from the U.S. and Australia, we talked about that. We do think we’ve had some parts opportunities to customers. Keep expending for fleets, trying to reduce short-term cost are creating some problems, which are opportunities for parts business in the second half and going into 2015. So the simple answer is lumpy. We are trying to give you the best insight, where we have visibility as I shared before. We do have visibility on rebuilds because those are scheduled for the most part. But the lumpiness is the short answer to the question.

Michael Feniger - Bank of America

Okay. Thanks, guys.

Ted Doheny

Okay. Well, we will use that then to wrap up. And just a couple of comments and now with the second quarter behind us, our team is truly focused on executing our strategy for the remainder of the year and preparing for 2015. We’ll continue to balance with refinement of our cost structure, with our commitment to growth platforms in the light of current market conditions. This is no easy task, but I know we have the right team in place to replenish, to accomplish our commitment, while continuing to deliver on our promise to solve our customers’ toughest mining challenges. Thank you. Okay, Tiffany?

Operator

And that concludes today's conference call. Thank you for your participation.

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Joy Global (JOY): FQ2 EPS of $0.76 beats by $0.05. Revenue of $930M (-31.6% Y/Y) misses by $3M.