Joy Global Inc JOY
Q2 2013 Earnings Call Transcript
Transcript Call Date 05/30/2013

Operator: Good day, everyone and welcome to the Joy Global Second Quarter Earnings 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 - EVP and CFO: Thank you. Good morning and welcome to everyone. Thank you for participating in today's conference call and for your continued interest in our Company. Joining me on the call this morning are Mike Sutherlin, President and Chief Executive Officer; Ted Doheny, President and Chief Operating Officer of the Underground business; Randy Baker, President and Chief Operating Officer of our Surface Mining business; and Sean Major, Executive Vice President and General Counsel.

This morning I will begin with some brief comments on our results for the second quarter of 2013. 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 this session we ask that you limit yourselves to one question and one follow-up before going back into 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 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 www.joyglobal.com.

Now, let's spend a few moments reviewing our second quarter results. Bookings of $1.1 billion in the current quarter were down 8% versus the year ago period with currency translation accounting for nearly half of the decline. Orders for original equipment were up 2%, while aftermarket orders were down 15%. The decline in new order bookings was comprised of a 28% decrease for the Surface Mining Equipment partially offset by an 8% increase for our Underground Mining machinery. The 28% decrease in Surface Mining Equipment bookings was comprised of a 57% decrease in original equipment orders and 9% decrease in aftermarket bookings. Aftermarket bookings in the second quarter of 2013 decreased year-over-year in North America and Australia and were partially offset by increases in South Africa, China and Eurasia. Current quarter aftermarket bookings increased 10% compared to the first quarter and we continue to see a decline in order lead times as our customers carefully manage their operating costs, mine site inventories and capital spending.

The 8% increase in Underground Mining machinery bookings was comprised of a 51% increase in original equipment orders and a 20% decline in aftermarket bookings. The original equipment bookings improvement compared to the second quarter of 2012 was due to a longwall system in the U.S. recorded in the current quarter. Excluding this longwall system order, Underground original equipment bookings increased 5%.

The year-over-year reduction in aftermarket bookings occurred across all regions, except Africa, as customers deferred rebuild activity, reduced parts inventory at mine sites and in certain markets idled equipment. Versus the first quarter of fiscal 2013, aftermarket orders for the Underground business increased 8%, backlog fell to $2.2 billion from $2.4 billion at the beginning of the second fiscal quarter. Net sales of $1.4 billion decreased, by 12% in the second quarter versus a year ago period with Surface Mining Equipment revenue up 3% and Underground Mining machinery and shipments down 23%.

Original equipment sales for Surface Mining increased 9%, while Underground Mining OE sales decreased 33%. Aftermarket shipments of Surface Mining Equipment decreased 2%, while shipments of aftermarket Underground Mining Equipment decreased 13% compared to last year. Taken together, consolidated aftermarket revenue in the second quarter of $716 million was down 8%. Surface aftermarket sales increased in all regions, except China and Australia, while the Underground aftermarket sales decrease was spread among all regions except China.

Operating profit excluding unusual items totaled $284 million in the current quarter, reflecting a decrease from last year of $74 million, return on sales decreased to 21% from an exceptionally strong 23% in the prior year period. The year-over-year decrease in operating profit was attributed to lower sales volume and lower overhead absorption from reduced manufacturing levels, partially offset by cost savings actions. Unusual items in the quarter included $6 million of restructuring costs, as the Company continues to rationalize its higher cost manufacturing operations in light of current and anticipated market conditions. In total, we expect restructuring costs for the year to approximate $25 million or $0.15 per share, which is consistent with our guidance coming out of the fourth quarter of 2012. Excluding unusual items in both periods, the decremental profitability in the current quarter was 41%. In addition to the prior year quarter being exceptionally strong, the higher than normal decrease in profitability on the year-over-year decline in sales is primarily due to three factors.

First, as the Company consolidates production facilities, incremental costs have been added during the transfer process to ensure a continued orderly execution in meeting our customer requirements. Secondly the startup of the Company's new facility located in Tianjin, China added incremental costs in the quarter. Finally targeted incremental SG&A spending has been incurred to accelerate successful integration of IMM operations into the joy Underground Mining equipment business.

I recently visited IMM and was very impressed with the pace of our integration efforts that have not only brought Joy's processes and technologies to that business but also in the application of current IMM offerings to some projects underway in our legacy operations. We are leading the challenges of the slower Chinese market head on and fully expect to see continued improvement in performance over the remainder of the year and into the future.

Turning back to the financials; the effective income tax rate was 31% in the current quarter compared to 31.1% in the second quarter of 2012. Excluding discrete items, the Company continues to expect its effective tax rate in 2013 will be in the range of 30.5% to 31.5%. Income from continuing operations totaled $182 million or $1.69 per fully diluted share, compared to $218 million or $2.04 per fully diluted share in the prior year quarter.

Excluding unusual items in both periods, fully diluted earnings per share totaled $1.73 in the second quarter of 2013, and that compares to $2.23 in the second quarter of 2012. Cash from continuing operations for the first six months of fiscal year 2013 totaled $93 million, approximately flat compared to the prior year period.

Trade related working capital to-date resulted in $56 million of cash usage, while working capital in the prior period was a usage of $237 million. The $181 million year-over-year improvement in trade working capital was offset by lower earnings and higher cash income tax payments in 2013.

The higher year-over-year cash tax payments were timing related. Capital expenditures for the first six months of fiscal year 2013 totaled $87 million, down $27 million versus the prior year. Expenditures today in 2013 have been focused on completing the Company’s capacity expansion in China and aftermarket service infrastructure.

Historically, the Company has generated significant cash in the second half of its fiscal year. We believe this year will be no different. While advance payments will be a cash use for the year due to lower year-over-year order rates, we do expect that cash generation from accounts receivable and inventory will more than offset this decline for the full year.

Now, with regard to inventory, while we believe there are structural opportunities to lower our inventory days on hand, we will continue to be prudent and measured in this area to ensure our customer service levels remain high, while undertaking the facility restructuring actions over the next several quarters.

For the year, we expect cash from operations to be in the range of $450 million to $500 million, and capital spending in the range of $150 million to $175 million.

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

Michael W. Sutherlin - CEO and President: Thank you, Jim, and let me add my welcome to those on this call. As Jim indicated, we continue to do an outstanding job of delivering top and bottom line performance. This is a result of three primary factors. For the past few years, our operational excellence programs have been focused on reducing order to delivery cycle times by streamlining our manufacturing processes, and this also improves process efficiency. The focus on cycle time will continue to give us a delivery advantage in current market conditions, as customers need quicker delivery to take advantage of brownfield opportunities. On top of costs that come out from these process efficiency improvements, we are consolidating functions in cost as we continue our integration toward One Joy Global.

Finally, we're also making good progress on restructuring to take our base cost down. This is supporting better bottom line performance in the current weak market conditions and will increase our leverage when demand recovers. We should reach our guidance of $40 million of base cost reduction this year and expect to meet next year's target of another $40 million.

The 2014 target will primarily come from facility consolidation and integration and we have already announced transferring of the remaining armored face conveyor components to China and the closure of a manufacturing facility in the United States. The longwall project that we booked this quarter was one of the five projects that I highlighted, now almost a year ago. We also booked two of these projects in last year's fourth quarter, leading to the go. One should book in the second half and the final one probably not till next year. Although this is a significant delay in project decisions, it also indicates that projects are starting to move forward again.

Our prospect list has bottomed and improved this quarter. Projects that were de-scheduled are being replaced and the new projects meet updated risk-adjusted return criteria and I believe that they'll move forward on a more normal schedule. However, the new normal will sustain rather than materially increase our order rate at least in the near-term. We are seeing projects come into our horizon for copper especially in South America, for coal in Australia, China and Africa, and for iron ore in South America and Africa.

As Jim mentioned we expect cash flow to accelerate in the second half. We continue to see share buybacks as the preferred use of cash but we will build meaningful cash balances before implementing the buyback program. Later this year is possible but early next year more likely. The outlook for our business continues to be dominated by the following factors. First, surplus mine capacity in most commodities is putting pressure on prices, customer margins and their cash flow. Management at most mining companies has been changed and they have new mandates. Second, CapEx spend on mining equipment is down 40% to 50%, and this is already reflected in our income and order rate over the last year and half.

Third, projects will go forward selectively. They must be low risk, and they must come in low on the marginal costs curve. Most of these projects can achieve returns without material improvement in market demand.

Fourth, although our order rates have been relatively consistent, although there is support for these rates to continue, the catalyst for upside must come from a sustained increase in demand. At lower growth rates, this will take longer than we previously expected. Demand must improve not only to absorb the current excess capacity in mines, but to create a predicted deficit raises commodity prices.

Fifth, we'll leave it others to predict timing and we'll continue to operate under the assumption that the inflection point is over the horizon. As such, we will continue to focus on process efficiency, a reduction of our base cost and on cash flow. We have definitely been in a period of slower macro growth and this is causing the mining industry to hit its breaks. In some cases, positive micro signs quickly turn into mixed signals. For example, China's trade swung to a surplus in April, but was negated by the May flash PMI, which moved below the critical 50 point level for the first time in seven months.

In other cases, macro improvement is not translating to the mining sector. Despite the stock market's anticipation of U.S. recovery, the industrial sector remains flat. There are important takeaways from these points. The lack of direction indicates that a turning point is further out, and the lack of flow through is telling us that even if demand improves, the forward growth will more likely be lower than that of the prior decade and that to which we are conditioned. The data closer to our in markets gives us a better read, so let's take a look at that. The outlook for the U.S. coal market has turned positive. I guess this is first-in, first-out if you will.

With natural gas prices above $4 per million BTUs, fuel for power generation is increasingly switching back to coal. Coal demand has been rising from an increase in electricity demand of almost 3% and share gains from fuel switching. As a result coal power generation is expected to increase by 60 million to 70 million tons this year, with improved momentum carrying into next year. This is because natural gas prices are expected to continue rising.

We think that natural gas competing with coal power generation but natural gas also competes with oil. Drillers make an economic decision to drill for gas or oil and drilling for oil is three times more profitable. That can be seen in the rig count data, where drilling rigs for natural gas continue to decline, even as prices rise above $4 dollars.

Halliburton believes it will take $5 to $5.50 natural gas to get a bump in the gas-directed rig count and this puts a lot more coal into the money. Although coal demand is up, coal production increases will lag to offset further depletion of utilities stockpiled, and because exports are expected to be lower.

Although U.S. production should increase by around 10 million tons in total this year, production in the Illinois basin and Northern Appalachia combined is expected to increase by 30 million tons because of dislocation from Central Appalachia. Stockpiles are expected to be down to their normal levels by the end of this year, and as a result production volumes will increase more significantly next year. We expect further production increases to largely benefit the Illinois basin. The longwall we booked this quarter is going into this region demonstrating the industry's willingness to invest in new capacity that will be a low on the global cost curve even as excess capacity prevails in existing but high cost mines. I believe this trend will play out in other regions, not just coal, as slower demand drives the industry to lower cost solutions.

If we shift to China we get an almost opposite view. China continues to slow and cannot seem to find traction. The growth in electricity production has slowed to 5% or half the prior rate and despite this slowing domestic coal production continued to grow at 7% or 8%. The maintenance outage of a major rail system locked much of this supply surplus in stockpiles in (indiscernible) in Inner Mongolia and allowed imports to proceed at record levels for the first quarter. With maintenance now completed that domestic coal will flow to the ports and power plants. This excess supply is keeping thermal coal prices near the marginal costs for both domestic and imported coal. Both large and small miners in China are already trimming production as they compete with imports and this process will eventually rebalance the markets both China and seaborne around the lowest cost production.

I think this helps us in two ways. First we are already demonstrating that the fastest and best way to take unit cost down is to improve the productivity of the mines. A major customer in Australia has recently reported that in collaboration with Joy they made operational improvements that allowed them to achieve a 20% drop in cost. We will see more industry focus on productivity, as the mines quickly exhaust opportunities to cut operational expense in a traditional fashion. Productivity is also a solution to unit cost reduction in mines in China, and this is exactly in line with our strategy, investment and capability in China. Like the U.S., challenges in China will translate to opportunity and I think we are well-positioned for that. I think copper is an underestimated market, especially because of the inventory that has moved private to exchange stocks and our customers agree with copper strongly represented on our prospect list.

Our aftermarket order rates slowed in the first quarter, but quickly started to improve in the second quarter. This confirmed our belief that the decline in the international markets would quickly correct. The stabilization of the U.S. Underground aftermarket last quarter was followed by improvements this quarter as well. We expect steady improvement over the next few quarters, but this correction cycle will still leave us short on aftermarket revenues for the full year.

So, if we looked at the second half, we expect revenues to decelerate as excess backlog is depleted and shipments converge to the run rate of incoming orders. We have a slight drag on margins from the aftermarket correction cycle through an adverse effect on product mix. As Jim mentioned, we expect some extra one-time costs related to the transfer of manufacturing from facilities we are closing. As a result, we are adjusting guidance for both revenue and earnings per share to more closely reflect our updated expectations for the year.

We're taking down the top of our guidance range because current market conditions will not allow us to reach those levels and earnings per share are adjusted for this volume change. In addition, we are taking an additional $0.15 off earnings for margin and cost issues that I just discussed. This gives us an updated guidance for fiscal 2013 of revenues between $4.9 billion and $5 billion and reported earnings per share of $5.60 to $5.80. If you adjust this for restructuring costs, the earnings per share are expected to be between $5.75 and $5.95.

So with that, I'll turn the call back to questions. So, back to you Anthony.

Transcript Call Date 05/30/2013

Operator: Andy Kaplowitz, Barclays Capital.

Andy Kaplowitz - Barclays Capital: So, you booked a little over $1.1 billion in bookings in the quarter with one of the projects that you've been talking about and so, I guess, your base bookings are really around $1 billion, maybe a little higher. Is that the range we should be thinking about as we go forward, somewhere in that sort of $1 billion to a little over $1.1 billion range, and then how does that translate into next year? We've talked about this the last couple of quarters, it seems like that level of revenue forecast for '14 is probably off the table but, I needed to ask you that question.

Michael W. Sutherlin - CEO and President: Yeah, we look at our base book – in effect if we go back to the second quarter of last year and look at that sequence of quarters for the last – now this will be five quarters that we look at, we adjust out the projects and we get a base booking number that's around $1.1 billion, plus or minus and it varies a little bit, but we look at that as a $1.1 billion base rate and then projects on top of that. I think that shows up even with the projects. If you take the projects out we have a base of like you say just $1 billion, but we have been there before and then we have had base rates that have been a little bit above $1.1 billion. So I think that – (and comfortably) we see that as still being a range. As we look out at the projects and as we look at the prospect list and the timing and sequencing of those projects we expect to see new projects come into bookings, but probably in a pattern and in a frequency and having an impact that's relatively consistent with what we have seen over the last few quarters. So we see more or less a continuation of the current market conditions including booking levels going forward. What that does for next year's guidance we are not really at a point that we are prepared to give guidance for next year. But you can look at the bookings rates and if you project that pretty flat you are probably going to be close to what we are looking at right now.

Andy Kaplowitz - Barclays Capital: Then if you think about the aftermarket, I mean, yes, definitely improvements from 2Q which we did expect. But maybe if you can give us a little more color on what's going on there? Because essentially in Underground you are still down pretty significantly year-over-year, is that just still kind of U.S. and maybe Australia, year-over-year comparisons that are difficult and then those will get better as the year goes on?

Michael W. Sutherlin - CEO and President: Yes. We will talk a little bit about the U.S. aftermarket because it probably represents what we see is the worst case because we have the most severe production cuts impacting the U.S. Underground and we saw that go through about five quarters to – for the order rates to come down, bottom out and begin to improve. We saw the order rates bottom between the fourth and first quarters and an improvement in this quarter. In a sequential basis the order rates for the U.S. Underground aftermarket were up about 15% sequentially first quarter to second quarter. That's a long way from gaining back the losses that we've had over that longer period of time from top to bottom. But we are starting to see a turning point and with the outlook for the U.S. market starting to improve we're beginning to see machine rebuilds comeback into horizon and other kind of elements, I think that (fit) the aftermarket in the U.S. back up to a level that's consistent with coal production volume changes. So, the coal production volume is down 7% or 8% and then our aftermarket will eventually settle in at that level. It's below that level today, starting to come back and it will take a few more quarters before it gets back to that level. I think we see that in the international markets that probably have been a little bit quicker based on the fact that the international markets took a pretty significant drop in the first quarter and started to come back already in the second quarter. I think it tells you that there's – this is more about cutting costs and driving cost reductions, which often translates into reducing mine site inventory levels. I think Jim talked about the need to be careful about inventory, because our customers don't have the – they are carrying the inventories of parts that they used to, so now they are going to need and expect us to have instantaneous delivery more certainly than we had over the past few years. There is a very limited amount that you can get out of that, if production is not declining at the same time. In the international markets, production has been relatively flat and so those costs have a very limited ability to come down and that's what we are seeing I think during the first and second quarter. So we expect those international aftermarket numbers to begin – continue to move up and somewhere around the end of the year, whether it's the fourth quarter, first quarter of next year we should start to be back at the levels that we ramped when we finished last year.

Operator: Rob Wertheimer, Vertical Research Partners.

Rob Wertheimer - Vertical Research Partners: Wanted to ask on the conversations you're having with the mines on the bigger picture. Maybe I can just ask two or three things at once and see how you want to respond. But, if major projects are down 30 and CapEx is down 40 or more for your customer CapEx, I'm curious about the split there, whether it's the 30% down on the major projects is dollar weighted or whether they're spending less, or do you think the shift of mines to spending more as sort of small, fill-in brownfield is net positive or net negative for your products? Then, one last question if I can squeeze it in is on, as they try and try and address this a little bit, to find ways to save money on equipment are they finding ways to be more efficient or is it really just shuffling out cost for a couple of quarters?

Michael W. Sutherlin - CEO and President: So, three pretty good questions here. As we look at our customers CapEx plans and programs, we're pretty well connected with them. We work with the customers pretty closely, and in most cases we're working with them on projects and equipment definitions and project specification a year, year and a half before they make their equipment selection decision. So we're pretty much upstream. We have people, in many cases we have engineers sitting in offices with our customers’ engineers, working collaboratively on projects and through that process we can actually see the projects that they're deploying resources on. Sometimes they have CapEx approvals for project, but there's no one working on them, and we can sort of pair out the difference between those two. The mines also spend CapEx on a number of other things, like port facilities and other things that don't affect us. So, we try to separate out the CapEx that's deployed on mining equipment versus the CapEx that's in the broader spectrum for most of the diversified mining companies. As we look at our original equipment bookings and we go back to 2011, in 2011 my view was above trend year because we were still catching up from the slowdown of 2009 and 2010, and even from that above trend line level we have seen the original equipment order bookings through the first half that are down about 35%. Our prospect list is down sort of in the 40% range, pretty consistent with that. So we look at what our customers announce for CapEx, we look at what they are working on, and then we take a back view from our own data set and look and make sure all that correlates, and it continues to tell us that their spend levels on mining equipment are down sort of in the 40% or so minus range. But it also – that been our order rate experience, and it's– so we believe that those kind of reductions in CapEx have been flowing into our order rates for quite some time last three, four, five quarters for sure, and they are already reflected in the base order rates, and that's why we have quite a bit of confidence that there is a base there that we can work from. As we look at brownfield projects, brownfield projects are, I think, good in many ways. One is that, if you have equipment working at mine site, you are going to have an advantage on the addition of equipment to that mine. We do a lot of our aftermarket through lifecycle management contracts. So we are not just selling parts. We have a total headcount level of around 18,000 people. We have almost 4,000 of those whose job is at mine site running lifecycle management programs and work on our equipment for the customer. So, in that context, I think we have an advantage when it comes to brownfield expansions and adding equipment, and certainly the work we've done in operational excellence to lower the cycle time is giving us a really significant delivery capability improvement, and I think that's an advantage as well, when customers want to move quickly on brownfield opportunity. So, the big projects are good and the big projects come in lumpy, and they're more intensely bidded and quoted and we spend a lot more time on engineering its specifications. Brownfield is pretty straightforward, so from that standpoint they're not as big a bite, but they're better in many ways, more efficient for us to work with brownfield compared to the greenfield. It just takes a lot more brownfield projects to add up to the same number. So, if we look today, we see the brownfield kind of mentality. The greenfield projects, in fact, that we're looking at are often adjacent to other mine properties that our customers own. So, they understand the geology. In many cases, they can share infrastructure, load out facilities and prep plants and things like that. So, those tend to be smaller greenfield projects and not brownfield expansions, but they're smaller greenfield projects. So, I think that's going to be pretty typical of where our customers are going to be deploying CapEx until we get into a more robust demand environment.

James M. Sullivan - EVP and CFO: Have we answered all your questions or not?

Rob Wertheimer - Vertical Research Partners: You basically did. I mean, I'll just – in terms of clarifying on one thing, your big project spend is down fairly, but presumably the maintenance or replacement to the extent there is down less. Then if presumably brownfield is a little more spend on new equipment versus the port stuff, it would seem that the current order rate is below where the CapEx rate is trending two or three years out? I don't want to try and box you in. It's just I am trying to interpret what you said.

James M. Sullivan - EVP and CFO: Yeah, I definitely think we're at a low point. There's no doubt about that. I think the question is, what does the slope look like as things get better and how long will that take, but I definitely believe we're at the low point right now. I think the good news from our perspective is that, the old projects that weren't going to make the ROI thresholds have been cleaned out, new projects have replaced them. So, we're looking at a new set of projects that have been reviewed by new management teams, and I think that they're much more likely to go forward. It gives us, I think, a much, much stronger confidence that there's a base level of work that we're going to get out of our customers as we all wait for the market demand to improve. So, that's not going to go further down. That's not going to go to zero, and the activity levels that we've seen, I think, represent a bottom that will slowly improve until we see more demand uptake and I think it will accelerate from there.

Operator: Mig Dobre, Robert W. Baird.

Mircea Dobre - Robert W. Baird: My first question is on the Surface Mining side and looking there at backlog, obviously, being down about 46%, which is quite a bit higher decline than what we're seeing in Underground. I know we spent a lot of time focused on Underground and what you guys are doing on the cost side there. But I'm wondering how do you feel about your cost structure in Surface, and should we be thinking about some adjustments there in the next few quarters as well?

Michael W. Sutherlin - CEO and President: Well, we have our two businesses that actually run in slightly different phases of cycles, so our Underground business tends to respond to the cycle first and the Surface business a little bit later, and some of that's driven just by the fact that Surface mines tend to be much bigger mines, more engineering work, more permitting work, and we certainly have seen that more recently. We see on both sides, both the upside and the downside; from the downside, we've been decelerating our Underground business from late last year into early this year, and we pretty much – we are deep into the reductions in cost and capacity in our Underground business and well on that way. Because of delivery commitments we have in the Surface business, they have been running at much higher production rates even as our order rates have remained weak and we have been working off backlog. So most of the backlog depletion in the Underground business was taken last year and there were some that spilled over this year, but largely they were into backlog depletion last year. The Surface Equipment business has been depleting backlog pretty heavily, and in the second half I think they are going to be the biggest factor for us transitioning from our current shipping levels down to the incoming order rate as we get ready for 2014.

Mircea Dobre - Robert W. Baird: I realize that you are not providing 2014 guidance, but I guess I am wondering, maybe you can give us a little bit of color on how you are viewing your revenue mix change, especially since you're talking about it rebound in aftermarket. Is it fair to assume that as a percentage of total revenue aftermarket is going to go meaningfully higher than what we've seen it in the past? Any color there would be helpful.

Michael W. Sutherlin - CEO and President: For sure. I mean, in the Surface Equipment business as we ship off backlog, most of that backlog depletion is coming out of original equipment. So we have a – today we have a bit higher of an aftermarket percentage in our total revenue stream than we would on average. As we look at next year with that backlog depleted, we are going to see aftermarket represent a higher percentage of our revenue stream, and that's typical of the business. At the peak of the cycle, the aftermarket percentage is high and the margin gets depressed because of the mix effect. The mix effect helps us on the downside, and it will help us as we move into 2014. Now, we also believe that the aftermarket is trending to improve. We took a pretty steep downturn in the aftermarket at first quarter, a little bit of uptick here in the second quarter, and on trend to continue improving as we go through the second half of the year. Beyond that, we believe that because of the equipment we delivered in 2011, 2012, those will come into normal rebuild cycles and we'll move into the life of the machine, where the parts consumption both ware parts and consumer parts will begin to increase. So, we expect for a couple of different reasons for the aftermarket revenues to go up in absolute terms in 2014, and we expect the aftermarket percentage of revenues to go up even more as the mix shifts from heavier OE to lighter OE next year.

Operator: Ann Duignan, JPMorgan.

Ann Duignan - JPMorgan: Mike, I was just wondering, if you would talk about the balance sheet and the outlook for the balance sheet going forward, if we look at day sales outstanding, they grew a little bit in the quarter? Working capital grew a little bit year-over-year and maybe not sequentially, but one of the risks I think for Joy in a downturn is that you do carry your own inventory, do your own service work. Is there any risk – customers asking to extend terms on payments or are they asking you to carry more inventory. Is there anything unusual going on the balance sheet side that we should be worried about are signaled?

Michael W. Sutherlin - CEO and President: I'll talk a little bit about the market impact and then Jim can give you a little bit more specifics on the balance sheet per se, but, I think we have focused pretty heavily on moving parts through production so we could build part stockpiles in the field to support the equipment and that should give us our higher inventory level in the field. Our customers are not asking us to stock more inventory, but in effect as a focus on cost and they're taking down the levels of inventory that they carry in their own mine site inventories, they don't have the volume of parts and so they need quick delivery a lot more today than they would have a year ago, and parts availability is really important for us. At the same time, as we go through this deceleration phase with our Surface Equipment business in the second half, that will result in more inventory reduction. Stuff that's work in process today will get shipped and we won't be buying the same level of inventory to replace it and we do have some inventory that's tied up and some new product appointments that we have in the field and the nature of getting those up and running and commissioned and debugged and we carry those on our balance sheet a little bit longer than we would at normal delivery. So, there's a combination of things that are probably unique to this point in time but not the kind of things that would worry us about the cycle. We've probably felt, we had the highest exposure to balance sheet risk with the U.S. Underground business. We watch that very, very closely and I think, to-date probably, because of that we have the lowest risk, and we're watching all of our markets very carefully as a result of that. So, we should start to see some of the dollars that are locked up in inventory begin to move into cash flow here in the second half and I think you will see a dramatic change between the first and second half from a timing standpoint. But I will let Jim give you a little bit more specifics on the balance sheet.

James M. Sullivan - EVP and CFO: Yes. Mike again this is Jim. So as I commented, we are expecting strong cash generation in the back half of the year. A large part of that is going to be receivables. Keep in mind receivables grew in the second quarter sequentially because of a pretty strong sequential increase in sales. A lot of those receivables are going to come home in the third and the fourth quarter. So we feel pretty good about that. As Mike said, we track our receivables very closely with our customers and we really haven't seen any significant change in the trends. Roughly 85% of our total receivables are what we would call current to post 30 days against our turns. So that's trending pretty consistent with history. I will say the one area or one geography that tends to get a little extended in this kind of period and I think maybe even exacerbated a bit in today's environment is China. Things are pretty slow in China and turns in China are always longer than what we experienced in more mature Western markets. So we are working through some of that. Some of the receivables with IMM are expended up to that. We are working very closely with the IMM team as well on the Joy side in China, but nothing at this point that we are concerned about in terms of balance sheet exposure. It's just something that we are watching very, very closely. Keep in mind, while we did use cash on working capital for the first six months of the year, that use of cash was significantly below where it was last year. So it is heading in the right direction.

Michael W. Sutherlin - CEO and President: We also have – we have built some inventory as we transfer manufacturing optimized with the manufacturing processes. In some cases, we're (just) in the talked into middle of those transfers and so we have some extra inventory built up to sort of buffer the movement from one facility to another. Yes, we will get the cash. I mean as we have done in prior cycles we have – as advanced payments have come down, which happens when bookings become weak, we've been able to offset that with significant cash coming out of working capital and we will get that starting in the second half as well.

Ann Duignan - JPMorgan: Could you just remind us when you will take the opportunity the next time to test IMM for impairment charges, when will that happen, towards calendar year end or fiscal year end?

James M. Sullivan - EVP and CFO: Ann, this is Jim again. Yes, we do our normal goodwill impairment analysis and review in the fourth quarter. So, we'll be doing that again during the fourth quarter.

Ann Duignan - JPMorgan: So, fiscal fourth quarter not calendar?

James M. Sullivan - EVP and CFO: I'm sorry, fiscal fourth quarter, correct.

Operator: Schon Williams, BB&T Capital Markets.

C. Schon Williams - BB&T Capital Markets: I wondered, if you will just maybe address the share repurchase and thoughts there. I mean it sounds like the timing has shifted a little bit, originally I think we were talking about the second half of this fiscal year, now it sounds like it's been pushed into next fiscal year. Can you just talk about what's changed there in terms of the timing, and then have you guys talked about in terms of absolute amount, what you think is plausible at this point?

Michael W. Sutherlin - CEO and President: The shift is really driven also by our own cash generation. So, we expect this year to see the majority of our cash generated in the second half and because of that we wanted to get the cash generation ahead of the buyback program and that's what's causing us to look out a little longer before we start the buyback program. When we start is probably is going to be dependent upon the timing of the cash within the second half and if we get more cash in earlier, we may start a little earlier, but it's not – I don't want to start a program and then have a sort of a weak to meager capability to execute. I want to have enough powder if you will that when we get started we can do that and be consistent in a meaningful way. So, that's probably – the timing is a little bit fuzzy right now, based just upon getting the cash balances built up, to give us a base to have good execution from. We're in process of reviewing that share buyback with the board. We don't have a number. We're not going to do a miniscule share buyback. It will be a meaningful number. We've had two prior share buyback programs and both of those programs, we started with $1 billion and we added $1 billion to the program. I'm not saying that that's a number we'd use this time, but that is our history. So, for reference, you can think about that as at least a historical precedent.

C. Schon Williams - BB&T Capital Markets: Then you briefly mentioned some of the new product introductions as possibly weighing on the working capital. You just talked about where we are in that process. I mean, obviously you talked a lot, hard rock Miner at the Analyst Day last year. Can you just talk about where we are in terms of the cycle for introductions? Are we still in the very early innings? Are we close to having something that's deliverable to the market or are we already delivering to the market? Can you just talk about where we are in kind of the pace of introduction?

Michael W. Sutherlin - CEO and President: Yes. We have some products that are in their introduction phase and some of that is we are currently carrying that in working capital. The stuff that we have in that category is the entry development with machines and the FCTs that we are deploying as an entry development equipment staff. We probably will look at the low-seam longwall that we had on display at Mine Expo is probably would be deemed as the next item that will go into the market. I think we have got – we are working on a number of prospects and that should – we are expecting something will materialize here pretty soon. We have – we are carrying some inventory around some of the prototyping and other elements around that piece of equipment. But that's a near term opportunity. Our 135-ton a pass shovel, the (Magna) shovel, which three pass loads 400-ton trucks we are expecting that to start building later this year and probably move into the market early next year for the first unit on that. So that will be an item that we will work with the customer on which customer which application, but that's not only probably in the revenue stream next year. It's probably next year. The hard rock Continuous Miner, we are building some refinements on, but from a noticeable standpoint we might sell a machine or a handful of machines in the next year. So, but I think from a meaningful number standpoint you are probably looking at 2015, and probably the hybrid shuffle just because of the extensive amount of fuel testing we want to do before we turn that loose. That's probably a 2015 number as well. These are sort of general things, but it certainly gives you a frame of reference. We're probably in the starting phases, starting low and building momentum over the next couple of years.

Operator: Ted Grace, Susquehanna.

Ted Grace - Susquehanna Financial Group: So, the first thing I was hoping to ask you Mike is, as you think about kind of the key, maybe trigger points or sensitivity points that you think your larger clients need to see to start accelerating their CapEx spend. Could you maybe just walk us through what signposts we might want to think about, whether its commodity prices or some metric that you think might be critical?

Michael W. Sutherlin - CEO and President: I think commodity prices are – it's a good metric to look at because it does reflect the current and projected supply demand balances and we see that today in copper. Despite some pretty strong inventory increases in the exchange stocks in copper, the price level has stayed sort of in that 3.20 to 3.40 kind of price range and that stays at an incentive level for copper producers. So we've seen investments in copper. We have seen customers talk about continued expansion in copper without a lot of reservation. I mean, we are – there are a number of projects that are underway in various phases. Some of those are moving into the equipment selection phase, some of those are in early startup phase. So, from a copper standpoint the price levels are representative of a supply demand balance that's going to keep the market in good condition and there's no hesitation to continue making the investments. I think as you get into coal, both met coal and thermal coal, on a global basis, we probably have 5% to 7% excess capacity. It seems like a lot now, because everybody's fighting over – more supplies fighting over less demand, but it's a single-digit kind of capacity excess. So, that's going to take us a little bit of time to work off, some combination of closing some high cost mines that need to come out and demand improving, but I think we need to see supply demand balance get closer, which is probably not a couple of quarters away, maybe a year away before you begin to see a point where our customers are willing to accelerate their CapEx. I will say that in our prospect list, we do have coal mines in our prospect list in places like China, Australia and Africa. So, it's not like no one's investing in coal mines. They are making those investments in new mine startups and we talked about the long-haul in the U.S. that we booked this quarter. So, the level of investments will be sort of a moderate level, until the market sees that there's enough demand strength to testify capacity expansion and I think that's going to be at least next year before you see that turning point. Iron ore's a different commodity where, there's so much high cost capacity in China that can be displaced by low cost capacity internationally. I think you'll see that follow the path more like copper where there is opportunity even at lower prices and there is opportunity for high grade low cost supply in place like Africa and South America.

Ted Grace - Susquehanna Financial Group: If you are going to say the equilibrium point on met coal, for example, I mean does it have to have a 2 in front of it to provide sufficient economic to incentivize people?

Michael W. Sutherlin - CEO and President: I think that the met coal has got to have a 2 in front on it. It could be rounded to 2, but the number maybe 1.90 maybe 2, I don’t think you are going to see a lot of people get excited about met coal at 1.70. We still believe that there is probably 15% of the world's production that's not economic at 1.70. So you get into the 2 number I think you are in pretty good territory in 2, but sort of if you are anywhere below that. in thermal coal you are going to have to be in three digits to create the incentive for some (indiscernible). The broader scale mine expenses are going to be pretty good just in thermal coal.

Ted Grace - Susquehanna Financial Group: The second thing I was hoping to ask and I don’t know if it's a Jim question or a Ted or Randy question. But could you just run through kind of the realized cost saving benefits in the second quarter in Underground and Surface? Kind of how those numbers compare to plan and how they feel relative to your built in trajectory?

James M. Sullivan - EVP and CFO: This is Jim. I would say we are definitely on plan and probably slightly ahead of plan. Most of the cost reductions are following Underground, as Mike said earlier, got started probably in the third quarter of 2012. Surface has taken some costs out but probably more so it's going to happen in the latter part of this year into the first part of next year. We talked about $40 million of year-over-year cost savings in '13 versus '12, six months into it. I think we're over-performing against that and I think our margins really speak to that. We're continuing to position the business and the cost base for a business that could be a little slower. So, we've got a number of things that we're working on and the Company, as you know, historically has always been very proactive and we'll plan on continuing to be there.

Ted Grace - Susquehanna Financial Group: Then on a related note and I'll get back in queue. The transient costs that Mike talked about, and I think there were three of them that was the consolidation and a few others. Could you just outline what each of those numbers was and so we can get a sense for the size of the pieces?

James M. Sullivan - EVP and CFO: So, I pointed to kind of three factors Ted, that kind of contributed to a little bit higher number on detrimental profitability in the quarter and really I would say it's kind of almost equally split between three factors. One being, kind of standing up with new facilities that are receiving additional production from the closed facility, that increase in SG&A as we accelerate and drive the performance of the IMM business going forward and a little bit on the startup of Tianjin. It's going be plus or minus, but roughly a third, a third and a third.

Ted Grace - Susquehanna Financial Group: The aggregate?

James M. Sullivan - EVP and CFO: Keep in mind, we're not talking about a huge level of higher cost in total, I think it's about $12 million.

Ted Grace - Susquehanna Financial Group: That was about $12 million?

James M. Sullivan - EVP and CFO: Yeah.

Operator: Joel Tiss, Bank of Montreal.

Joel Tiss - BMO Capital Markets: So, just two questions. One, if you can talk about the competitive landscape at all, obviously with the fewer projects and just as many competitors, I wonder if you can give us a sense of what's going on there and then second question is on the operating margins, can you give us any sense if the new business you're booking is similar to the current operating margins or do you think that there might be a little more pressure coming from what's going into the backlog?

Michael W. Sutherlin - CEO and President: Let me talk about the margin and then I'll turn it over to Ted and let him talk a little bit about the competitive landscape, and Randy if you want to lay in that's good. These two guys are much, much closer to the day to day issues in the field. But on a margin standpoint, two things I think we've done in the business that we feel very confident that we're going to be able to hold margins pretty well, and one of those things is being very transparent with our customers on pricing. We've been consistent, open, and transparent with them on pricing when we need to price and we haven't tried to overprice in the up cycle and they – I think they've developed a confidence that we're fair and balanced with them, and therefore we're able to execute pricing when we need to in the down cycle. We had price increases in 2009, and price increases last September and we're looking at when we're likely to do that again and we will when we need to. We were very, very focused on positive price realization. We know, to maintain margins, we've got to continue to maintain price realization. In up markets the number is bigger and in down markets it's thinner but we always get positive price realization. When we do our business reviews we always look at the margins in recent shipments, the margins in backlog and the margins in outstanding quotations to make sure we are seeing some positive progression in those three steps. I think you will find that margin erosion from process competition is something that we are – we work to fight off all the time. We know that this industry has a very, very steep elasticity curve and we just don’t want to go down that path. But in terms of the competitive pressures and threats in what we are doing in the field maybe Ted I will turn it over to you.

Edward L. Doheny - EVP, Joy Global and President and COO, Joy Mining Machinery: This is Ted. I will actually segue from Mike on to margins for what we are seeing. Obviously with the market being slow globally not just the U.S. where we started the Underground almost 12 months ago now. Obviously competition for the OE is strong but where we have actually seen most of the activity is in those Brownfields where Mike talked about. In Brownfield applications we have such an advantage because we have our equipment installed, we have a really, really strong preference for our equipment. So we have been able to hold the pricing levels just because of the preference for our equipment and that goes around the world. Where we have had the most pricing pressure actually have been in Australia and China, where you would expect China – first of all Australia. Australia has had huge cost pressures with their business. So where we have seen actually the activity still where we have been getting the business again it's where we have Brownfield installations and also we have really been focusing with our customers on some of the newer technology where we can jump in and help them in their costs. Mike even highlighted in his comments, one of our largest customers in Australia, we've been significantly – have been able to lower their operating costs and hence we have been awarded with more business there. China though, is really still an open book. China still goes through public tender. So really, really pushing our service strategy to get in there, get with our installed base. We now have, on just shares alone China is now the largest market of the world, to really focusing on the differentiation. But probably the most price pressured, because those still go through public tender, still go on the internet. So, that's where the biggest bite is right now in the market and around the world.

Michael W. Sutherlin - CEO and President: With that, we just need to wrap up. It's a little bit past the hour. So, closing, I just want to remind all of our analysts and investors that under the current market conditions, we are going to continue to focus on reducing our costs and streamlining our business. We're going to do that, because we think it's going to enable us to deliver results despite the market, and we believe very strongly it's going to increase our leverage to the up cycle when demand begins to see significant growth again. I think both of those are important in delivering consistent performance over the cycle. So, again thank you for being on the call. Thank you for your interest in Joy Global and look forward to talking to you at the end of the next quarter.

Operator: That does conclude today's conference. Thank you for your participation.