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Joy Global Inc. (JOYG)

Robert W. Baird Industrial Conference Call

November 8, 2011 12:50 pm ET


Mike Sutherlin - President & CEO


Rob McCarthy - Robert W. Baird


Rob McCarthy - Robert W. Baird

So I think we are going to get started now. Good morning everybody. I am Rob McCarthy. I lead Baird's research team for machinery and diversified manufacturing stocks. And I am pleased this morning to be welcoming Joy Global back to the Baird Industrial Conference.

Joy Global generates an unusually large share of its revenue and an even larger share of earnings by providing mining companies with the aftermarket replacement parts, consumables, and services needed to achieve lowest cost per ton production and lowest product lifecycle cost.

Joy has also been an active participant in industry consolidation with the important LeTourneau acquisition in June, and the pending $1.4 billion acquisition of IMM, the leading indigenous supplier of underground coal mining machinery in China.

Today, we are joined by President and CEO, Mike Sutherland; Executive Vice President, CFO, and Treasurer, Mike Olsen; and President and Chief Operating Officer of P&H Mining, Randy Baker.

I’ll turn it over to Mike.

Mike Sutherlin

Thanks, Rob, for the introduction, and it’s first of all my pleasure to be here at this conference today. I want to have this opportunity to talk you about commodities, about mining, and about Joy Global. And during the presentation, I want to, really want to concentrate three things. I want to talk to you about our outlook for the commodity markets and how that outlook will drive demand for mining equipment. Secondly, I want to talk about how we have performance and programs that will translate that positive outlook into improved performance for our shareholders. And then third, I want to profile some of the strategies that we use in our business that I think is adding value to our top-line and to our bottom line.

Well, before I go further, I just need to caution the audience that the presentation and the comments I make today will contain forward-looking statements, and need to be interpreted accordingly.

I believe that we are still in the very early stages of a long-term multistage growth cycle for commodities. As I look at the markets we serve, they are definitely driven by the demand out of the emerging markets, whether that is population growth in the emerging markets, urbanization, or industrialization. And as a result, our view is that we expect the commodities to remain supply constraint over the long-term.

Despite concerns about macro issues, which are plenty of those out in the marketplace today, we still see very strong fundamentals in the mining industry. We still have customers that are learning mines globally at or very near full capacity. We still have pricing levels for commodities that provide sufficient incentive or continued mining expansion.

In addition to that, we still have, we have customers that are better off today than they were in 2008 it was up in comparisons made for 2008. Customers today have much better balance sheet; they are sitting on very strong cash balances compared to where they were in 2008. To our last customer they will tell you that they regret shutting down projects in 2008, trying to restart them in 2010. It costs them too much time and money and they wish they wouldn’t have had to do that. Today they have enough financial flexibility to have it, as the decision capability of whether to or not to. And I think they will continue to move forward with their projects.

We certainly see our customers have a strong preference to spin their cash on CapEx for organic growth. There is very little M&A activity and there is very little disposition of return cash to shareholders.

As we take a look at the commodity environment, first look at the copper environment. For me, copper is a commodity that has constantly supply constraint. Production from the major copper producers this year is down both year-over-year and sequentially from the second quarter down to the end of third quarter. And those declines are pretty significant. They were down 8% sequentially, 15% year-over year. Those kind of declines are pretty characteristic of the copper markets and they are driven by a couple of things that create supply disruptions, production disruptions. It’s almost unusual for copper producing company to make it’s production forecast. And as a result of constant disruptions, labor disruptions; geology, weather disruptions, and those have become so frequent that they are now predictable.

If you look back over the last five or six years, you see the difference, disruptions have taken about 6% away from production levels in the copper industry in general. To the point that today we can predict those 6% losses.

Secondly, the other head win that they have is constantly declining ore grades. The ore grades have declined by 20% over the last decade, as the better areas of the mines have been mined out and they have now moved into areas of the mine that have lower ore grades. So that ore grade decline challenges our customers to keep production rates up, because they have to move more raw materials to give them a leveled output.

It’s good for mining equipment because the demand is more mining equipment for given level of copper output. So with those conditions prevailing in the copper industry we see pricing levels that continue to stay at 3.50 level or above, we see some resistant points at 3.50. That provides adequate incentive for continued mine expansion.

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