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Joy Global Inc (NYSE:JOY)

F1Q2012 Earnings Conference Call

February 29, 2012 11:00 AM ET

Executives

Mike Olsen – Executive Vice President and Chief Financial Officer

Mike Sutherlin – President and Chief Executive Officer

Analysts

Ted Grace – Susquehanna

Jerry Revich – Goldman Sachs

Ann Duignan – JPMorgan

Rob Wertheimer – Vertical Research Partners

Michael Gallo – CL King

Schon Williams – BB&T Capital Markets

Charles Brady – BMO Capital Markets

Operator

Please standby we are about to begin. Good day and welcome to the Joy Global Inc first quarter earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Olsen, Executive Vice President and Chief Financial Officer. Please go ahead sir.

Mike Olsen

Thank you, Roxanne. Good morning and welcome everyone. Thank you for participating in today’s conference call and for your continued interest in our company. Joining me on the call this morning is Mike Sutherlin, President and Chief Executive Officer; and Sean Major, Executive Vice President, General Counsel and Secretary.

This morning I will begin with some brief comments, which expand upon our press release and would provide some additional background on the results for the first quarter of our 2012 fiscal year. Mike Sutherlin will then provide an overview of our operations and our market outlook. After Mike's comments, we will conduct a question-and-answer session.

During the session, we ask you to limit yourself to one question and one follow-up question before going to the back of 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 be referring to a number of non-GAAP measures, which we believe are important to understanding our business. For a reconciliation of non-GAAP metrics to GAAP, as well as for other investor information, we refer you to our website at www.joyglobal.com.

Now let’s spend a few moments reviewing first quarter results. As was the case in our fourth quarter the first quarter operating results include performance of our legacy surface and underground mining equipment businesses, along with the impact of the LeTourneau and IMM acquisition. The LeTourneau results were fairly straight forward while the IMM impact on the first quarter is far more complicated. In connection with IMM, the first quarter started with Joy Global owning approximately 29% of the IMM outstanding shares, which we acquired in open market transaction in 2011 at 8 Hong Kong dollars per share.

At the end of December, we received approval of the IMM acquisition from the Hong Kong regulatory authority and we completed the previously announced acquisition of 41% of the IMM shares owned by the Pillar’s Group for 8.50 Hong Kong dollars per share. This transaction triggered two things first, a shift to consolidating the IMM results for the month of January offset by the minority interest in the IMM January net income associated with the 30% of the shares, which Joy Global did not own.

And second the recording of the $19.4 million gain associated with the difference between the 8 Hong Kong dollars per share we paid for the shares Joy Global acquired in 2011 and the approximate market value of 8.50 Hong Kong dollars per share at the end of the first quarter for these shares that were acquired in 2011.

To summarize, the first quarter in connection with IMM included two months of equity income, one month of consolidating the IMM results offset by minority interest. A $19.4 million gain associated with the shares purchased in 2011 and additional interest expense associated with the IMM acquisition.

As these items do not add sufficient confusions to the first quarter result the Chinese New Year came in January this year compared to February last year and the one month that the IMM results were consolidated with Joy Global was significantly impacted by the Chinese New Year holiday.

Finally, on February 10, we’ve successfully concluded our tender offer for the IMM shares that we do not already own by receiving approximately 29% of the 30% that we did not own. This extent will allow us to delist IMM from the Hong Kong exchange sometime in our third quarter.

Turning to LeTourneau the first quarter was the second full quarter of including LeTourneau results with Joy Global. In the current quarter poking net sales and operating income were all below our expectations. A product quality issue identified during 2011 prove more difficult to resolve than originally expected and the distractions on the production floor at the LeTourneau Longview facility as a result of the drilling equipment business also having an unfavorable impact on its early shipment.

But apart quality issues affected bookings, shipments and operating process. The good news is that both issues have been addressed and you expect the LeTourneau results will be back on track beginning in the second quarter. Returning to the legacy surface and underground mining equipment businesses the financial results were very favorable. Bookings in the current quarter were up 9% from a year ago and equaled $1.3 billion of bookings recorded in the fourth quarter of 2011.

The increase in new order bookings was led by a 40% increase for surface mining equipment with flat booking for underground mining equipment. The underground equipment bookings were the second highest first quarter bookings on record. However, the highest first quarter bookings on record was in the first quarter last year when ordered were received for long lost business in Australia.

The 40% increase in surface equipment bookings in the current quarter was made up of an 81% increase in our original equipment orders and a 20% increase in aftermarket bookings. The original equipment increase was led by strong performance in the South African and South American markets. The aftermarket favorable booking trends, which we experienced recently continued in the current quarter with the underground and service mining equipment businesses reporting 20 big and 20% bookings increases respectively. Both business units have book-to-bill ratio in excess of 1.0 and backlog increase around $3.3 billion at the beginning of the quarter to $3.6 billion at the end of the quarter.

Net sales for the legacy businesses increased by 29% in the first quarter with OE shipments up 37% while aftermarket revenue increased 10%. OE shipments for both businesses benefited from a strong OE bookings received in 2011. While the underground equipment segment had a 17% increase in aftermarket net sales while the surface bookings business had an increase in aftermarket revenue of 4%.

Operating profit of $204 million in the current quarter exceeded last year by $50 million with both the surface and underground mining equipment unit having return on sales percentages in excess of 20% and an overall incremental profitability percentage of 28%. The increase in operating profits is primarily due to the increase in net sales and favorable manufacturing overhead absorption.

Net income in the current quarter was $1.33 per fully diluted shares compared to $0.96 per share last year. The table included in the press release and on our website provide the summary of the various items, which impacted the current quarter. The effective tax rate was 27.9% in the current quarter compared to 31.6% last year. Excluding favorable discrete tax item and the tax treatment for acquisition costs and the IMM stock gains the tax rate would have been approximately 31% in the current quarter.

For the full year, we expect the effective tax rate to be between 29.5% and 31.5%. On a final note, the revised guidance included in the press release does include all of the actual results reported for the first quarter and assume full year fully diluted weighted average outstanding shares of 108 million.

Let me stop now and turn the discussion over to Mike Sutherlin.

Mike Sutherlin

Well thanks Mike. And I would like to add my welcome to those on this call. I was really pleased with our first quarter because we continued to deliver strong results from our core legacy businesses that are our foundation and we made good progress on investments in our future. That balanced performance will allow to navigate to the volatility that has become almost normal for our industry and this balance is also the basis for long-term sustainable performance.

Our legacy businesses delivered 28% operating leverage on 20% revenue growth I will pick that anytime. We had several items related to M&A activities that were outside of our guidance. But neutral on operating profit and a slight drag on EPS. The EPS drag was from the interest on the bonds that we placed earlier to ensure that we got plenty in place for the IMM tender.

The ordered bookings for our legacy businesses displayed a typical lumpy nature this quarter. Orders for underground original equipment were down or this is somewhat influenced by last year’s record first quarter. In fact, it was not last year this would be our best first quarter for underground original equipment. More importantly we had very strong amount of growth for surface equipment and their aftermarket parts and services for both surface and underground.

I believe that both orders and financial results for the first quarter position us well to deliver on expectations for the remainder of 2012. This quarter we had to work through the legacy warranty issue on (Inaudible) the core heat treating affected the articulation valves that are used to connect the two body gaps of their machine and are used in their lifting arms. We have identified the root cause of this problem and have a retrofit program underway. While customer concerns rightfully slowed both orders and deliveries this quarter we expect both to catch up as machines in the field go back to work.

Our customer still sees LeTourneau to be far superior to prevent and as an alternative to hydraulic excavators in some surface volume applications. So we continue to be very, very positive on the LeTourneau acquisition.

This quarter we were successful in reaching ownership over IMM that enables us to get tender for the remaining shares. As a result we expect IMM to be delisted by early June. Starting in January IMM has reported into our Joy underground business. Although we will remain a separate business unit to better serve the minds have used this domestic Chinese equipment. We are planning to upgrade IMM to technology transfers and operational excellence programs.

The objective is to make IMM the technology leader while keeping the price and performance appraisal to our comparable joint value products and to bring our factors up to the Joy Global operational standards. We believe both will be significant incremental value to IMM. Now let’s look at our markets, we are overall positive at our markets but that’s the mixture of strong sentiment for the international markets offset by expectation of weakening in the U.S. home market.

So let’s get to the heart of the matter and deal with the U.S. home market first. Although there are longer term regulatory headwinds turning point U.S. coal demand came through a weather that didn’t rise and unusually the winner has significantly reduced the demand for electricity and coupled with excess supply in natural gas prices and drop to sub $3 during a winter heating season for the first time in century.

One factor from reducing the demand for thermal hole in the U.S. and our customers are reducing production and announcing (Inaudible). After spending time we know that the weather will change and the customers are making investments. The investments to lower the fleet average cost from the amount of due expand export capacity.

Get back there in investing and expanding production from the bigger lower cost mines and the reduced amount to whole, smaller, higher cost mines and their expansion with export facilities is based on their view that seaborne markets will be increasingly undersupplied the years ahead. So I view the U.S. home market weakness as a near term issue.

As repeatedly I said, I do not expect the U.S. market to be high growth but we do expect it to be a stable base from which to grow our international businesses. Listen up the first time we’ve gone through mild weather conditions in the U.S. and based on past experience we received the clients and the meds in the U.S. they impact our total revenues by as much as 4% to 6%. However, we believe there was enough upside from the international market to more than offset yes. In addition, some of the impact was into our guidance for 2012 and some of it was in our first quarter results.

We are already adjusting our cost by using U.S. resources to assist international projects. And as a result we do not expect the U.S. market to undermine our guidance for 2012. Conversely we are very positive about international markets, these markets largely demand from the demand from the emerging markets and especially China and India.

China weakened into the final months of 2011 and has been quiet so far this year due to early Chinese New Year. I live their upholsteries items, in place in Beijing has already taken the first step to reduce the real rate of return, which will lease let me more requirements. Try this export markets including U.S. and Japan should be struggling in 2012 and most importantly Beijing will do what it takes to deliver the GDP growth rate as forecasted. I like an interesting man that tried to increase by 14% last year and domestic coal production did not keep phase in import streets record levels. Then we call him force into China are structural because Australia landed prices are competitive with coal from inner Mongolia because of the long train runs that add a high transportation for moments of the domestic cost.

The new coal base is even further west, which will increase the competitiveness of Australian coal. And the build out of electricity grid into Western base should keep our demand growth and imports into China high. Steel is an important part of China’s GDP and Chinese steel makers have continued to stock import iron ore in anticipation of production returns. They are doing this because iron ore market is highly concentrated and increased demand that brings high cost Chinese iron ore back into production raises the price point because met coal has a more diversified supply base it’s stock levels have declined and restocking will add to leverage coal demand in 2012.

China has also shown its supply for copper initially to restocking in 2012. Even the 2012 demand for copper is low the market will continue to be shorter supply this is due to declining ore rates and disruptions that have reduced output by a consistent 5% to 6% each year for over the past five years. In fact copper production was forecast to increase by 1 million tons at the beginning of 2011 but the actual increase was only a 10th of that. Supply shortages and demand upside are already being reflected in the copper price, which is moved up over 12% in the first year.

India has become a major importer of thermal coal it’s electricity demand grew by 9% in 2011 their domestic coal production was flat. As a result, imports grew faster in India than China and we expect that to continue. Our customer’s convinced in the upside from the international markets and this is reflected in their capital expenditure plans for 2012. Not only as demand expected to improve the global mining it’s already near full capacity. In addition, international commodity prices remain in incentive levels with more upside than down. As a result, our customers have raised their capital budgets by over 15% to 2012 and this includes a drag from the U.S. coal producers.

For example the major diversified mining houses have raised their capital budgets by over 20%. I believe this is real as the customers are getting board approvals to proceed and we are seeing them begin to apply resources to these projects. As a result of these overall factors we are comfortable with our basic guidance for 2012; we also expect 2012 to be a year in which we build backlogs in both our surface and underground businesses excluding the addition of the IMM impact of course.

We are upgrading our guidance for both IMM and for the items that were not come with our prior guidance. We expect IMM to add $300 million to revenues over the remaining three quarters of our fiscal 2012. This will add $0.50 to earnings per share over the same period excluding excess purchase accounting charges related to the first year. This will be offset by $0.16 of interest expense of which $0.04 was incurred in the first quarter. In our first quarter we also had $0.12 of acquisition costs and $0.19 of gain on the IMM shares as we go prior to the tender and neither of these volumes was in our prior guidance.

When as all rolled in we are moving our guidance for 2012 earnings per fully diluted share of $7.40 to $7.80 from revenues of $5.6 million to $5.8 million. Again this does not include the excess purchase accounting charges for either IMM or LeTourneau and with that I will turn the call back to Roxanne for questions.

Question-and-Answer Session

Operator

(Operator Instructions) we will go first to Andy Kaplowitz with Barclays Capital.

Unidentified Participant

Good morning guys this is (Inaudible) for Andy.

Mike Olsen

Good morning.

Mike Sutherlin

Good morning. How are you?

Unidentified Participant

Good thanks. Looking at your surface OE orders plus 81% obviously very strong was there anything unusual in those numbers this quarter?

Mike Olsen

They are just a continuing of a strong bookings levels we’ve seen at surface equipment through most of 2011. 2011 was a, we’ve got an extraordinary booking year for surface equipment and that continues here in the first quarter and 2011 was a extraordinary year and continues into the first quarter of 2012.

Some of this is I think is catch up from the projects that were started in 2008 put on hold at 2009 and our customers have been pushing hard to get these projects back on schedule. So 2011 was strong bookings so it was partially due to a factor or recently we’ve indicated new respect to the order growth to moderate in 2012 as that catch a bolt spark through the system we will go back to a more normal 15% to 20% a year order rate growth.

So we don’t see, the distribution it’s a pretty broad distribution it’s not going to apply to a single project it’s across several quantified projects. So there is nothing really unusual about the surface equipment business.

Unidentified Participant

Okay, great thank you. And then just on the LeTourneau and the IMM businesses. As you entered into those businesses and introduce operational excellence into those segments. Can you talk about would you expect those to have similar incremental margins as you see on your core businesses and over what period of time do you think it would take to get them there?

Mike Sutherlin

I will give you an overview and then maybe ask Mike to give you some more specifics on the margins. As we were on the business as we have the strong belief that we can continue to deliver incremental margins 25% the businesses than we purchase in LeTourneau and IMM are the same characteristics as our legacy businesses and we would expect them to do the same thing.

The introduction of operational excellence to go back to the start of operational excellence in Joy Global is part of that program and we had about a year of start up costs associated with the reaction and we’ve had some cost headwinds in the early days as we started off those programs and we mentioned that to claims to the next program so it became self funding. And that eventually just turn to net additions so over about we deploy it too we went from the net drag on expenses to net neutral to net positive, we expect both LeTourneau and IMM to do the same thing.

So we don’t see it to reduce the results in the early years but we don’t probably in the first year we didn’t see a lot of incremental additions to earnings performance. But we expect to start in the second year to see some improvement and we sort of pick up speed at the end of the second year. Let Mike spend a little closer to those, Mike Olsen has been closer to those programs so maybe Mike you can add a little bit more granularity.

Mike Olsen

Yes, as you look at the LeTourneau acquisition what our expectations are is that we will have the opportunity to increase their participation in the aftermarket business with the utilization of our significant install base and we would expect that the LeTourneau results would drive to become very, very similar to the results that we see for our surface mining equipment business.

As you look at the IMM results if you have been tracking their public results during the 2011 year what you would have seen is that right again to incur some purchase accounting charges that were associated with the IPOs as they did at the beginning of 2011. Will have some purchase accounting charges as we go through our evaluation of IMM and then the other thing I believe that that we will see with eth IMM business is some investment in improving the technology associated with their products.

We intend to make them the leading China equipment manufacturer in that marketplace and that will in fact require some investment. But in connection with IMM we would expect them to also have operating results at least equal to the results that we see for our underground equipment business going forward. And then also with IMM we also have the opportunity to increase their service aftermarket businesses as well as part of the longer term strategy.

Unidentified Participant

Great, that’s very helpful that you guys.

Mike Sutherlin

Thank you.

Operator

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

Ted Grace – Susquehanna

Hey guys, how are you doing?

Mike Sutherlin

Hey good. Ted how are you?

Ted Grace – Susquehanna

So I think we’ve all been very encouraged by the CapEx numbers we’ve seen and your commentary was positive. I guess what I was curious just to understand a little better is when we think about the call the sequential improvements since last quarter in the assessment we all felt and then you guys articulated in December related to how we feel today and then we think about your guidance that on an underlying basis is pretty much unchanged.

Should we interpret that as being you know it’s early in the year we think it’s prudent to be conservative or do we think we are getting better visibility on 2013? Mike I know that you commented that something with that effect but I was wondering if we could just start there financially.

Mike Sutherlin

Yeah, when we at a earnings call in December for our fourth quarter we were more cautious about the market outlook at that time our customers were, they were proceeding with their capital expansion projects, they had a priority to for organic growth and saw that’s a higher return on their investments. And they didn’t plan M&A activities they didn’t plan dividend and other capital occurrence of smith organic.

Having said that we also know that our customers will act quickly to keep supply and demand in balance they did that in the end of 2008 and it was remarkable how quickly they adjusted their production to at least applying demand over that 35. So I was little bit skeptical about their attempt versus what their actions will be if the economy pickups and struggle in long and no signs of improvement and went into the later part of 2011 that still does, it was a lot of, certainly a lot of headwinds driven by towering debt prices in Europe for example we are still un clear what that outcome is going to be.

So I was much more cautious at that point since it has rolled into the first year we saw the capital budget skids said and approved by the boards in late December so we know what those numbers are now. But more importantly we see them going to their boards with projects with the boards approving projects so this is just a budget to be approved later by the board. Their boards are on high with them to invest now the longer term future demand that they see in the market.

And like everybody believes that demand in markets is going to be stronger in three or four years and when your supply will stay in the day and we need more capacity. So the difference is the budgets were same the difference is the boards are continuing to do approval projects for our customers and the difference is that the outlook is starting to indicate we maybe sort of reaching the end of the bumpy road of the modern times it’s hard to see a slow find out in the global economy certain the U.S. is showing signs of, starting to get better Japan should be a lot better than last year because the tsunami effect. And if Europe is neutral our select income are good overall.

Ted Grace – Susquehanna

Okay, that’s helpful. So is, as this.

Mike Sutherlin

Yeah, the last part of your question. Our guidance today is a little bit more cautionary around the U.S. coal market more bullish around the international markets and more cautionary around the U.S. coal markets. As we get deeper into the winter weather and winter doesn’t arrive and gas prices get depressed and you see some fuel switching.

As we think in the short-term there is going to be some headwinds in the U.S. coal market. So we are still cautionary about that maybe we are over cautionary about it as we go forward I really clear on how the U.S. coal market is going to settle out and they are sort of factoring in that and more of a worst case scenario and we have our guidance right now. And as the year progresses we will get a little bit more clarity.

Ted Grace – Susquehanna

That is great and then as a follow on just based on the conversations you are having in the prospect list and how those are evolving. When we think about maybe 2013 and beyond how do you encourage us to think about the relative growth prospects for underground versus surface.

You know if you become less rely or expose the U.S. coal global mining companies expand production and commodities I think more often than that get thought about open pick kind of context. Do you think it will be fair to assume the surface potentially it performs better in the 2013 timeframe or is that probably I guess that will be the question.

Mike Sutherlin

Yeah and that will be I think long-term growth is more predisposed to the underground just because we have a lot of surface mines that are reaching to limit out their surface mineable capacity to get in distributing ratios are no longer economic. We are seeing a ship in Queensland the Bowen Basin the Queensland, where surface mines have started to go underground and we are seeing that activity increase in numbers. So as of surface points meets near their national stripping ratio get into smaller things underground.

There is another number of things here that I think are the upside we’ve undergone. This is why it’s weak as the U.S. is it’s really extraordinary how many projects along the way and Australia for example Australia have just a huge number or projects, some of those are majors, some of those by their junior mining companies but there is an asset number projects in the flight plan not all of those are going to come all the way to Europe for the selection and in the near term that’s part of the activity and the lot of that is underground.

As we looked at our surface, when the surface equipment is coming to see this as well. So we don’t actually see over the next three or four years we don’t see a change shifting from one to the other we think the ratio is going to be fairly similar. Did you see our surface equipment business a little bit of major cycle than their underground business we saw strength in the underground and then began to this level on the last couple of quarters sort of taken through there and we see some positives were the forward.

The surface equipment continue to be strong when we expect a growth rate in order for a surface equipment to tapper to have the whale back out of that this is to get deeper the cycle you can’t make angles in a year-over-year growth rate so. What we will see with the underground equipment is a little bit more of a catch up spider in 2012 and we will see who will surface took at the end of modeling. So those two will come back in the level ratios.

Ted Grace – Susquehanna

That’s super helpful. That’s all my question and I will jump back in queue.

Mike Olsen

Thanks Ted.

Operator

We will take our next question from Jerry Revich with Goldman Sachs.

Jerry Revich – Goldman Sachs

Hi good morning.

Mike Sutherlin

Hi Jerry, good morning.

Jerry Revich – Goldman Sachs

Can we pick up discussion where you and Ted just left off and Mike I’m wondering if you could just orders for us, which mining base since you expect to drive your new equipment bookings in the course of this fiscal year and also just touch on where to expect bookings for the legacy business to shake out versus last year. Thanks.

Mike Sutherlin

We are really positive on probably in order where we are positive right now on Australian coal we are positive on South American copper we are very positive on China coal we are also very positive on iron ore developments in African and in South America. So when we look at those bulk of basins we see strength in all those areas.

We are going to see some strong activity in places like Canada, everything from met coal to oil sands to iron ore but if you put them in the right order I think Australia is at the top of the list and probably a close tie between South America for copper and China for coal and then iron ore in South America and Africa. As far as breaking out the order bookings we expected guide order bookings and I will turn this over to Mike I’m not sure we can give you information on the legacy bookings outlook Mike.

Mike Olsen

We have not said, what we have said is we’ve provided guidance related to sales we expect, sales with the new guidance to be between $5.6 million and $5.8 million and that was increased by about $300 million that we were expecting IMM to provide in the next three quarters. What we’ve also said is that as you look at the legacy businesses we expect both of the legacy businesses to have a book to bill ratio for the full year exceeding 1.0. So as you look at the legacy businesses we would expect those bookings to exceed the revenue guidance.

Mike Sutherlin

Look if you take our guidance for the year and we bring back our value to same $100 million we backed out. The kernel that we added in at the beginning of the year of $400 million and then we are roughly $5 billion legacy, T&H and Joy businesses and many apply as positive to go with that. We were talking in the range of what we expect what those mean.

Jerry Revich – Goldman Sachs

You know part of the, no that’s perfect that you, part of the opportunity you had highlight on the literal business was to really improve the operating base from an industrial standpoint. Because they clearly had operating issues at times in the past do you feel comfortable that you have a grasp over that supply chain at this point and how far along are you in reducing cycle times related to your target for the facility. And are you comfortable with type of issues we saw this quarter won’t come up in another part of the supply chain.

Mike Sutherlin

Well, the issues we kind of this quarter were legacy issues that related to outsourcing a product that was previously made in (Inaudible) factory. So we feel pretty good that we got control of those processes and we had to start different post to remain process changes. We have a much more full filled procedure to do that.

As so we feel, we don’t see anything else out there it’s going to be able to bring a lot of extra due diligence on the machines to make sure we don’t have other surprises out there. This one is a new one acquired then we knew that that was the decommission a problem was much smaller at the time of the acquisition and it’s grown and as we’ve done resources that we are going back far enough to over cover a number of machines that are actually affected.

So we feel pretty good that we got this capture with this I think that the supply chain issues we don’t have other major hiccups is supply chain. Probably the number one issue that we deal with we have a transition manufacturing agreement with Cameron and their markets are increasing as well. Just so we are trying to manage their our commitment on that transition manufacturing agreement and our own demand and that’s been a little complication for both us and Cameron are on territories that we don’t normally get into and actually we are going to consider the contractual supply arrangement resident than a supplier is looking for more new business.

So but we feel pretty good that we’ve got to come down and return advantage some people from Rocky down there to supplement the resources they have on site and we feel pretty good to discuss the situation under control and we will start to see improvements as the year progresses and we will be on our numbers by the end of the year with deposit trend as we exit the year.

Jerry Revich – Goldman Sachs

Thank you very much.

Mike Sutherlin

Okay, yeah. Thanks Jerry.

Operator

We will take our next question from Ann Duignan with JPMorgan.

Ann Duignan – JPMorgan

Hi good morning guys I’m Duignan here.

Mike Olsen

Hi.

Mike Sutherlin

Good morning Ann.

Ann Duignan – JPMorgan

Can you just talk about these quality issues that you are just expanding on we need something that you knew about acquisition time and with the part of due diligent that’s discovered these it was identified in the due diligence over the acquisition process.

Mike Olsen

But at that time the information that we’ve had suggested that it was relatively a new issue and it was packed a few dozen machine to something like that. And somewhere in the neighborhood of 10 or 20 machines and so we were all that particularly worried about it I mean as we got more field experience and some more feedback in the field and started to see some earlier signs of benchmark failures and he started to trace that back to process changes and we identified that this thing actually will impact for quite some time in effective lottery number machine.

So we weren’t surprised by the issue we knew about that we weren’t surprised by the issue we knew about that we were surprised by how far back the issue went and I this so we probably overcorrect because we went back to the point of a significant change in the manufacturing process and make sure that we’ve included everything from now all the way back to that point in time. Even if we don’t have any inspection evidence that suggest that there is a problem you are going to change that out, so you got that problem with the customer resolved the problem get a customer’s back deal on board with extension it will create customer goodwill that we are going to do it. So we did know that we brought that into due diligence process and when you want to know it I will go back to it.

Ann Duignan – JPMorgan

Okay and you also mentioned that orders were below expectations as a result of all of what you’ve just described. Did those orders go to your competitors I mean if you lost market share effectively or are those orders sitting on the side line that you can regain.

Mike Olsen

No, no we did not lose market share those orders actually leverage. But the customer’s are just paying we’ve got these orders, which is more than change we want to get to the change at the OpEx our machines fixed and then we deal with these additional orders so they will use them as leverage. As this instant thing they do to make this (Inaudible) and the thing that the shipments out there, a few shipments for the customers who are not willing to take the machines until we traded out the articulation balls and 100s of machines with the updated articulation balls.

Ann Duignan – JPMorgan

Okay, I appreciate that and I like just on U.S. coal can you talk a little bit about what you guys discuss internally around the short-term cyclical headwind when facing the industry versus the longer term secular headwinds that could face the industry.

Mike Olsen

Yeah, the short-term cyclical are this is volatility we have to manage through and we are doing that, we have real value that we bring for our customers that’s having global resource phase then we comply to local problems. We have a lot of work to involve yet in Australia lot of project work we are involved in and removing resources also U.S. based projects on to the Australian based projects there is Spain and the U.S. but we are doing basically around the world in genera on those Australian projects, which is only given us opportunity to move faster on those projects and at the same time and this was past enough, sorry, this is what we are already down.

So we are, we have wasted measure of all things we do quite a bit of outsourcing in our businesses. At this point of cycle we are probably in the mid upper 20% of our production in the outsource we have some fresh that we can use, we did that in 2009 and you can do that again. For long term we follow what our customers are dong our customer are preparing for long-term to involve a lot more exports in there in the revenue base than we have today and are building capacity in the West coast building capacity in the Port of New Orleans they are building capacity on the East coast to increase exports.

So we think the U.S. is going to into more production standpoint going to be a continue to be a solid market, not a high growth market, maybe not much of a growth market but a solid market and we don’t see a real disclaimer even (Inaudible) it’s difficult mining and it’s high cost per business. It’s some of the best volumetrically in the world and is priced accordingly.

The central absent will turn more into a met coal base and less into a thermal coal base and lawyer base and we will pick up some volumes as a result of that as per volumes will also with a slower decline we are looking at maybe 40 to 60 gigawatts of legacy power generating capacity in the U.S. coming offline with customer induced. So that’s not a huge number when you look at the upside potential we have in ports. So although we are looking all of our plans are based around the U.S. being flat and anything we get above that is good for us. But we, our plans are always around the U.S. being a flat market.

Ann Duignan – JPMorgan

Okay, that’s very helpful. I will get back in the line. Thanks.

Mike Olsen

Thanks.

Operator

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

Rob Wertheimer – Vertical Research Partners

Hi, good morning everybody.

Mike Olsen

Hi Rob.

Rob Wertheimer – Vertical Research Partners

Real quick question on IMM and I’m sorry if I didn’t see a release but do you have full year revenues for 11 and then could you comment on whether you are seeing any capacity constrains and needed a 12 outlook what capacity looks like at IMM?

Mike Sutherlin

I will talk to the capacity issue and let Mike to give the numbers. We, they have some capacity addition that will underway we are continuing to support those programs. But we also expect to see significant improvement in internal capacities through operational exit programs. So if you look at 2013 we are planning on a combination of some CapEx to release some bottlenecks and we are also plan to get some realizable capacity by streamlining their original cost message.

We have in our Shengda plant in Wuxi we have some excess capacity right now to build, (Inaudible) for example and expect to get closer to their capacity and we could begin to lose some models now in Wuxi. So we have some flex within our network in China we have some capacity that’s in process right now that was already in process and planned by IMM and then have the operational excellence program we inspected they came back clean just in terms of realizing moving faster within any existing.

Rob Wertheimer – Vertical Research Partners

Great and Mike on the amount.

Mike Olsen

Okay and then related to the IMM revenue there are results that are not completed at this point in time but their revenues for 2011 you astallers are coming in at about $330 million for the 2011 year.

Rob Wertheimer – Vertical Research Partners

Makes sense, that’s perfect thank you. Mike if I could ask just a bigger picture question I mean you’ve talked a lot over the years about the transitional some sort of transactional based pricing to program based transactional based revenues instead of program base.

Are you willing to talk about what the total upside is have you gone in a mind we’ve gone from transactional program is that 20% increase in revenue potential or 50 have you hit the limit in some minds or is there continued potential there and then sort of what percentage of the mines are selling into you, you are 10% of weight through converting your customer base or 40.

Mike Sutherlin

I will give you some general numbers in both places. We can’t compare some mines we have all the equipment under life cycle management contract versus what we, we do everything on transactional basis. So with those comparison if we look at our bunch capital rates are in the mid 70% range. So as we look at those two factors we can see that we have 30%ish kind of upside as we continue to build on our life cycle management programs.

We also in the life cycle management programs we increased the services that we did and we expand by now in our business were any consumables to those life cycle management contracts, things like filters and fluids we have some. Fluids now that are branded fluids that have twice your capability to go through from modern segment. So we keep expanding what goes into work close contracts but we get everything that I go almost machinery stuff and so I guess you have sort of a dimension of what the improvement is.

Right now in terms of life cycle management we are as a percentage of our aftermarket we are in the 30%, 33% sub contract revenues are all notes five type of management that arm long-term art supply contracts where we agreed to provide first for contracts with price the best buyer costs and I’m not including those, we are including things that parts and labor associated with the life cycle management that could be full maintenance of machines including rebuilds and repairs it could be a machines that changed progress we will be your machines after every panel and rotate those pistols back to the customer’s base.

So those kind of programs will add up to about a third of our aftermarket revenues. So we do have quite a bit of time we think that core services will be a real forward but we have already seen a strong response from our customers for services. The applications we have in South Africa are delivering real results and we will see improvements in production rates and see improvements in availability, increase in the meantime between new areas of new (Inaudible) and we are getting this information from our customer so we are seeing this as well. So we really think that does call is going to be an accelerator to the adoption of the programs.

Rob Wertheimer – Vertical Research Partners

That’s very helpful. Thank you.

Mike Olsen

Yep, thank you.

Operator

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

Michael Gallo – CL King

Hi good morning.

Mike Olsen

Hi Mike.

Michael Gallo – CL King

Question just on the gross margin decline year-over-year how much of that was related to some of the warranty and other issues at (Inaudible) and then also how long will it take to complete the refer program and what do you expect that to the cough thank you.

Mike Sutherlin

Mike, those will be like better for you than me.

Mike Olsen

Yeah, I’m sorry could you just repeat that question.

Michael Gallo – CL King

Sure, the gross margin decline year-over-year Mike how much of that was related to some of the warranty issues look torn and then also how much it will cost to complete the refer program and when would you expect that to be complete in terms of fixing somebody units and feel. Thank you.

Mike Olsen

Yeah, actually none of the LeTourneau issues that would that Mike and I had talked about were charged to first quarter earnings. Because these items were in fact where we reserved for on the beginning the beginning balance sheet. Some of the movement in those gross margins are associated percentage of original equipment shipments in the first quarter compared to the prior year versus the aftermarket revenue and then there was actually a small increase in charges associated with some late delivery of course that we put in place in the first quarter. But none of the turn up charges were associated with the first quarter in a very comfortable with it. All of the costs all of the net money will be incurred I have in faxed and reserved for.

Michael Gallo – CL King

Hey, that’s helpful. Thank you.

Operator

We will go next to Schon Williams with BB&T Capital Markets.

Schon Williams – BB&T Capital Markets

Hi good morning.

Mike Olsen

Hi Schon.

Schon Williams – BB&T Capital Markets

Wonder if you could just talk a little bit about it was a small discrete expansion in South Africa this quarter I noticed that you are I guess partnering with a new product supplier there Fletcher. I’m wondering if I’m just wondering if there is more opportunities for you guys to partner with outside manufacturers and maybe some of the emerging markets given your large physical infrastructure the ability for you guys to bring a new product partners. But there is something you will be as material.

Mike Sutherlin

Well, we’ve been doing that in our surface equipment business as a lion’s partner program with active dealers who are different OEMs that don’t have their own distribution capability or looking for income free dealership report. To the extent to this complementary to our product line we can do that in the surface in fact we were dealers for LeTourneau before we acquired them and we were dealers for Terex and then markets for actually hydraulic excavator.

So, that’s been a part of our surface equipment program we are moving that underground. In our surface equipment we probably have too many program, too many OEMs in our line programs some of those are small and not very material we are looking for products that can be very complementary and have a significant impact on not only our business but our customers see this a significant addition to our product. And ultimately we look at those as potential future acquisitions so they wouldn’t be a potential acquisition we wouldn’t be interested in enacting as a partner.

So flagship product line is very complementary to us it’s got a great reputation and works pretty well for the underground business. And so we look at them and we are pleased to be represented in the many of the markets around the world and we represent today at Hachi for trucks and escalators and Chili and Brazil for example. And we do have those kind of alliance programs we want them to, we don’t want to do in just one market we like to see them be global and broad based around the world so you can have critical mass with actually a private resources (Inaudible) not only for the OEM but for our customers and we wanted the products that we think could be future best runner in our own business. So we are selective but we do, do that and we like to do more of that to get around those selective area.

Schon Williams – BB&T Capital Markets

Okay, thank you and then just in terms of the corporate expense that charged the operating profit. It looks like in the quarter for the core business it expanded kind of in line with the sales growth from a GAAP basis it is actually down. I was wondering if you could just maybe talk about what kind of a clean number is going forward.

Mike Olsen

Are you talking about corporate expenses.

Schon Williams – BB&T Capital Markets

Yes, corporate expenses that’s charged operating profit. You know you talked about $12.8 million in the quarter kind of up on a core basis but I’m just wondering where do we get it from here.

Mike Olsen

Yeah, our expectation is that that level of expenditure will be fairly consistent throughout the remainder of the year. It might have some slight upward pressure there would be, there generally is a, an adjustment for salaries that take place with the business in January. So there will be some of that, that would increase in the remaining three quarters and then the other issue here is a fairly significant portion of the compensation for the employees of the company ranging all the way from senior management all the way down to the workers on the shop floor is variable compensation that’s tied to performance.

And because our business is so seasonal the percent of that variable bonus related compensation will tend to be higher in the second, third and fourth quarters than they were in the first quarter. So related to corporate expense I would expect that number to be up slightly from the number that we received, we achieved in the first quarter.

Schon Williams – BB&T Capital Markets

Again, just to clear the GAAP number that you have in the press release shares about 6.9 million and the core number is closer to 12.8 million. I mean was there well part of the gains buried in that 6.9 million?

Mike Sutherlin

Yes, that’s correct.

Mike Olsen

Alright, well we can follow up offline.

Mike Sutherlin

Yeah, there would be a combination of acquisition costs that would be in that number and then the gain on the share of the a gain on the IMM shares.

Schon Williams – BB&T Capital Markets

That wasn’t buried in corporate not in underground?

Mike Sutherlin

That’s correct because really that was really an investment transaction that had nothing to do with the operation of that business.

Schon Williams – BB&T Capital Markets

Okay understood. Thank you. Great quarter guys.

Mike Sutherlin

Thank you.

Mike Olsen

Thanks. We have probably time for one more question we are close to the top of the hour so Roxanne there will be one more question and close out.

Mike Sutherlin

Excuse me Roxanne one point before the last question would like to make this one clarification to comment on the guidance. The guidance does not include the first year purchase accounting for the IMM transaction we are in the process of working through evaluations to come up with that number.

But it does include the first year purchase accounting charges for LeTourneau it’s in the current guidance and it was also in the guidance for the first that we gave back in December. So I just wanted to clarify that one so with that Roxanne I will turn it over to you for the last question.

Operator

Okay, we will take our last question from Charles Brady with BMO Capital Markets.

Charles Brady – BMO Capital Markets

Thanks. Hey, just a clarification on LeTourneau is your expectation still for $400 million in revenue contribution and $0.41 in EPS for fiscal

’12 for LeTourneau?

Mike Sutherlin

The $400 million revenue is I think the EPS was Mike is that right? The EPS.

Mike Olsen

Yes, our expectation is that the EPS guidance that we provided that we expect to achieve that guidance.

Charles Brady – BMO Capital Markets

Alright and you’ve talked about putting some capital into IMM to upgrade some of the technology there. Can you quantify kind of where you expect that capital expenditure would be and kind of what timeframe that would play out?

Mike Sutherlin

The technology will be probably not capital it would be applied in some engineering resources to help them upgrade some of the technology they have in their machines it has a significant technology gap between the machines that we build from the U.S. and the Shengda machines we build in China and IMM is closer to the Shengda machine so we think it’s a real advantage in the process of keeping IMM at the lead of technology among it’s spear Chinese equipment manufacturers that maintain a differential with our Joy branded products.

So along this what we basically technology transfers and middle human resources to walk to whoever is stronger they conclude the liability add some consult and that will be advantageous based on their own. It was basically walk them through the progression that we’ve gone through Joy over the last 15 years in building extreme machines up to world class level. So just we’ve had some problems with our AFC department as they started to, as we obviously know AFCs very well and we’ve been helped in resolve those problems pretty quickly. So the technology issue is really more of a human resource price issue rather than a capital resource price issue.

Charles Brady – BMO Capital Markets

Thanks. One more question. Sorry do you have another point.

Mike Sutherlin

No, go ahead.

Charles Brady – BMO Capital Markets

In the release you broke down the exposure to U.S. underground coal 20%, 25% I wondered if you could comment on exposure to Western U.S. coal surface mining in the U.S.

Mike Sutherlin

I don’t think I remember right it’s about 3% of revenues.

Charles Brady – BMO Capital Markets

Great thanks.

Mike Olsen

Low single digit.

Mike Sutherlin

Around 3 but sure low single digit.

Mike Olsen

That was for surface coal.

Charles Brady – BMO Capital Markets

Yeah surface units.

Mike Olsen

Yeah, that would be in that 3% to 4% range.

Charles Brady – BMO Capital Markets

Thanks guys.

Mike Sutherlin

Okay, so we are at the top of the hour and you got to appreciate everyone’s time on the call. At closing I would like just to reiterate that we think ourselves as a business that’s focused on growth, on strategy, on execution and I believe that these factors were demonstrated in our first quarter and they will continue to build a high value for our shareholders. So with that I want to thank you for joining us on the call and look forward to talking to you again in the second quarter. Thanks very much.

Operator

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

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