Joy Global (JOY) Tops Q1 EPS by 13c

Joy Global (NYSE: JOY) reported Q1 EPS of $0.49, $0.13 better than the analyst estimate of $0.36. Revenue for the quarter came in at $704 million versus the consensus estimate of $753.75 million.

Market Outlook

The outlook for global growth in 2015 has been reduced in recent months as the slowing trends seen in the second half of 2014 have continued. Weak commodity prices, diverging monetary policy and weak world trade all present challenges to the growth outlook. After showing some signs of improvement, growth in Europe remains stagnant with the fourth quarter registering just 0.3 percent. Slowing housing market activity and a movement towards consumer driven growth has China adjusting to a new normal level of economic activity. The strength seen in the U.S. economy during the second half of 2014 now faces headwinds from slowing activity in the energy sector. Combined, these challenges contribute to a decidedly more difficult end market unfolding for the company in 2015.

The decline in oil prices seen during the second half of 2014 has continued with prices hovering around $50 per barrel. Record production, elevated inventories, and weakening global demand are expected to result in oil prices remaining depressed through mid-2015, if not longer depending upon the speed of the supply response.

Although the underlying fundamentals of copper remain strong with low global inventory levels and a production deficit of approximately 500,000 tonnes in 2014, near-term demand uncertainty has driven prices down nearly 10 percent since December 2014. New supply growth is expected to move the global copper market to a surplus in 2015 / 2016 before returning to a longer-term deficit.

Entering 2015, U.S. coal markets were expected to be under pressure from power plant retirements and the looming implementation of increasingly stringent regulations. Over the last several months, added pressures have materialized from lower natural gas prices and exports have been hampered by a stronger U.S. dollar. Current natural gas prices have declined to below $2.90/mmBtu as record production has increased inventories. Forward curves for natural gas point to around $3.00/mmBtu for 2015 which will continue to pressure major U.S. coal basins. Exports are also facing challenges in global markets as seaborne thermal coal is trending around $60 per tonne and met coal prices remain range-bound between $110 and $120 per tonne. U.S. coal exports are expected to decline approximately 8 percent in 2015 falling to 90 million tons. The combined effect is likely to see U.S. coal demand decline by nearly 50 million tons in 2015 which will have a direct impact on overall production.

The challenges seen in seaborne thermal coal markets are expected to persist throughout 2015 as supply growth continues to outpace a strained demand environment. Despite Indian coal imports growing annually at 16 percent, strong production in Indonesia coupled with 8 percent growth in Australian exports have left the seaborne thermal coal market well supplied.

Conversely, seaborne metallurgical coal markets appear closer to finding an equilibrium balance as prices have averaged $114 per tonne since April 2014. The production curtailments announced in 2014 are expected to support prices at current levels, with the possibility of some marginal improvement by year-end. On the demand side, the largest driver remains the health of global steel consumption which is expected to increase approximately 2 percent in 2015. The combination of continued supply restraint and stable demand should continue to drive metallurgical coal back to an equilibrium point.

Global steel consumption will continue to influence seaborne iron ore markets. With additional supply set to reach the market in 2015, global iron ore prices, currently trending around $65 per tonne, will remain under pressure. Should a substantive downward revision to global steel markets occur, iron ore prices could trend lower.

The increase in economic uncertainty along with further deterioration in commodity prices continues to adversely impact our business. While mining capital expenditures were expected to decline in 2015 by over 10 percent, further reductions in spending have been announced in recent weeks as the industry battles depressed commodity prices and an uncertain demand outlook. Mine productivity improvements and cost reductions are the focus of the industry as further mine and asset consolidation is expected to take place in 2015.

Company Outlook

"The macro-economic and commodity price environment that marked the beginning of our fiscal year has worsened in recent months,” continued Doheny. "Lower commodity prices have decreased our customers’ cash flows and they are continuing to reduce capital expenditures and delay maintenance in an uncertain demand environment.

"Our direct service business remains a critical and stabilizing force for us, but we have recently seen slowing in the bookings profile as maintenance and rebuild schedules are stretched. There has also been evidence of commodity production declines in some end markets that is also impacting our service bookings. Although production declines will help to rebalance supply and demand fundamentals, they will also put pressure on our near-term service booking activity.

"In light of the slower market environment, we are accelerating our facility optimization plan and are taking additional cost reduction actions to those previously announced. Our cost savings initiatives are now projected to result in $10 million to $20 million of restructuring charges which will increase total expected savings in fiscal year 2015 from $25 million to $50 million. We are committed to prudently managing our business for softer market conditions, while retaining our ability to ramp up capacity when growth returns.

"The result of the slower macro-economic environment and incremental commodity pricing challenges that emerged in the quarter is a reduction in our full year 2015 guidance. We now expect revenues to be between $3.3 billion and $3.6 billion with earnings per fully diluted share, excluding restructuring and unusual items, to be in the range of $2.50 to $3.00. This compares to our previously announced guidance for the full year 2015 of revenues between $3.6 billion to $3.8 billion and earnings per fully diluted share, excluding restructuring and unusual items, of $3.10 to $3.50. As is typical for our company, we expect our earnings and cash generation will be greater in the second half of the fiscal year.

"As a company, we’ve traversed difficult market conditions before while maintaining our commitment to the future. We continue to do that today and remain focused on working with our customers to deliver differentiated, innovative solutions that they need to maximize their mine performance."

For earnings history and earnings-related data on Joy Global (JOY) click here.

You May Also Be Interested In

• Tesla plans 'flying' Roadster stunt at SpaceX Texas site as early as August
• Pro Diversity Network (IPDN) Reports Q2 Loss of $0.15
• Outlook Therapeutics (OTLK) Misses Q3 EPS by 9c