NACCO Industries Inc (NC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2004 NACCO Industries earnings conference call. My name is Michelle and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call you require assistance, please press "*" followed by "0" and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Miss Christina Kmetko, manager of finance. Please proceed, ma'am.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining the company's results for the fourth quarter and year ended December 31, 2004. If anyone has not received a copy of this news release, please call me at 440-449-9669 and I will be happy to provide you with a copy.

Our conference call today will be hosted by Al Rankin, chairman, president and chief executive officer of NACCO Industries. Also in attendance, representing NACCO Industries is Ken Schilling, vice president and controller. Al will provide an overview of the quarter and full year and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today.

Additional information regarding these risks and uncertainties were set forth in yesterday's press release. I will now turn the call over to Al Rankin. Al?

Good morning to all of you. I'll begin with an overview of the earnings release which was sent out last evening. This, of course, complements the 10-K which was also released last evening and is available on the NACCO Website.

Fourth quarter net income was $32.6 million, or $3.97 per share, compared with $27.4 million, or $3.34 per share for the fourth quarter of 2003. That brought full year 2004 net income in at $47.9 million, or $5.83 per share, compared to $52.8 million, or $6.44 per share in 2003.

2004 included a charge of $9.4 million pretax, $6.1 million after tax for a restructuring program at Hamilton Beach/Proctor-Silex. Excluding that charge, results for 2004 were just slightly above 2003 for the full year. Consolidated cash flow before financing activities continued to be strong, $85.9 million in 2004 compared to $80.5 in 2003.

The individual business results vary significantly so I will discuss fourth quarter results and outlooks of each separately, beginning with NACCO Materials Handling Group wholesale, and followed by NACCO Materials Handling Group retail, Housewares, and North American Coal.

Turning to NACCO Materials Handling Group wholesale, wholesale reported net income of $10.3 million on revenues of $545 million for the fourth quarter of 2004 compared with net income of $9.8 million on revenues of $478 million for the fourth quarter of 2003.

The revenues increased 14% in the fourth quarter of 2004 compared with the fourth quarter of 2003. Lift truck shipments increased to 22,400 units in the fourth quarter of 2004 from 19,800 units in the fourth quarter of 2003. The backlog increased to 25,700 units at December 31, 2004 compared with 19,100 units at December 31, 2003 and decreased from 26,800 units at September 30, 2004.

Wholesale reported slightly improved net income over the fourth quarter of 2003. The increase was primarily the result of the positive effects of the increased unit volumes, increased parts volumes and margins and improvement in operating expense, a reduction from a temporary perspective of fees paid to NACCO Industries and a favorable change in the effective income tax rate.

Those substantial benefits were almost completely offset by lower margins as a result of unfavorable currency movements of $5.8 million pretax primarily due to the sourcing of trucks and components for the U.S. market from countries with appreciated currencies and from increased material costs of $21.1 million pretax, particularly as a result of increased costs for steel.

As you know, the material cost trends became apparent early in 2004, NACCO Materials Handling Group wholesale implemented price increases in response to material cost increases. Those price increases resulted in benefits totaling $6.2 million pretax in the fourth quarter of 2004 which moderately offset the rise in material costs.

For the year ended December 31, 2004, NACCO Materials Handling Group wholesale reported net income of $22.3 million on revenues of $1.9 billion, compared with net income of $22.4 million on revenues of $1.6 billion for 2003.

Turning to the outlook, NACCO Materials Handling Group wholesale expects stronger lift truck markets in 2005 in both the Americas and Asia Pacific, pretty flat markets in Europe compared to prior periods. While the fourth quarter backlog rose significantly compared to a year ago, orders are anticipated to remain strong and wholesale anticipates that its unit shipment levels for 2005 will increase at controlled rates to accommodate the phase in of newly designed products.

Nevertheless, NACCO Materials Handling Group wholesale expects to continue to have increased volumes in 2005 in comparison to 2004.

Despite these stronger lift truck markets, wholesale does expect 2005 to be challenging, as the company works to moderate the effects of increases in material costs which are largely related to supplier price increases for steel. Price increases implemented by NACCO Materials Handling Group wholesale during 2004 are expected to help partially offset the effect of the increase material costs, although the company does not expect full cost recovery in 2005. In addition, the company will continue to monitor increases in material costs on a regular basis and to evaluate the need and the potential for future price increases.

As you know, the company is also completing several significant program initiatives that will increase or are expected to increase costs and inefficiencies in the near term. Those additional programs relate to wholesale's new product development and manufacturing restructuring activities, and in particular, product development and product production costs related to the new product development programs are expected to continue at current high levels through 2005 as the introduction of the new one to eight ton internal combustion engine lift trucks begins early this year, or has begun early this year, while costs attributable to the manufacturing restructuring program are anticipated to decline.

The transition to the new products in the Americas and in Europe will affect operations in the first and third quarters of 2005, putting pressure on earnings during the first part of the year, especially in the first quarter. This pressure should be alleviated by the end of 2005 as the manufacturing locations move into full production of this first wave of new products, and the company expects to complete the Americas portion of its manufacturing restructuring program, including the rearrangement of the layout of its production lines by the end of 2005 with a consequent reduction in manufacturing costs and an improvement in productivity.

NACCO Materials Handling Group's various long term programs, particularly these significant new product development programs, are expected to enhance profitability and generate growth as they begin to mature, particularly in the 2006 to 2008 period. As previously discussed, the company has begun the introduction of the first wave of those new products early this year with the expected introduction of all of the products by the end of 2008.

The global lift truck market has exceeded wholesale's expectations in 2004 by rebounding approximately to the midpoint of the lift truck market cycle, although they have not yet reached peak cyclical volume levels, and of course the company is hopeful that these increased levels will be sustained and continue to improve going forward.

Turning to NACCO Materials Handling Group retail, the retail business, which includes the required elimination of intercompany transactions, reported a net loss for the fourth quarter of 2004 -- $2.6 million compared with the net loss of $5.0 million for the fourth quarter of 2003. For the full year, retail reported a loss of $7.2 million, compared with a loss of $6 million in the previous year.

Basically, retail expects to continue the programs it's been undertaking to improve the performance of its wholly-owned dealerships over the course of 2005 in order to meet its longer term objective of achieving and sustaining at least break-even results while building market position in these important dealership areas.

For NACCO Materials Handling Group consolidated, the whole entity generated consolidated cash flow before financing activities of $62.7 million. And that compares to $39 million in 2003.

Turning to the Housewares group, which includes NACCO's Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries, reported improved net income of $18 million for the fourth quarter of 2004 on revenues of $232 million compared with net income of $16.2 million for the fourth quarter of 2003 on revenues of $213 million and that was despite a weak market for housewares products in general and reduced customer visits at factory outlet malls.

Revenues at Hamilton Beach/Proctor-Silex increased in the fourth quarter of 2004, primarily due to increased sales volumes and sales of higher-priced products in the U.S. consumer and international markets and particularly driven by increased advertising.

Net income at the Housewares group improved in the fourth quarter of 2004 compared with the fourth quarter of the previous year, primarily as a result of improved operations at Hamilton Beach/Proctor-Silex. Ham Beach experienced increased sales volume and improved margins as a result of the items previously discussed and as a result of a reduction in the effective income tax rate. Those additional items were partially offset by higher material costs, particularly resin and steel commodities and additional but expected pretax charge of $700,000 related to the restructuring announced in the first quarter of 2004 and increased advertising and employee related costs.

Kitchen Collection’s net income declined moderately as a result of reduced customer visits at comparable stores.

For the 2004 full year, the Housewares group reported net income of $17.2 million compared with $19.5 million in the previous year. The decline in the 2004 net income compared with 2003 is primarily attributable to a $9.4 million pretax charge, or $6.1 million after a tax benefit of $3.3 million recorded in 2004 related to the restructuring program currently being implemented at Hamilton Beach/Proctor-Silex manufacturing and distribution facilities.

During 2004, the Housewares group generated cash flow before financing activities of $9.4 million compared to $35.4 million in 2003.

Turning to the Housewares group's outlook, the housewares group is cautiously optimistic that markets for its consumer products are going to strengthen in 2005 compared with prior periods although volume prospects from current and new products are dependent on the need for and acceptance of the company's products along with availability of shelf space within the housewares retail market.

Continued product innovation, strong brands, heightened channel efforts and reduced costs are expected to help the Housewares group maintain and strengthen its lead market positions. New products already being introduced such as the Eclectrics line of electric appliances by Hamilton Beach and the Traditions line by Proctor Silex as well as the continued success of the Hamilton Beach BrewStation coffeemaker and other new product introductions are anticipated to generate additional product placements and continued margin improvements in 2005 resulting in positive effects on revenues and operating profit.

Hamilton Beach is continuing programs including manufacturing restructuring and cost reduction efforts begun in earlier years which are designed to reduce operating costs and improve manufacturing efficiencies. Additionally, the manufacturing restructuring program implemented in 2004 is expected to contribute to improved results excluding future charges for this program in 2005.

The company also expects continued margin improvements from increased sourcing of products from China as a result of the program. These programs and others initiated by Hamilton Beach/Proctor-Silex are expected to increasingly improve operations in 2006 and 2007. Kitchen Collection long term expects to continue programs to enhance its merchandise mix, optimize store selling space, a number of other programs which include developing new store formats, including closed mall formats while aggressively managing its costs.

Now turning to North American Coal, Coal's net income for the fourth quarter of 2004 was $3.9 million, compared to $4 million for the fourth quarter of 2003. Coal deliveries for the company's consolidated mines were about the same in 2004 and 2003 and the company's unconsolidated project mines were slightly lower in 2004 than 2003. On the other hand, limerock dragline mining operations delivered 5.1 million cubic yards of lime rock in the fourth quarter, compared to deliveries of 3.3 million cubic yards in the same period in 2003.

Full year net income for North American Coal increased 30% to $18.6 million from $14.3 million for 2003.

Turning to the Coal company's outlook, the company anticipates that both the consolidated mines and the unconsolidated project mines will continue to perform at current levels in 2005. However, operating results are expected to be temporarily affected by moderately increased costs at Red River Mining and Mississippi Lignite Mining Company as these operations work through adverse geological conditions.

Over the longer term, results at Mississippi Lignite Mining Company and San Miguel Lignite Mining Operations are expected to improve considerably in 2006 and 2007 as a result of improved operating conditions and contract changes respectively. In addition, North American Coal expects to continue its efforts to develop new domestic coal projects and is encouraged that more new project opportunities may become available given current high prices for natural gas, the main competing power plant fuel.

Further, the company continues to pursue additional non-coal mining opportunities, including additional lime rock drag line mining services projects. I might add that the Coal company generated cash flow before financing activities in 2004 of $25.8 million compared to $9.8 million in 2003.

In conclusion, I have a few thoughts on the company's overall prospects and outlook. First, if you have previously participated in these quarterly updates, you may remember my references to NACCO's 2002 and 2003 annual reports. In those reports, my CEO letters and the subsidiaries' CEO letters, have particularly focused on the key strategic and operating programs we have in place at each business to enhance profitability and generate growth. These programs have the objective of meeting each business as long term minimum financial targets over the next few years.

The objective is to reach these minimum operating profit targets or return on capital employed in the case of North American Coal by the 2007-8 time period or before depending on when each business' programs mature.

Likewise, my CEO letter in the annual report outlined our focus on cash flow and our general objective of being a substantial generator of positive cash flow before financing over time as we were in 2002, 3 and 4.

As I noted in those letters, reaching these objectives presents a very large financial opportunity in comparison to 2003 and 2004 income levels. Our key change programs have our full commitment. They were generally on track during 2003 and remain so in 2004. I do want to emphasize, however, that while we are obviously one year closer to maturity than we were a year ago, their effect still will not happen overnight.

Program maturity in one case extends out as far as 2008 with the rest of the programs maturing variously over 2005, 6 and 7. We expect to fully update our shareholders shortly on our profit, cash flow and growth objectives and our anticipated progress toward them in the 2004 annual report.

In overview, we believe that 2005 will continue to be a year of preparation for what we hope will be a very significant impact in 2006 and then again in 2007. I do, however, once again, want to note that while we believe the prospects for the next few years are excellent, other events could intervene and markets and competitive conditions are always uncertain. For example, the increased raw materials pricing and the dramatic strengthening relative to the dollar of the euro, the British pound and the yen are having a significant effect on our short term profitability at NACCO Materials Handling Group.

As I've noted in the past, if these conditions appear likely to continue over the long term, we will have to take additional pricing and possibly procurement and sourcing actions to bring costs and margins in line with our targets.

Generally, however, we believe that the key strategic programs outlined in our 2003 annual report and our strategy presentation on our Website are the right programs and that our challenge now is the execution of these programs.

Again, as I have already said, I want to emphasize that 2004 was and 2005 will continue to be a time of significant continued preparation for future years as we incur high expenses to implement programs that will significantly benefit the future. This is especially true at NACCO Materials Handling Group and to a lesser degree at Hamilton Beach/Proctor-Silex and North American Coal.

Further, as I have already indicated, we expect the results of our programs to be increasingly visible, indeed, quite visible in our financial performance beginning in 2006, 7 and 8.

We believe that we will be executing these programs in a period of recovering markets. Near term we are hopeful that our consumer and capital goods markets will continue to strengthen in 2005. The pace of these upturns, of course, is uncertain, but the direction seems very clear. Nevertheless, our near term challenge is to continue to execute our programs effectively and at NACCO Materials Handling Group to recover raw material price increases through price increases and cost reductions, a process we expect will in due course have a significant impact, especially beginning in 2006.

With that I'd now like to turn to any questions that you may have.

Thank you sir. Ladies and gentlemen, if you wish to ask a question, please key star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please key star followed by two. Questions will be taken in order received. Once again, that is star one to ask a question.

Our first question comes from the line of Tom Klamka of CSFB. Please proceed.

Good morning.

Morning.

On the Material Handling Group, obviously steel had a significant impact. I guess excluding the impact of your own price increases, almost $15 million pretax, so $15 million to EBITDA. Can you talk about - that seems like an awfully high unrecovered steel impact and your narrative suggests possibly waiting to see what happens before making additional price increases but it seems like there is definitely the need. Can you talk about how well these increases are being accepted by the market and how you guys deal with that going forward?

We have in place price increases that are designed to - if fully recovered in the marketplace are designed to recover the costs that we have incurred or know about incurring now. Further price increases really would be largely dependent on either specific demand considerations or more fundamentally on further price increases which - in raw material costs - which at this point are definitely moderating.

With regard to the ability to pass these price increases along in the marketplace, I wish the equation worked as straightforwardly as you wish it would. There has been a lot of resistance in the marketplace. Generally, we think that our competitors are, perhaps with some lags, having the same cost increases that we are having.

The customer base, particularly certain segments of it pushed back very hard and there are times when competitors see that as an opportunity to make inroads in share position. So it's a very competitive period and I think that our planning is that to try to balance two objectives, insuring that we maintain our position in the marketplace on the one hand and over time show the leadership so that it has other companies move forward that they will realize that it's in their interest as well to have price increases that are - that reflect the kinds of cost increases that they have had.

So I think it's just a - there are many negotiated bids. We have to test the market all the time. We have objectives of fully implementing these price increases, but it all doesn't stick. And of course, there is a delay mechanism which is part of the impact because the backlog doesn't get repriced when new price increases come out, necessarily. But it's a slow and difficult process and I would distinguish it from the commodity producers themselves. They're operating in an environment where supply and demand tends to move prices very quickly.

In our case, that's not necessarily true. Our end customers will look hard when they receive any price increases in certain cases, regardless of the reasons and the justifications.

And let me add that I don't think that this situation is in any way untypical of what's going on among commodity steel users such as ourselves. There are substantial lags that many companies are facing because of these costs in the marketplace, and for that matter, we even have lags at Hamilton Beach/Proctor-Silex where we have some commodity price increases in both chemical raw materials and in steel that affect particularly the costs in our own manufacturing operations in Mexico.

But they affect our operations in, our suppliers' activities in China as well and our Chinese suppliers are pushing on us to put price increases and of course we resist and we try to work through value improvement opportunities that we can maintain prices for our end customers in the small kitchen appliances business but the same lags and delays are going on in that business.

There it tends to be year to year matter, but any time you increase prices at some of the larger customers, they get very aggressive about looking for alternatives and testing the marketplace. So it's a very delicate period and my own assessment is that it simply will take some time for these price increases to be fully realized in the marketplace. Our working assumption is that we will recover all of our cost increases through price increases or cost reductions during the course of 2006.

I hope it happens sooner than that but that's our cautious way of thinking about it at this point.

Have there been price increases announced - I guess more recently, that aren't reflected in the fourth quarter? And I guess another way of looking at that is, if you make a very basic assumption and say steel is not going to go up from December 31,'04. So steel is flat from now on and who knows, but most guys are saying it's probably going to be flattish and maybe soft but to say it's flat, given price increases that you've already announced maybe later in '04 that didn't hit this fourth quarter number, do you still expect to see significant impacts in '05 from steel or if steel is flat are you going be able to make all this up in '05, a more bullish ...

Well, first, I tend to agree with your assessment on the cost side of the equation. The best we can see is that steel prices are going to be flat and we cross our fingers and hope that they may actually turn down. We think the somewhat longer term outlook is even more positive because we see more steel capacity coming on in China and the supply-demand equation shifting to some degree around the world in 2006 and 7.

So we, I think, concur with your view on the cost side of the equation. We did have price increases at both the beginning of 2004 and in the last quarter of 2004. So you're right that the last quarter price increases have not rolled through really into the marketplace and those are the ones I was really referring to as bringing us to full recovery. If we can get full realization of those in the marketplace.

OK. And then, just the last question from me. The net debt at NMHG declined substantially in the quarter, over $65 million. It looks like there was some pretty big shifts in working capital and especially accounts payable. Can you address that working capital account as a source of cash in the quarter?

You know, I think we have very disciplined management of working capital. I think we feel pretty good about our receivables levels. In fact, I think our receivables levels in terms of days sales outstanding were about as good as we've ever done. The guys have done a super job there. Inventories have obviously been going up due to the increased volume, due to the preparation for the launch in January-February for the first of the new products and from our Berea plant and the provisioning for that.

And I think I would say that in the fourth quarter, especially toward the end of the fourth quarter, we had very good production levels and we overcame some of the supply shortages which we had had, related to some of the steel issues you mentioned earlier that were affecting us in what I would call a moderate but nuisance-some way in terms of cost and efficiency in the second half of '04 and we got that pretty much cleaned up by the end of the year.

We also had some issues in Japan where - that don't show up necessarily in all the consolidated numbers but where we got our shipments levels up to what we needed to have them at as we - as our suppliers in Japan recovered from the hurricane that affected a couple of our Japanese suppliers.

So by the end of the year our inventories were in better shape and we had a lot of sales volume right toward the end of the year. In addition, in the payables area we always have a very disciplined payables process at the end of the year and so - but it isn't anything different from what the case was at the end of the previous year. So if you look at the year on year numbers, those are I think representative of improvement in a market that was turning up.

And - I've got the payables balance up $100 million.

Volumes up substantially. Remember, it's the units that are really generating the payables volume. And we've got a lot of material coming in at the end of the year in preparation for the increased volume levels that we're expecting as we go into 2005.

Right. OK. Thank you.

Mm-hmm.

Once again, ladies and gentlemen, if you wish to ask a question, please key star followed by one on your touchtone telephone.

Our next question comes from the line of Ryan Harkins (ph) of Credit Suisse Asset Management. Please proceed.

Hi. Good morning.

Good morning.

A couple of just kind of detail questions and then I wanted to ask kind of a bigger picture question. In the press release, it notes that for NMHG wholesale that you had some marketing and employee related expense increases. I just wanted to - if you could elaborate on that.

And then also, if you could elaborate on the temporary suspension of fees paid to, I guess to corporate.

In the marketing and employee expenses in the main, those are not increases in major significance in the head counts. We do have our regular increases and expense levels associated with employees and those are in there. There was also a return to levels of incentive compensation, that while still below target because of performance, in absolute terms the business isn't yet where we want it, were better than in previous years. And so those expenses are associated, are involved there. But other than that there is really not anything particularly unusual going on in that area.

Support for the one to eight ton program as well.

And I do think you do have to be a little careful with the numbers - as Ken said, we have the support for the one to eight ton and I think you do have to be a little careful with the numbers because we've had so much currency change that the European expense levels for GS&A get translated into U.S. dollars and make those expenses appear to be much higher than they really are.

Actually, if you look at our GS&A expenses as a percent of sales, they were in really quite good shape for the year and we expect them to be in quite good shape going forward.

I don't have really much to say on the NACCO fee except that we looked at that and simply decided that in the context of the issues surrounding recovery of pricing and the speed of that recovery in the marketplace that we just preferred to have more flexibility in NACCO Materials Handling Group and so we did not pay those fees out and they'll return in due course, so ...

And what's the magnitude of those fees, typically?

$2.25 million a quarter. Pretax.

I'm sorry, $2,250,000 ...

Two and quarter million a quarter pretax.

Pretax.

So in a quarter that we forego, that's two and a quarter.

And that shows up on your consolidated income statement as a part of ...

That's a part of NACCO and Other.

Got it. OK.

At the NACCO level it's a non issue in terms of our reported earnings.

OK. And you just discontinued that for the fourth quarter, correct?

We had a couple of quarters in 2004 that we forego the fee.

OK. So I guess my next question would be, with regard to kind of the pace of the restructuring, the execution of the restructuring program and other programs within NMHG and the other businesses, for that matter, can you comment on that and also share your views on the duration of the current economic cycle that we're in?

Let me just go through each of the businesses and very quickly give you some kind of flavor for that. If you look at the coal business, basically by the end of 2005 we should be moving into much better geological conditions at our Mississippi operation and earnings should begin to turn up in 2006 at that business. In that operation. Likewise, at the San Miguel operation, we will be mining under new contract provisions in a more - in a way that has greater impact beginning 2006 and finally, we've had some temporary geological issues at our Red River mining operation which we're already starting to sort through.

So I'm optimistic that - the coal company, that there are several things that are going to have an impact really beginning, substantially beginning in 2006 and I should include additional lime rock operations as well. And then there'll be a further uplift in 2007. So that's the coal company timing and outlook.

At housewares, the big impact is the completion of our further plans on sourcing product from China and we have, as you know, a restructuring program under way. We will not complete all of the transition of that until 2006 and the impact we felt significantly in 2006 and more in 2007 so - and that affects both our commercial business and our consumer businesses and it's a double impact because on the one hand we have greater - We reduced the inefficiencies of our U.S. manufacturing operations and then the other hand, we get absolute lower costs from our China sourcing.

So those are the major sources of impact at Hamilton Beach and the housewares business. I might add that there is also the opportunity for increased impact but much harder to predict from the new products that are coming out, the pipeline during the course of 2005. Some of those may hit in the later part of 2005 and be helpful even in 2005 results but we certainly are hopeful that they'll have a substantial impact in 2006.

So - And then we see further opportunities for additional placements and the full impact of the resourcing programs in 2007. So, again, it's a 2006, 7 story, similar to the 2006, 7 story at the coal company.

OK.

At the Nacco Material Handling Group retail business, the - we're working very hard to bring those losses down but still to build market position. You may remember that the reason we participate in those is not because we're really in the retail business. We're in the wholesale business but in order to be in the wholesale business you have to have effective distribution and we have had some areas where we have had dealership operations that were less than what we needed and in some cases it made sense for us to own those for a transitional period.

So we are always on the look, on the hunt for first class dealer operators who might play a role in some of our retail operations and actually put them in even stronger camps. So there are kind of two things. One is the intrinsic improvement of those and the other is the potential opportunity for enhanced volume if we find the right long term operation to take some of those over at the right.

We have been - we have sold some, we sold a small one, I believe, in the fourth quarter in Germany and we're pleased with the outcome of that situation so the way we have put it is that while we own them we would like to be operating at breakeven and that as a practical matter means that some of them are going to be making money and others are probably going to continue to lose money as they are currently structured and as we're currently operating them to ensure that they meet the strategic needs of the wholesale business.

But our objective is to get to breakeven while we continue to build the market position. And we expect that process to be enhanced in 2005 compared to 2004. And presumably it will be going even further in 2006 in terms of meeting our objectives as I've just outlined.

At the wholesale business, there are really several different kinds of things going on. All of them affect what I would call the margin side of the equation. Volumes in the business are increasingly pretty good. The - as I said earlier in response to Tom's question, I think - or somebody -yours, I guess. The GS&A in the wholesale business is in satisfactory position. The issues there are margins and the costs of the programs we're undertaking. And there are really two kinds of programs that are affecting it. The most important one is our new product development program. It's way - far and away the most ambitious program we've ever undertaken.

And the first of those products are now being produced in our Berea facility in the United States. They are in the hands of our dealers and so far we are very enthusiastic about the reception and the progress of that. It'll have a short term impact in terms of cost and throughput in the first quarter because we've been going - ramping up those products very carefully to try to make sure that quality is absolutely number one as we bring those new products in.

And then we have other products that are being introduced around the mid-year third quarter period, so there'll be some pressure from those. But increasingly those new products will be out, we'll hope they'll be well-received in the marketplace. They'll have many more features and capabilities and enhanced cost position in comparison to existing products and so we feel that over the course of 2005, 6, 7 and 8 that that new product development program will have an increasing impact on the business.

At the same time, we will be completing, in 2005, for all practical purposes, our manufacturing restructuring program. There will be some changes that come in terms of production locations as a result of product introductions in the 2006 time period, I believe it's 2006 and it might include a little of 2007. I'm not sure.

But the bulk of it will have settled down, certainly in the United States by the end of this year. All products will be being made in the plants where they will be made prospectively under our new plans. And those plants will begin to settle down and become more efficient.

It's a very difficult process for them to go through a combination of new product and changing of production lines both in concept and in location and in the magnitude we're doing but we think that that's got enormous potential to pay off increasingly over the next three years.

So that really covers both the product and the manufacturing programs that are underway. Now, there are many, many other programs in marketing, in distribution, in procurement and so on that are underway but the only other one that I really - the only other aspect I'd want to focus on right now is the one that Tom really asked about which is the pacing of the recovery of additional commodity costs over the next few quarters and I outlined in a pretty complete way my thinking on that issue. I certainly would say that if commodity costs would add to that, that if commodity costs began to decline, that the whole process would become considerably easier than it is at the current time.

So that's kind of the perspective that I would leave you with. There's a lot happening with impact in our housewares business, in the coal business with significant impact in '06 and '07 for very specific reasons and the same is true in NACCO Materials Handling Group, but of course, our energies and focus are on fine-tuning the price cost relationship process as a result of this combination mainly of material cost increase but also currency - adverse currency impact.

That may cause us to think about some modest adjustments in some of our sourcing patterns over the next year or so depending on the durability, as we see it, of those trends. I think that's kind of a comprehensive answer to your question.

And that's very helpful. I appreciate it. I just have two quick follow-up questions and then I'll hop off.

So with respect to NMHG then, just going back to the strategy presentation you put out I guess last year, is your operating profit target, is it 9% of, let's just use kind of your current revenue base in that business, or is it the 160 which represents 9% of your '03 ...

No, it's 9% of whatever the volume is. That's our target.

OK.

And, I've got to emphasize that to reach the full target - There's a lot of room for improvement and if we hadn't been - If it hadn't been for the material cost increases this last year and the currency, the story we would be telling would be a very, very different story at the moment.

Sure.

But we have to deal with what we have to deal with and so what we're focused on is trying to get that back into balance at the same time that's we're introducing all these products through the 2008 period. So you have to put the achievement of the target in the long term contest and it's the longest term of all of our businesses because we don't get all those new products completed until 2008.

Now the manufacturing restructuring including Europe will really be complete in, I think in 2006 or maybe it's the early part of 2007. So there's a longer term process but a lot happening in the near term and then you have to overlay on that the price cost relationship issue and I'm giving you a very judgmental - my own best judgment on that and that is it is going to take a while to get the full recovery but eventually we see no reason why that shouldn't happen.

We know we've got some competitors with different relationships with steel companies, longer term contracts so they're advantaged in the short term in competing against us. That may be one reason why some of them don't raise their prices as quickly as others. All of that is part of the mix here. So that's the very significant question and everybody is going to have to think about - make a judgment on that and I would say that there is no particular reason that what you see happening with other companies that are kind of similarly situated in due course shouldn't happen with us.

OK. And then finally, could you just - What sorts of changes are being made to your coal contracts that ...

Oh. It's just one. It's just one situation and basically it's in our San Miguel operation and what really happened was that mining activities needed to take place in an area that was outside the contract and that meant that there had to be a negotiation between our customer and ourselves and it was amicable and worked out but it addressed a number of issues that have affected us negatively in terms of the way the old contract provisions were written. So as we mine in those new areas more and more, things will be better and that's what I meant by that. It's only one operation.

OK. Thanks very much.

Yeah.

Ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I would like to turn the presentation back over to Mr. Rankin for closing remarks.

I have no closing remarks other than to thank you all for attending and to say that, of course, there is opportunity for follow up questions with Christy as questions may occur to you and she will either be able to answer them or get answers for you. So let me turn it over to Christy for her final thoughts.

Thank you, thank you for joining us today. We appreciate your interest and if you have any additional questions you can reach me at 440-449-9669. OK.

OK. Thank you very much.

Ladies and gentlemen, thank you for your participation on today's conference call. This does conclude the presentation. You may now disconnect. Good day.