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Joy Global Inc.(NYSE:JOY)

Q3 2014 Earnings Conference Call

September 4, 2014 11:00 AM ET

Executives

Edward L. Doheny II – President and Chief Executive Officer

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

Randal W. Baker – Executive Vice President and Chief Operating Officer

Sean D. Major – Executive Vice President, General Counsel and Secretary

Analysts

Michael W. Gallo – C. L. King & Associates

Robert Wertheimer – Vertical Research Partners LLC

Ross Gilardi – Bank of America Merrill Lynch

Steven M. Fisher – UBS Securities LLC

Daniel Politzer – RBC Capital Markets

Jerry Revich – Goldman Sachs & Co. Inc.

Ann Duignan – JPMorgan Securities Inc.

Eli S. Lustgarten – Longbow Securities, LLC

Chad Dillard – Deutsche Bank Securities

Operator

Good day and welcome to the Joy Global Incorporated Earnings Conference Call. Today's conference is being recorded.

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

James M. Sullivan

Thanks, Tracy. Good morning and welcome, everyone. Thank you for participating on today's conference call and for your 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 third quarter of fiscal year 2014. Ted will then provide an overview of our operations and our market outlook. After Ted's comments, we will conduct a question-and-answer 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 third quarter financial results. Bookings of $923 million in the current quarter were up 33% versus a year ago period, orders for original equipment of $284 million were up 195% versus a weak third quarter a year ago, while service orders of $639 million were up 7% our third consecutive quarter of year-over-year growth.

In adjusting for foreign currency exchange, orders for original equipment were up 199% orders were up 8%. Current quarter’s service bookings decreased 8% sequentially from the second quarter due to a combination of seasonal factors, a decline in the U.S. coal production outlook in the back half of 2014 and some slowing of activity in the Eastern Europe and Russian markets.

The $228 million year-over-year bookings increase this quarter was comprised of a 37% increase for underground mining machinery and 36% increase for surface mining equipment. The 37% increase in underground mining machinery bookings was comprised of 130% increase in original equipment and 11% increase in service. The original equipment bookings increased compared to the third quarter of 2013 was primarily due to longwall and room and pillar orders received in North America and conveyor orders in Australia.

Service orders led by higher rebuild activity increased in all regions expect Australia where we continue to see some deferred maintenance on our installed base. The 36% growth in surface mining equipment bookings versus the year ago period was comprised of 551% increased in original equipment and a 3% increased in service. The over five, fold increase in original equipment was driven by electric mining shovel orders in Latin America and China and wheel loaders in North America and Australia.

Service bookings in this segment were driven by Australia and the Americas, partially offset by declines in the other regions. Backlog increased modestly to $1.7 billion from $1.6 billion at the beginning of the third quarter and is up just over $200 million since the end of fiscal 2013.

Now on to sales, net sales of $876 million decreased 34% year-over-year with the Underground segment down 35%, and the Surface segment down 32%. Sales for original equipment decreased 57%, while service sales decreased 14% from prior year period. When adjusting for foreign exchange, sales were down 33% compared to the third quarter of 2013. Original equipment sales for underground and surface mining decreased 59% and 54% respectively with declines in all regions.

Service sales on our surface equipment decrease 17% while underground service decreased 11% compared to the prior year. The Surface segment saw decreased service sales in all regions while the Underground segment had decreased service sales in all regions with the exception in North America. While service sales were down just over 10% year-to-date versus 2013, the growth we have seen and service backlog is expected to support an improve year-over-year comparable for service sales in the fourth quarter.

Operating profit excluding restructuring and pension curtailment charges totaled $133 million in the current quarter down 52% from the third quarter of the prior year. Return on sales in the current period was approximately 15% down from 21% in 2013, but up 110 basis points from the second quarter. The decremental profitability on the year-over-year volume decline in the quarter was 32%, bringing the year-to-date decremental to 36%, just above our full year target of 34%.

The decrease in operating profit versus a year ago period was primarily due to lower sales volume and lower manufacturing cost absorption partially offset by cost savings from the Company’s restructuring actions and lower incentive base compensation expense. Operating profit was also unfavorable impacted by the month long national labor strike in the Republic of South Africa in July. This labor dispute has been resolved and we expect to fully recover from the missed shipments in the region during the fourth quarter.

In that quarter the Company completed negotiations with certain U.S. bargaining units to freeze their defined benefit pension plans at the end of the calendar year, which resulted in an $8 million non-cash curtailment charge. The freezing of these union plans combined with the 2012 curtailment of the salary plans in the U.S. substantially completes the transition of the Company’s defined benefit plans to define contribution programs.

Also in the quarter, restructuring expense of $6 million resulted from further actions taken to better align the Company’s cost structure with global demand, including the continued optimization of the Company’s global manufacturing footprint. Year-to-date, we have realized $54 million of year-over-year cost savings from our restructuring programs which puts us on track to deliver our full year cost savings target of $75 million.

The effective income tax rate excluding discrete items was 32.1% in the third quarter of 2014 compared to 31.1% in the prior year period. The increase in tax rate from the prior year is due to a projected shift in income from lower rate jurisdictions to those with higher rate and a change in the net operating losses of certain foreign subsidiaries without a currently recognizable tax benefit. The company continues to expect its effective tax rate in 2014 excluding discrete items to be in the range of 32% to 33%.

Income from continuing operations before restructuring and pension curtailment charges, totaled $81 million or $0.80 per fully diluted share in the current quarter, down from $182 million and a $1.70 per fully diluted share in the prior year for the quarter. The year-over-year increase in the effective tax rate reduced adjusted fully diluted EPS in the current period by $0.02.

Cash from continuing operations in the quarter totaled $92 million a decrease of $258 million compared to the third quarter of 2013 as lower sales volume drove lower cash earnings in the current period combined with less cash generation from changes in trade working capital levels versus the year ago period.

We now expect cash from continuing operations excluding discretionary pension contributions to fall below our target of approximately 15% of sales this year and it’s primarily due to the timing of certain receivables collections related to the strong anticipated sequential increase in sales in the fourth quarter pushing into fiscal 2015. The Company continues to focus on carefully managing its investment and trade working capital in a challenging market environment where customers conserving cash by increasing supplier requirement on service inventory and also in some cases flowing down payments and receivables.

Capital expenditures in the current quarter totaled $25 million down $6 million versus the prior year. The expenditures in the third quarter of 2014 were focused on the Company’s global service center infrastructure in Latin America and Russia in general facility maintenance. We know expect full year capital expenditure to be at the lower end of our guidance range of $100 million to $125 million.

We also completed the acquisition of the underground hard rock business MTI in the quarter. This acquisition did not materially impact earnings or operating cash flow in the quarter. Despite the challenging environment, we continue to generate good cash flow primarily through our direct service business. During the third quarter we repurchased 1.1 million shares of the company stock for $65 million. Year-to-date, we’ve repurchased 3.5 million shares for $194 million. This represents about 85% of the Company’s year-to-date free cash flow.

During the quarter we were able to take advantage of favorable credit markets and refinance our $1 billion revolving credit facility in term loan. The refinancing will provide annual interest rate savings, lower amortization requirements on the term loan and less restricted financial covenants both the revolver and the term loan have been extended to July 2019.

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

Edward L. Doheny II

Thanks, Jim, and thanks to everyone for joining us on the call this morning. First I would like to take a few minutes and review the current market conditions as they pertain to our business. Then I’ll highlight some of our operational achievement during the quarter as well as how we see the reminder of the year. It goes without saying that conditions in mining remain difficult and while we see some signs of stabilization in terms of our order rates in service activity there are still challenges on the horizon.

Despite these market conditions, our quarterly performance continues to demonstrate that we are operationally efficient while continuing to invest in our strategic growth plans for the future. Over the last 18-months we focused on improving our ability to better to respond to difficult market conditions, provide that the value that our customers come to expect and deliver consistent return to our shareholders. Our operating results for the quarter again demonstrate the commitment in high level of performance of our people.

The challenge of low commodity prices provides us the opportunity to work with our customers to help them achieve the lowest total cost of ownership and improve their positions on the industry cost curve. Providing full system solutions with smart services will help our customer’s performance and ours. Historically tough market condition had driven technological advances in the equipment as well as new mining methods that had driven productivity gains and enhanced safety in the mine.

As a Company, we've been a leader in solving these challenges, we are continuing to focus our research and development projects on the most compelling solutions that will significantly lower the cost, increase production and remove people from harms way in the mine operations. These new product and system development will create future growth opportunities for our business.

Let me just take a moment now to review how we see our current markets. We continue to see the global economy improve although they are regionally specific issues that are creating headwind to overall growth. While global growth is expected to exceed 3.5% this year they remain headwind in china which continues to see starts and stops of growth. The numerous efforts enacted during the second quarter that popped up growth at 7.5% have had a less of an impact in the third quarters as manufacturing conditions slowed again.

This is renewed call for additional fiscal and monitory stimulus, but these to need to be balanced with the ongoing property market concerns. We still expect Chinese of plus 7% will drive commodity demand in that country. The Eurozone after seeing strong first half of the year with hopes for strengthening activity has begun to feel the effects of the ongoing crisis between the Ukraine and Russia. Retention and economic strain has implementation for the entire regions as Germany saw second quarter growth contract.

Eurozone as whole had no growth during the second quarter with full year expectation being downgraded as the uncertainty of the situation persists. We are starting to see some impact on our business in the region which has been tracking in the $75 million to $100 million per year range. We are encouraged by recent reports of lessening the conflict in a region and hope the impact on our business will be short lived.

Despite the regionally specific headwinds facing the global economy, overall commodity demand is strengthening as evidence by global growth readings at a three year highs. While demand had strengthened, surplus supply in most major commodities research still exists and curtailments have been slow to materialize. The process of a supply rationalization is at different stages with each commodity and will drive our customers to improve their mine productivity and lower their total cost of operation.

The key focus of our strategy is our service commitment to our customers and the ability to service our fleet of equipment that’s in the filed today. Ensuring the highest utilization and efficiency of equipment and the system is critical to our customer success. We continue to invest in our service capabilities around the world. After recently opening a new service center in Australia, we are nearing the completion of a state-of-the-art facility in Russia and Peru to build on our service capability ahead of future market growth. These service centers are capable to handle both surface and underground equipment.

Service is critical to our customers and the foundation of our Company as it provides stabilization to our business during swings in original equipment activity and also enables our equipment to perform at the highest level in the industry. We are encouraged to see the third consecutive quarter of year-over-year growth in service bookings with the third quarter up 7%. Year-to-date, service bookings are up 6% compared to last year. This improved service bookings trend should continue into fiscal 2015 as the fleet of equipment put in the field in the last five years reaches various stages of rebuild and maintenance cycle.

As we stated in the past, the cycle of minor delaying rebuild and maintenance continues as they struggle with lower commodity prices. The exact timing of this processes vary by region, but we track our fleet closely and we are embedded with our customers at their mine sites. For example, we started to see signs that our U.S. service business is stabilizing though at lower levels than seen in the past. We believe the rebound we saw in the U.S. service booking during the quarter was to a large extent due to the inability to continue to differ maintenance that has affected our service business over the last 18-months.

However, challenges remain as U.S. coal production now faces some headwinds in second half of 2014 from continued depressed coal prices, decreasing export opportunities and a cooler than normal summer. Net coal prices remain under pressure, but seem they have found a floor to pricing as stock prices of trended in the $110 to $120 range since March. Pricing at these levels continues to pressure over half of global producers. Despite the announcement of over 20 million tonnes of curtailment these cuts had not yet materially impacted the market as many producers had stockpiles built up that are still being depleted.

Over half of the announce curtailment come from the United States as they historically have been positioned at the higher end of the global cost curve. This will likely have an impact on U.S. met coal production and exports for the remainder of the year. While met coal demand has grown in the low single-digits on the back of 3.8% growth in steel production year-to-date many producers remain strained. This provides an opportunity for us to work with our customs to lower their cost of operations and shift their cost curve position.

Steel production is expected to growth 3% to 4% this year and they will help support the demand side, but the current over supply is likely to persist through 2015 capping any marginal upside pricing improvements around $130 per tonne. Global iron ore prices remain under pressure as production has ramped in Australia and exports have flooded in already over supplied market. Prices have drifted towards $90 per tonne and at time fallen below that level on macro economic concerns.

The 3.8% growth in global steel production has not been enough to absorb global supply increases and would likely result in a price ceiling on iron ore at a $100 per tonne in the absences of any major supply disruption. We continue to track the domestic iron ore industry in China. The market is defined by segmented producer prices in lower ore grades. We've seen some initial idling of capacity in China, but not nearly enough to balance the supply increases coming out of Australia.

Additionally, the ability of many state owned enterprises to sustain losses for a longer period of time continues to create uncertainty in global pricing for iron ore. During the quarter we did book two shovels with a Chinese iron ore producers that needed to upgrade the mine performance with better technology to lower their cost position. Turing to the Chinese coal market production is down year-to-date close to 2% through July.

While prices were down 25% and over 60% of the producers are losing money. The continued consolidation and closers of unsafe mines will drive mechanization in the market. Our strategy is to inject technology into our local China products, as well as to work on fully integrate systems to improve the full mining performance. We are starting to see some traction with these strategies; we are moving customers from buying pieces of a longwall system to buying the complete integrated longwall system from Joy.

Turing to global copper market, we continue to see strength in both business activity and the underlying fundamentals of the copper market. The unexpected 400,000 tonne deficit through the first half of the year reflects two dynamics. First, the typical supply disruption that occur simply from geological conditions or from policy decisions remain prevalent in the market. And second, the strong demand that has resulted from global economic growth continue to support the plus $3 per pound copper and where we see strong activity in our quote log.

During the quarter, we did receive three large shovel orders for copper mines. We also saw our service business in Latin America return to the 2012 run rate for the first time in the last five quarters. The expectation for copper to return to a deficit post 2015 continues to drive longer term investment for those that are well positioned on the cost curve. The mining dynamics of lower ore grades, higher strip ratios and a great percentage of ore deposits moving underground can clearly be seen in the copper market.

These dynamics match well with our hard rock growth strategy and full system solution that maximize output in lower total cost of ownership. Tougher mining conditions continue to drive our underground hard rock mining product portfolio not only for copper, but for a host of other minerals including platinum, zinc, nickel and other metals. Speaking of our hard rock strategy we have been encouraged with the integration process for our newly acquired MIT business.

As I previously stated, this business represent the next step for us and our hard rock strategy of extending our underground product portfolio into the hard rock mining space. The integration of MTI into our overall company and direct service network has gone according to schedule and resulted in business and order activity on pace with expectations.

Coming into 2014 we expected business activity to be nearly 30% below levels seen last year. In light of this we’ve continued with our restructuring action. As Jim mentioned, we are on target to deliver our year-over-year cost savings from these actions of $75 million with about $15 million of carryover benefits in 2015. While we continue to see signs of stability in our service business and believe our overall bookings activity has [dropped] (ph) through some headwinds persist and in any event we remain committed to further optimization of our global manufacturing footprint.

We also remain committed to our share repurchase program and have completed over 40% of the Board authorization in the first year with one quarter of year remaining and based on the lower outlook for U.S. coal production in current geopolitical circumstances in Eastern Europe and Russia, we are tightening are full year 2014 guidance on revenue and earnings. We now expect fiscal 2014 revenue in the range of $3.65 billion to $3.7 billion in full year earnings per diluted share in the range of $3.15 to $3.30 excluding restructuring pension charges in other unusual items.

So with that I will turn the call over to Tracy for Q&A. Tracy.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will go to Michael Gallo from C. L. King first.

Michael W. Gallo – C. L. King & Associates

Hi, good morning.

Edward L. Doheny II

Hi, Michael.

Michael W. Gallo – C. L. King & Associates

Two questions I was wondering whether – okay actually a question a follow-up, I was wondering whether with the 25% decline in pricing in China, whether you think we have reached a tipping point or you think we will see an accelerated consolidation and move to western equipment or whether you think that will drag out for some time. And I also had a follow-up question on the SG&A which looked like it was down significantly in the quarter, I was wondering whether there was anything unusual that drove that and what kind of level that we should assume going forward or this is just the benefits of the restructuring? Thank you.

Edward L. Doheny II

I’ll take the first part and let Jim talk about the SG&A. What we are seeing in China, it’s definitely tough on the market in China especially as I mentioned in the comments we are seeing over 60% of the producers are actually not making money. So we had talked before in previous quarter about the consolidation needing to happen because of safety concerns, we are also seeing that the China and its local government trying to reduce production to see if they can hold up the pricing. So in the short-term, I think the answer to your question is, yes, I think that will help stabilize pricing, but there is a lot of consolidation that still needs to take place in China.

James M. Sullivan

Yes, Mike this is Jim. Let me address the SG&A question. It’s down a little bit more this quarter than what we saw last quarter, part of that is due to the lower incentive compensation and this quarter versus the previous quarter and year-over-year quarter and a lot of the remainder would be our cost reduction programs. Going forward we would expect that number to kind of settle in that one high 140s to low 150s range per quarter.

Michael W. Gallo – C. L. King & Associates

Thanks very much.

Operator

We will go next to Andrew Kaplowitz from Barclays

Unidentified Analyst

Good morning guys. It’s [indiscernible] for Andy how are you.

Edward L. Doheny II

Good.

Unidentified Analyst

So decrementals improved really nicely in the quarter, but your guidance is implying a significant ramp in earnings in 4Q. So can you give us some more color on your visibility to both the sequential revenue ramp in your confidence level and achieving profitability improvement that guidance implies?

Edward L. Doheny II

I’ll give some quick color and then let Jim add some more detail. Part of what we see in the fourth quarter is the ramp up in the improvement if you looked at the two different segments of service and underground you saw at the beginning of the year we had some of our cost action some of absorption actions hitting the underground and you saw in this quarter underground getting close to that 34%.

We think that should track nicely in the fourth quarter and we think the absorption plus we have a large longwall that we mentioned a low seam longwall the first quarter that should be shipping in the fourth quarter. So we should get absorption benefit there as well. We also have we should fully recover of the problem we had in South Africa with the strike – we should get that all back in the fourth quarter.

So we think we have pretty good visibility in the fourth quarter we are still planning on hitting our decremental target for the company of 34%. So we think we have pretty good visibility of hit that in the fourth quarter.

Unidentified Analyst

Okay thanks helpful. How big was the South African issue on the owner?

Edward L. Doheny II

Yes. On a sales basis, it was $10 million to $15 million and probably $0.02 to $0.03 EPS.

Unidentified Analyst

Okay, that’s helpful. Maybe one last question, as we look at the services bookings, you have been right around $6.50 a quarter through the first three quarters. So can you talk about your visibility to growing that business, growing services demand as you round out the year end and into 2015?

Edward L. Doheny II

The biggest piece that we have visibility to is the rebuilds. Our customers work with us pretty closely and actually schedule those, so we see that visibility and especially in the U.S. where we've been watching closely. We had a good quarter. We are seeing – it can't keep extending so we are seeing that rebuild level pick up.

So we think we have pretty good visibility and we'll say that this next quarter and to the next six months to see that rebuild activity should level and we feel good about that. We are still a little bit behind in Australia so we still see that maintenance stretching, so we are watching that closely, but overall we best visibility we have is to the rebuilds and we see that improving. The parts we are watching that is directly tied production.

So if there is a production increase we will see that really quickly in our parts business. So again, it all come down with the pricing why we spend so much time talking about what’s going on with the commodity. As if there is movement in the commodity pricing and the production goes up we should see that directly in our parts business.

Unidentified Analyst

Okay, thanks a lot.

Operator

We will go next to [indiscernible].

Unidentified Analyst

Yes, thanks guys, good morning.

Edward L. Doheny II

Good morning.

Unidentified Analyst

So maybe just a question on the corporate line first, so you guys came in at $7 million, I think in the press release you called out lower compensation expense, should we view that $7 million as sustainable on to 4Q or do you expect it to move towards kind of the normal level and a low double digit?

Edward L. Doheny II

Yes, the more normal level its going to be low double digits.

Unidentified Analyst

Okay, got it. That’s helpful and then, maybe another question on 2015, I know you will give official guidance next quarter, but what are your thoughts on the ability to post like $1 billion plus of OE revenue in mid 2015 since your LTM OE orders are like about $1.2 billion.

Edward L. Doheny II

For the year, the $1.2 billion for the year?

Unidentified Analyst

LTM orders for OE.

Edward L. Doheny II

I’ll give you just our initial thoughts on 2015, because its tied, we don’t see much change in, we see the service business settling, so we feel good about that. We would like to see this increase going.

On the OE piece, we don’t see any major unless there is a push on the pricing, we don’t see major projects coming through, but what we do see is some of these rebuilds have been extended for a long enough period of times, some of that could show up is OE in the 2015, we are looking that but we truly think for 2015 a lot of growth is going to have to be created.

Some of the things we have talked to you about with our new products, new product development and creating share with our hard rock penetration and especially into china. Such a large market and we continue to drive share gain, even though the market is tough can we gain share, but those are our initial thoughts.

On the cost side, we think our restructuring we've done well, we should give that benefit next year, but right now it’s still a very tepid environment with the commodity price of being pretty tough.

Unidentified Analyst

Okay. Thanks. I'll pass it on.

Operator

We will go next to Rob Wertheimer from Vertical Research Partners.

Robert Wertheimer – Vertical Research Partners LLC

Oh hi, good morning everybody. Just a quick clarification, the tough Africa issue would be most underground or all underground and the margin that come back on the underground margin side?

Edward L. Doheny II

Yes, it’s underground.

Robert Wertheimer – Vertical Research Partners LLC

Okay, perfect. One quick question, also a clarification I guess. You know when you mentioned the rebuilds have been put off so far I guess you are talking about the [indiscernible] top is that were service or underground. I guess I had the impression it’s easier to stretch out on surface but maybe I'm wrong on that.

Edward L. Doheny II

It’s actually both, but right now we are feeling more of the effect on the underground. The surface if you look at our two businesses surface and underground, surface is a strong component is in the hard rock. So that's where you're seeing that copper business still fairly strong in iron ore. Where underground is predominantly coal so you're seeing that effect.

Robert Wertheimer – Vertical Research Partners LLC

Okay. And then just one sort of bigger picture question I guess – if China does slow down on some of the unprofitable domestic production – it does the government sort of support that? I mean on the cold side obviously there's risk that they're trying to shutdown so far so what's your sense of local and national desire to have that slow down and does that translate in a year or two you know an increased export opportunity that it does benefit to am just curious if that's a major thing or not in your next couple of years outlook and I'll stop. Thanks.

Edward L. Doheny II

Yes. I don't think those are tied that directly, but I'll tell you how we think about that. I think the opportunity is the government can come in and try to store up pricing – hold up pricing on the coal markets by reducing production and consolidation of the market. So we will feel that effect because it’s going to force the producers to go to mechanized mining.

As far as exporting, that's a little bit different. We are starting to see all that with our local China products. We have exported already some of our road headers so as we inject the technology, we do see some export opportunity into some of the emerging growth markets where we have the right price value opportunity.

We're actually going to try to drive that conversion factor. Not being a Chinese exporter with a low price, low performance as we inject our technology, we think we could be a better price, better performance alternative and we are going to start driving that – it will take time. It will take years. That will be something that won't happen in one-year.

Robert Wertheimer – Vertical Research Partners LLC

Thanks for the response I meant I guess some exporting from other global markets iron and coal to China. So anyway, sorry about that.

Edward L. Doheny II

I'm sorry. The imports – importing into China from Australia?

Robert Wertheimer – Vertical Research Partners LLC

Yes?

Edward L. Doheny II

I think that will continue as that imports coming in from Australia, Indonesia, into China will continue. There is infrastructure issue in China as well there so, at least in the short-term the next 12-months we see that continuing.

Robert Wertheimer – Vertical Research Partners LLC

Thank you.

Operator

We’ll go next to Ross Gilardi from Bank of America Merrill Lynch

Ross Gilardi – Bank of America Merrill Lynch

Yes, thanks a lot. Good morning, just a couple questions I wanted to just go back to the implied earnings step up in the fourth quarter. Can you help quantify some those different buckets that get you from Q3 to Q4? A bit more and do you at least have the low end of your full year guidance in your order book right now?

Edward L. Doheny II

I will give it and Jim will probably correct me if I give you too much detail there, but we feel pretty confident in the fourth quarter in protecting the low range and that’s part of the reason moving it up, we didn’t want miss on the low. So do we see everything? No, we still have to have a book to bill in our service business, but we think we have visibility to go make that happen.

James M. Sullivan

And I think a lot of that would have happened in the first month of the quarter here, we haven’t financially closed a month, so we don’t have the numbers in front of us, but I would expect the book to bill as we exit the first month of the quarter to be pretty low in terms of needing to get to the bottom of the range.

But whilst just to kind of maybe add a little bit, you know the implied full year guidance you can obviously back into what we think about the quarter, the sales we are looking at in the fourth quarter based on the updated guidance would be a $1 billion [$1.1 billion] (ph) so a pretty step up sequentially, versus the third quarter at the low end about 15% and the high end about 25%.

And then as we've talked about and as we've seen in past quarters on an incremental basis, especially on our short-term incremental basis, the incremental margins sequentially can be pretty attractive, so we would expect to get margin accretion in the fourth quarter. We do have additional cost savings that we will be kicking in, in the fourth quarter and a little bit of benefit in terms of EPS on share repurchase. So hopefully that gives a little bit of help there.

Ross Gilardi – Bank of America Merrill Lynch

That’s great, thank you very much and then my follow-up, this maybe a tough one to answer, but I'm just curious to get your view on more of a qualitative sense, I mean that the – certainly the headline mining CapEx figures from your customers still look very weak and feel like they have been trending down still after having come down pretty sharply already over the last year or two.

But anyway to quantify of just to think about what portion of your product support business is actually running through, your customers operating expense as oppose to CapEx and if replacement demand for new equipment is generally running through growth CapEx or maintenance CapEx for your customers and again I realize that’s probably a question for your customers, but any sense there would be helpful.

Edward L. Doheny II

Well I wouldn’t know, I would be just speculating, I can tell you how it feels, I think some of our OE bump that we are going to get, we've already seen in the U.S. it will translate into 2015 as well, that they have extended some of the rebuild cycles that we saw some of our bump in OE in the U.S., because equipment to hit production was just getting too old and they had to be replaced. I'm not sure, the specific answer to your question is that – is the customers moving their CapEx from maintenance to capital, don’t know that?

Ross Gilardi – Bank of America Merrill Lynch

Okay thanks very much.

Operator

We’ll go next to Steven Volkmann from Jefferies.

Ross Gilardi – Bank of America Merrill Lynch

Hi, good morning. First would you mine commenting on any transit that you're seeing in pricing in your bookings.

James M. Sullivan

As far as price realization?

Stephen E. Volkmann – Jefferies LLC

Yes.

James M. Sullivan

Yes, in general, I'll say we're seeing it flat we are not seeing obviously a price gain. We would like to think we’re holding our pricing the OE has been small, so I think we talked about that before where there's order and shovels or a longwall to be taken. We are pretty aggressive out there on features and benefits and defining what we have versus something else. So we are – I will say holding the price there.

We are seeing trying to expand I’ll say or capture of our customers wallet especially on the service side in the ramp up where you know standing into some of our consumable products, we have different product offering.

So we are offering a larger suite of equipment. So we are trying to get more of what’s last in the customer’s small wallet and also to be very aggressive on delivery. We have a capacity where in the ramp up in the past some third party suppliers got in to the equipment. So we are trying to be very aggressive there feature and benefit and delivery right now. On pricing to try to hold our pricing in the current market environment.

Stephen E. Volkmann – Jefferies LLC

Okay great, that’s helpful. And then I think you mentioned a couple times in your prepared remark that you are trying to help your customers lower their cost of production. And I am just wondering what exactly that means, because sometimes we hear from some of the minor that the goal is to try to use the existing fleet of equipment either a longer or more efficiently so they don’t buy as much more and I am wondering how do you benefit from kind of helping them do that and then sort what specially are you doing?

Edward L. Doheny II

Multiple different thing, the biggest gain we probably had in productivity as working with our customers and actually bringing our OpEx into the mine and can we help them we move bottlenecks, get the equipment running on a more regular basis, it could be a simple maintenance of a part or it could be taking a look at how the equipment is preventing something that would go out ahead of time of using our smart services.

So its really getting the overall efficiency at the mine instead of running a mine at our highest use an example we had one of our large customers was running at less than 50 hours of a week is availability moving had up to 100 hours by working with them on various components. Some of them are actually people issues. Our direct service team is all over the mine and so multiple different answers I don’t have one specifically but it’s improving the – getting the equipment running and not just stretching it but getting it running more efficiently, which might have been doing more preventative maintenance so the machine doesn't break.

Stephen E. Volkmann – Jefferies LLC

Oh I see. Okay. Thank you

Operator

We’ll go next to Steven Fisher from UBS

Steven M. Fisher – UBS Securities LLC

Hi. Good morning. You guys mentioned some service investments in Australia and Russia and in Peru. How quickly can those translate into bookings?

Edward L. Doheny II

The service booking it actually workout pretty quickly. The Russian and Australian service center is up and running this year and we have already seen that would be quite helpful. The Peru is not till the end of this year and the Russia is also the end of this year so we won’t see that until 2015.

Steven M. Fisher – UBS Securities LLC

Okay. And then you mentioned some further investments in China. What kind of investments do still need to make there?

Edward L. Doheny II

Well, capacity we have a plenty of capacity so it’s not capacity investments it’s actually the technology as we continue to improve the product lines. So its more the injecting technology into the current local product lines that we have in China also the majors in China are quite interested in our technology are low seam longwall is quite active now on being quoted into China. They have to take that then seems out to get the thick one and we are also working on some high seam mining opportunities again that’s more of technology injection not capital. Not CapEx.

Steven M. Fisher – UBS Securities LLC

Okay. Thank you very much.

Operator

We’ll take our next question from Seth Weber from RBC Capital Markets.

Daniel Politzer- RBC Capital Markets

Hi. Yes this is Daniel Politzer on for Seth Weber. In the past you've talked about capturing – recapturing market share and its service business. Is there any update on that or could you provide some additional color on any initiatives that you have been working on?

Edward L. Doheny II

I’ll talk about initiatives we’ve talked about is the consumables how can we get more of the wearable parts of their products whether it’s the wearable component for the shovel or wearable even all the way to the bits of the continuous mine or so. That’s in various stages throughout our product line.

The other part of the capturing is just speed that I mentioned earlier is being very responsive to the customer when the equipment is down we’ve increased one of the initiatives that has worked well or especially on the copper market as we got went into this year with a higher inventory levels because we are worried our customer.

We are stretching too far so we seen having the inventory and be able to turn quickly, by having unforecasted parts has helped, but right now the consumables would be a new product, being more responsive to our customers and with the current availability or having the capacity be more aggressive in getting all the service around their equipment.

Daniel Politzer- RBC Capital Markets

Okay. Thank you. One more question, in your release you talked about kind of tampered supply rationalization, offset was strengthening economic growth, but you kind of say that it’s going to result in a slower growth profile looking forward, could you just kind of clarify that comment?

Edward L. Doheny II

In other words, we are not anticipating if you looked at the ramp up we had in the past 10-years, it was driven by very steep pricing curve and following up that pricing curve we are not anticipating or forecasting I’ll call it a rebound, we are looking more of an extended view that we've been talking about. So we think the growth that we are actually going to have to create, so if we build our growth profile for going out, we are going to get more service of our fleet that we talked about a lot, whether its new products to the fleet, covering our fleet, getting a higher percentage capture of our fleet.

It’s going into emerging markets and we talked about China, Peru and some of those markets that are growing, we want to be there, it’s talking about going into hard rock as we talked about before. We think with our acquisition, we think we have an opportunity to bring mechanized mining to hard rock, so we think that’s a growth for us. So all these are growth elements on top of the business that we think we are going to have to have created, we are not going to get the uplift of the past 10-years with commodity prices booming. So that’s what we mean by that.

Daniel Politzer- RBC Capital Markets

Okay great. Thanks a lot.

Operator

We will go next to Jerry Revich from Goldman Sachs

Jerry Revich – Goldman Sachs & Co. Inc.

Good morning.

Edward L. Doheny II

Hey Jerry.

Jerry Revich – Goldman Sachs & Co. Inc.

Ted, I'm wondering if you could just talk about your new equipment prospect list today, how does it compare versus a year-ago and you know what regions and commodities do you expect to try to your new equipment orders over the next 12-months, I think you may have stated in the press release that there are some opportunities in met coal, despite the fact the supply has been come down. Is that right, can you just flush that out for us?

Edward L. Doheny II

Yes, I’ll talk about it regionally and then by commodity. So we've talked a lot about China Jerry that we think the new product we have potential to grow into China, even in a very, very tough market and I just reiterate it, 70% of the producers are not making money. So they are looking to us, what can they do to move that cost curve.

And we bring in better equipment, better system that significant drop their cost of production so they can sell products. So we see some new product opportunity in China. Specifically we think we see some low seam longwall we see some high seam opportunity there in China. Those are a big ticket we are not going to go to the project being with you but we see opportunity.

We still see opportunity in Australia. Not the boom that we saw with the mega longwall that are coming Australia is producing quite well actually over producing creating havoc around the world. But we do see some opportunities there is some of the old mines are being exhausted we do see some new product opportunity there.

In the copper markets we continue to see the strong we also looking in some new product development we have the hybrid, shovel and excavator that will take us into smaller opportunity mobile equipment the tethered so we see some new product opportunity in the copper markets as well.

We also see South Africa picking up a little bit we have been talked about South Africa we have strong presence getting through the strike there we see some opportunities picking up in South Africa we are probably we have our strongest smart service center, smart service base but we see equipment new product development – not new product development, but as well as existing mine expansion there.

Those – and then the U.S. – the U.S. is flat the U.S. is going to be continue to maintain that service base has been settling and hopefully bottom. We don’t see the major projects out there in the U.S. but right now.

Jerry Revich – Goldman Sachs & Co. Inc.

And based on everything that you have in front of you and I know might be tough to handicap the win rate, but relative to the orders that we have been seeing a new equipment of the past couple of quarters or the project that you are looking at enough to see orders flat up off of the levels that we’ve seen call it over the past 12-month.

Edward L. Doheny II

Well, very clever and getting me try to get 2015 guidance there, I think we see it actually is flat and I will just answer you directly I think we are going to have to again create the orders and get the orders that are out there, but we don’t see a strong uptick into 2015 on the OE side.

Jerry Revich – Goldman Sachs & Co. Inc.

Okay, thank you very much.

Operator

We’ll go next to Ann Duignan from JPMorgan.

Ann Duignan – JPMorgan Securities Inc.

Hi, good morning everyone.

Edward L. Doheny II

Hi.

Ann Duignan – JPMorgan Securities Inc.

Can we go back to your discussion about meeting your cash as percent of sales target and I think the discussion about your customers pushing up payments. Could you give us more color on that please?

Edward L. Doheny II

Well, first with respect to the target, we always said that we would like to target our cash from operation excluding pension contributions around that 15% level and what we are seeing in here in the fourth quarter, we talked about the sequential step up in the sales being between kind of 15% to 25% and what that does is that puts a lot into receivables and some of that is coming at the very end of the quarter and we've got a few pretty large payment related to OE that we see something in the end of the first fiscal quarter.

So we really don’t see necessarily and a change in the – if you will to go forth profile of the company that target we believe that is still intact, but there is a little bit of tiny difference there. Inventories exited third quarter at a pretty high level, why? Largely due to the fact that we had to prepare for the shipments that are going to be going out both in OE and service in the fourth quarter that inventory level will come down but some of that will go into the receivables. So it’s a bit of timing thing.

In terms of slow down, our DSOs have edged up a little bit if you look over the past year to 18-months and just quite honestly our customer are holding on cash longer and nothing that gives us concerned in terms of ultimately being paid, but we have clearly have seen slow it down a bit.

Ann Duignan – JPMorgan Securities Inc.

Okay Great. That's a really good color that's exactly what I wanted to understand and then did MTI – did the acquisition add anything to orders in the quarter or how should we think about that acquisitions comes inline going forward?

Edward L. Doheny II

In the quarter, we didn’t have a full quarter; it’s about $11 million in the quarter in sale. Is that right?

Ann Duignan – JPMorgan Securities Inc.

And orders, did it add anything to orders?

James M. Sullivan

Yes, the order were about the same level and just put that acquisition in perspective a bit, I think that in a press release when we issued back in early June I believe, when we closed that acquisition. We indicated that the business was a bit at the peak over a $100 million their business came down as our business did in the first part of fiscal 2014 so kind of the base level on an LTM basis for that business is around $70 million.

Now we do believe that we can bring that sales back up pretty quickly by leveraging our global infrastructure in terms of selling and so we are working that pretty hard, but as Ted said getting them ramped up here in the third quarter, we had two months of activity. So we are looking to drive that pretty hard going forward and we do see the ability to get that back to a $100 million maybe in 2015 and that will provide certainly a bit of accretion on an EPS basis versus what we saw this year.

Ann Duignan – JPMorgan Securities Inc.

Okay, great. That’s a good color. Thank you for answering my question and I appreciate it.

Operator

We will go next to Eli Lustgarten from Longbow Securities

Eli S. Lustgarten – Longbow Securities, LLC

Good morning everyone. Can we talk a little bit about where you are in the plant rationalization and right sizing the plant to the current levels of activity, where are we sort of, are we coming to at the end of it this year, do we have another year of it to go. Can you give us some color of where you are in the process and thinking of how far we have to go on that business?

Edward L. Doheny II

Yes, we think we have the plans in place that we put through the restructuring, so in that process right now and I don’t like to mention the actual facilities, because we do have employees as well, but we think we have those plans in place to hit the target and restructuring that Jim gave. We still have movement; it should be cleaned up, some of it taking us into 2015.

The real issues is we have significant capacity now in China available, so we are continuously looking at that and how can we optimize the footprint and also be closer to our customer. So we still have some footprint optimization going into 2015, without being too specific with you, we are looking at that. We are also looking at it closely, if we do see another step down in the market what more could we do, because we still have a more capacity right now in place than what we see in our current market outlook.

Eli S. Lustgarten – Longbow Securities, LLC

Okay. And sort of the follow-up, fourth quarter I guess you said you have a big longwall projects, $100 million longwall going out or so, is it fair to say that with the – I guess that was five shovels that it seems you got very recently and some earlier orders that you have enough of the OE orders in 2015 to make up for the big shipment that you have had in 2014 but we don’t have a hole to fill at that point, then we at least a $100 million longwall and they sort of were shipped out this year, that had to be replaced.

Edward L. Doheny II

Yes, so the longwall that we got in the first quarter Eli was actually the low seen that’s less than a $100 million, so its smaller, but yes our plan is to get that in the fourth quarter. As far as the projects, we do have book-in turn that we have to get in the first half as we look into 2015, so we don’t have the backlog of 2015 in place.

We do feel pretty comfortable; we have the backlog to close out the year in the fourth quarter. We still have some work to do for 2015, we've got to get some book to bill and again we have cycle times down, we have capacity, so we can go get that. So we will be aggressively looking to get everything we can and then into 2015.

Eli S. Lustgarten – Longbow Securities, LLC

All right. Thank you very much.

Edward L. Doheny II

We have time for just one more question. Tracy?

Operator

We’ll take our last question from Vishal Shah from Deutsche Bank.

Chad Dillard – Deutsche Bank Securities

Hi. This is Chad Dillard on for Vishal. Thanks for taking my question. So I would like to better understand how concentrated your booking were this quarter on the service side, orders mainly coming from a small set of the large mining companies or have you starting to see more productivity from some of the smaller guys?

Edward L. Doheny II

On the service side it’s all over. We have seen are we talking about just on the service – the aftermarket side?

Chad Dillard – Deutsche Bank Securities

Service but we can expand it over to original equipment as well?

Edward L. Doheny II

I mean that pretty well to our fleet and we have pretty well distributed fleet around the world and then in region so it’s not one particular customer we do have a high concentration with the majors, but it’s not one particular customer that’s driving that.

Chad Dillard – Deutsche Bank Securities

Got it. And then could you just talk about the buying behavior and contract miners are you seeing any increased productivity or any actual orders from this customers that?

Edward L. Doheny II

Well I would say the quote log like our business has stabilized we think its pretty clean we have seen activity picked up and I mentioned already in the U.S., but its not the major projects that are out there mostly if the activity were customers producing equipments getting older we have a newer technology that they think they can improve their efficiency, the productivity of the mine. That’s where the majority of the quote log is going right now.

Chad Dillard – Deutsche Bank Securities

Great that’s it from me. Thank you.

Edward L. Doheny II

Okay. Okay Tracy thank you. I want to thank you everyone for being on the call. We definitely appreciate your support and we are looking forward to talk to you about the fourth quarter results in December. Thank you.

Operator

This does conclude today’s conference. We thank you for your participation.

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