Joy Global maintains margins in challenging conditions

OPERATIONAL efficiencies and cost reduction efforts ensured that mining machinery maker Joy Global kept operating profit margins in the second quarter at a healthy 21%, despite a downturn in sales and profits brought about by an industry downturn.
Joy Global maintains margins in challenging conditions Joy Global maintains margins in challenging conditions Joy Global maintains margins in challenging conditions Joy Global maintains margins in challenging conditions Joy Global maintains margins in challenging conditions

Joy Global's longwall system. Courtesy of Joy Global.

Lou Caruana

Joy analysis indicates that customer capex spend on mining equipment is down 40% to 50% on last year.

Joy’s net sales figure in the three months to April 26, 2013, was $US1.4 billion compared to $1.5 billion for the same period last year. Operating income was $279 million in the quarter, compared to operating income of $333 million in the second quarter of 2012.

Quarterly income from continuing operations was $182 million compared to $218 million in 2012. Second quarter bookings decreased by 8% to $1.1 billion in fiscal 2013 compared to the second quarter of last year, but increased by 10% sequentially over the first quarter of this year.

Joy Global president and chief executive officer Mike Sutherlin said the quarter reflected “strong execution against continued market headwinds”

“Revenues were down 12%, in line with expectations, and operating profit margin remained strong at nearly 21% due to operational efficiencies and cost reduction efforts,” he said.

“Our original equipment order stream included a longwall system for US coal and, as expected, our aftermarket orders improved sequentially.

“Even though the overall order rate continues to reflect soft market conditions, the base order rate, before major projects, has been consistent over the last five quarters. We see this as providing market stability until the current commodity supply surplus is worked off.”

Orders for underground mining machinery were negatively impacted by foreign exchange of $30 million compared to the second quarter of last year.

Net sales of underground mining machinery declined to $681.9 million or 23% in the second quarter compared to a year ago.

Original equipment sales decreased 33% and aftermarket sales declined 13% from the prior second quarter. The original equipment sales decline was driven by a soft US coal market and lower shipments in China and Eurasia.

Aftermarket sales were down in all regions except China.

“Current market conditions are affecting both original equipment and aftermarket order streams,” Sutherlin said.

“Commodity prices are being driven by the cost of production in all key markets, and this has materially reduced customer cash flow. For example, most coal mines in the US and many coal mines in Australia are operating above cash costs but below total costs.

“In addition, the long term expectation for commodity prices has been lowered and it limits the number of mine expansion projects that can meet updated risk-adjusted return criteria. This combination has significantly reduced customer capex spending.

“This is consistent with our project bookings, and therefore the adjustment in customer capex is already reflected in recent incoming order rates.”

Joy expects customers to continue to deploy capex for mining equipment on a selective basis, Sutherlin said.

“They will do so to rebalance their mine portfolio by adding assets that have quick returns and which will operate low on the global cost curve,” he said.

“Even if prices are not at incentive levels, miners are adding high-quality assets as they close older and higher cost mines to lower the operating cost across their portfolio. This is consistent with recent events in the US coal market, and we expect this to play out at a more measured pace in global markets.

“The prospect list of major projects that we track has declined by about 30% from 2012 levels, and has stabilized over the recent few quarters. That stabilization is the result of the winding down of project re-evaluations partially offset by new projects being added.

“To the extent that the new projects meet more recent return thresholds, they are highly likely to proceed. We expect to see major projects coming to equipment selection in a frequency that is consistent with that seen over the past four to five quarters. As such, we can expect major project bookings in most, but not all quarters.”

Aftermarket orders improved sequentially, recovering some of the first quarter's decline, Sutherlin said.

The second quarter included improvement in the US underground coal market, which was up sequentially after stabilizing last quarter.

It has taken the US underground business five quarters to adjust, stabilize and start to recover.

However, the aftermarket recovery in the current quarter indicates that the correction could occur somewhat faster in the international markets.

“Over the longer term, we see further aftermarket upside from increased parts and services as machines we delivered in the 2010 through 2012 timeframe move into a period of higher parts consumption and scheduled rebuilds,” Sutherlin said.

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