NACCO Industries Inc (NC) 2005 Q1 法說會逐字稿

Good say, ladies and gentlemen. And welcome to the first quarter NACCO Industries earnings conference call. My name is Gregory, and I will be your coordinator for today.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Ms. 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 and our first quarter 10-Q were distributed outlining the company's results for the first quarter ended March 31, 2005. If anyone has not received a copy of this news release or copy of the 10-Q, 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 CEO of NACCO Industries. Also in attendance, representing NACCO Industries is Ken Schilling, VP and Controller. Al will provide an overview of the quarter and then open up the call to your questions.

Before we begin, I would like to just 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 and in yesterday's 10-Q.

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 as Christie said was sent out last evening and which complements the 10-Q which was also released last night. And as she said, it's available on the NACCO website.

First quarter net income was $5.2 million or $0.63 a share compared with a net loss of $4.5 million or $0.55 a share for the first quarter of 2004. First quarter of 2004 results, that is last year's results, included a charge of $9.1 million pre-tax or $5.6 million after tax for a restructuring program implemented at Hamilton Beach/Proctor-Silex. Excluding that charge, the results for the first quarter of 2005 were $4.1 million higher than in 2004.

The individual results vary significantly -- of the individual businesses. So I will discuss first quarter results and outlooks for each separately, beginning with NACCO Materials Handling Group, Wholesale followed by NACCO Materials Handling Group, Retail, Housewares and North American Coal.

NACCO Materials Handling Group Wholesale, reported net income of $2.8 million on revenues of $536 million for the first quarter of 2005, compared with net income of $2.5 million on revenues of $421 million for the first quarter of 2004. Revenues increased 27% in the first quarter of 2005 due to increased unit volumes, primarily in the Americas, a favorable shift in mix toward higher-priced lift trucks in all markets, the effect of price increases implemented during 2004, foreign currency movements and increased parts volumes.

Lift truck shipments increased to 19,909 units in the first quarter of 2005 from 17,624 units in the first quarter of 2004. Worldwide backlog increased to 27,500 units at March 31, 2005 compared with 24,500 units at March 31, 2004 and 25,700 units at December 31, 2004.

The slight increase was primarily the result of the positive effects of increased unit and parts volumes, lower restructuring-related expenses in 2005 compared with 2004 as a result of the completion of the Lenoir plant closing in 2004, and improved equity earnings from unconsolidated subsidiaries. These benefits were offset primarily by increased material costs of $22.2 million pretax, particularly as a result of increased costs for steel.

As the material cost trends became apparent in 2004, NACCO Materials Handling Group, Wholesale implemented price increases in response. These price increases resulted in benefits totaling $10.8 million pre-tax in the first quarter of 2005 compared with the first quarter of 2004. This partially offset the increased material costs.

Also offsetting the favorable effect of increased volumes were net unfavorable currency movements of $5.2 million pre-tax primarily due to the sourcing of trucks and components for the U.S. market from countries with appreciated currencies, as well as increased operating expenses compared with the first quarter of 2004. Operating expenses increased as a result of higher marketing expenses related to the product launch of the 2 to 3 ton cushion truck in January 2005 and preparation for the launches of the 2 to 3 ton pneumatic truck and the 1 to 2 ton cushion and pneumatic lift trucks in the third quarter of 2005.

Also contributing to the increase in operating expenses were increased employee-related expenses and the reinstatement of the quarterly management fee paid to NACCO Industries.

Turning to the outlook for the wholesale business. Global lift truck markets continued to grow in the first quarter of 2005. NACCO Materials Handling Group Wholesale expects stronger lift truck markets in 2005 in the Americas and Asia-Pacific and relatively flat lift truck markets in Europe compared with prior periods.

While first quarter backlog rose significantly compared with a year ago and orders are anticipated to remain strong, NACCO Materials Handling Group Wholesale anticipates that its unit shipment levels for mid 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 with 2004 levels.

Despite the stronger lift truck markets, NACCO Materials Handling Group Wholesale expects 2005 to be very challenging especially in the second and third quarters as the company works to moderate the effect 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 continue to help partially offset the effect of the increased material costs, although the company does not anticipate full cost recovery in 2005.

Further, the company continues on a regular basis to monitor changes in material costs, which appear to have begun to trend down from peak levels at the end of 2004. In addition, since past currency movements are expected to continue to affect current operations, the company is actively analyzing moving the sourcing of components from British pound sterling and euro areas into U.S. dollar and low cost areas on the assumption that currencies are likely to stay at levels that are disadvantageous to NACCO Materials Handling Group Wholesale's current sourcing pattern.

Wholesale is currently completing several significant program initiatives that will benefit the company long-term, but near-term are expected to increase costs and inefficiencies, particularly in the remainder of 2005. These additional programs relate to Wholesale's new product development and manufacturing restructuring activities. And the company introduced the first of the new 1 to 8 ton internal combustion engine lift trucks in the first quarter of 2005, with the expected introduction of all of these products by the first quarter of 2007.

Product development and product introduction costs related to these new product development programs are expected to continue at current high levels through 2005, as the introduction of the new lift trucks continues on schedule with the launches of the 2 to 3 ton pneumatic lift truck and the 1 to 2 ton cushion and pneumatic lift trucks in the third quarter of 2005.

At the same time, the associated costs attributable to start-up inefficiencies and the ongoing manufacturing restructuring program are expected to continue as some production moves to different facilities. The introduction of these new products will continue to put pressure on earnings in the second and third quarters of 2005. But this pressure should be significantly alleviated by the end of the year as the assembly lines move into full production of this first wave of new products. The company expects to complete the majority of the rearrangement of the layout of its assembly lines in the Americas by mid-2005 with a consequent reduction in manufacturing costs and an improvement in productivity in 2006.

While the introduction of the additional 1 to 8 ton products, as well as certain other programs, including the final changes in European production locations, are expected to continue to affect operating results unfavorably in 2006, the benefits from the increasing effect of its pricing and other programs and expense reduction efforts already implemented are expected to provide significant benefits in 2006.

Overall, NACCO Materials Handling Group's various long-term programs, particularly significant new product development programs, are expected to enhance profitability and generate growth increasingly as they mature in the 2006 to 2008 period.

NACCO Materials Handling Group Retail, reported a net loss for the first quarter of 2005 of $2.5 million compared to a net loss of $2.0 million for the first quarter of 2004. The increase in the quarterly net loss for the quarter compared with the previous quarter -- previous year's quarter is primarily the result of reduced margins on new trucks in Asia-Pacific.

In 2005, NACCO Materials Handling Group Retail expects to continue its programs to improve the performance of its wholly owned dealerships in order to meet its longer-term objective of achieving at least break-even results while building market position. However, restructuring and improvement programs will continue to affect -- in 2005 without achieving the full benefit of those programs until future years.

Turning to NACCO Housewares Group, which includes NACCO's Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries. They reported a net loss of $1.1 million for the first quarter of 2005 on revenues of $115 million compared with a net loss of $6.5 million for the first quarter of 2004 on revenues of $117 million.

First-quarter 2004 results included a $9.1 million pre-tax restructuring charge, or $5.6 million after a tax benefit of -- after tax benefit of $3.5 million, related to a restructuring program implemented at Hamilton Beach/Proctor-Silex's manufacturing facilities.

Revenues at Hamilton Beach/Proctor-Silex decreased slightly in the first quarter of 2005 predominantly due to lower sales volumes in the U.S. consumer markets, moderately offset by improved volumes in commercial food service and international markets and favorable foreign currency movements.

In the first quarter of 2005, revenues at Kitchen Collection decreased compared with the first quarter of 2004 due to reduced customer visits at comparable stores, mainly as a result of significant increases, we believe -- mainly as a result of significant increases in gasoline prices. The number of Kitchen Collection stores increased to 186 stores at March 31, 2005 from 183 stores in the previous year.

The reduction in the net loss at NACCO Housewares Group in the first quarter of 2005 compared with the first quarter of 2004 was primarily a result of the absence of the restructuring charge recognized in the first quarter of 2004. Excluding the effect of the restructuring charge, operating results at the Housewares Group declined slightly between periods due to the lower sales volumes at Kitchen Collection.

Looking forward, NACCO Housewares Group is cautiously optimistic that markets for its consumer goods will strengthen in 2005 compared with prior periods. Importantly continued product innovation, strong brands and heightened channel efforts are expected to help Housewares Group maintain and strengthen its leading market positions. New products introduced by Hamilton Beach/Proctor- Silex are expected to generate additional product placements and continued margin improvements in 2005 resulting in positive effects on revenues and operating profit.

These new products include the new Hamilton Beach BrewStation Deluxe coffeemaker, the Big Mouth Food Processor, the WaveLogic and WaveStation Blenders, which incorporate the company's new WaveAction new blending technology, the Change-a-Bowl Slicer/Shredder and the new Hamilton Beach Eclectrics and Traditions by Proctor Silex along with additional new product introductions.

Hamilton Beach/Proctor-Silex 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. The manufacturing-restructuring program implemented in 2004 has already favorably affected operating results and is anticipated to continue contributing to improved results. This restructuring program is expected to be completed by the end of 2005.

The company also expects continued margin improvements since increased sourcing of additional products from China will be largely completed by 2006. These programs and other programs initiated by Hamilton Beach/Proctor-Silex are expected to increasingly improve results in 2006 and 2007. In the near term, however, anticipated increases in shipping costs related to sourced products could adversely affect results.

Turning to North American Coal. Net income for the first quarter of 2005 was $4.3 million on revenues of $29.1 million compared with a net income of $5.8 million for the first quarter of 2004 on revenues of $25.9 million. Revenues at North American Coal increased primarily due to increased revenues from the consolidated coal mining operations and the start-up of the new limerock dragline mining operation in 2004.

The decrease in first-quarter 2005 net income compared with first-quarter 2004 net income is the result of increased employee related operating expenses and increased costs incurred at the Mississippi Lignite Mining Company as the mine works to recover one of the coal seams, which has been affected by adverse geological mining conditions, and as a result of increased repairs and maintenance costs. Equity income in unconsolidated project mining subsidiaries decreased nominally as a result of the decrease in tons delivered by The Coteau Properties Company.

As they look to the future, North American Coal anticipates that both the consolidated mines and the unconsolidated project mines will continue to perform well throughout the remainder of 2005, with continued improvement at San Miguel Lignite Mining Operations compared with the prior year. However, results are expected to continue to be adversely affected temporarily by moderately increased costs at Mississippi Lignite Mining Company, and to a lesser degree at Red River Mining Company, as these operations worked through certain adverse geological conditions in 2005.

Limerock mining activity is also expected to continue to increase as a result of two new dragline mining services contracts signed in the first quarter of 2005 for operations which are expected to commence in the third quarter of 2005 and late 2006 or early 2007.

Over the long-term, results at the Mississippi Lignite Mining Company and the San Miguel Lignite Mining Operations are expected to improve 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.

Now further, the company continues to pursue additional non-coal mining opportunities, including additional limerock dragline mining services projects.

At NACCO and Other, which includes the parent company operations and Bellaire Corporation, a wholly owned non-operating subsidiary, net income was $1.7 million for the first quarter of 2005 compared with a net loss of $4.3 million for the first quarter of 2004. This improvement is primarily the result of lower income tax expense and the reinstatement of the management fees charged to NACCO Materials Handling Group, which were temporarily suspended in the first quarter of 2004. Lower tax expense was primarily attributable to the recognition of a tax benefit related to previously generated losses in Europe and a reduction in the interim consolidating effective income tax rate adjustment.

In conclusion then, I have a few thoughts on the company's overall prospects and outlook. First, if you participated in these quarterly updates, you will remember my references to NACCO's 2002 & 2003 annual reports.

In those reports my CEO letters and the subsidiary CEO letters particularly focused on the key strategic and operating programs we have in place in each business to enhance profitability and generate growth.

These programs have the objective of meeting each business's 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 target in the case of North American Coal by the 2007-2008 period or before depending on when each business's programs mature. The 2004 annual report makes the same points and outlines similar timings.

Likewise, my CEO letters in the annual reports have outlined our focus on cash flow and our general objective of being a substantial generation of positive cash flow before financing overtime as we were in 2002, 2003 and 2004.

As I noted in that letters reaching this 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 remained so in 2004 and in early 2005.

However I want to emphasize that while we were obviously, we are obviously 1 year closer to maturity than a year ago their effects still won't happen overnight. Program maturity in one case extends out as far as 2008 and the rest of the, with the rest of the programs maturing variously over 2005, 2006 and 2007. As I indicated earlier, we have recently updated our shareholders on our profit cash flow and growth objectives in our anticipated progress toward them in the 2004 annual report.

In overview, 2005 will continue to be a year of preparation, for what we hope would be a significant impact in 2006 and then again in 2007 from our programs to achieve our overall objectives. 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; markets and competitive conditions are always uncertain.

And obviously 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 bring cost and margins in line with our targets.

Indeed, we now concluded that we should actively implement such procurement and sourcing programs in 2006 -- really at the end of 2005 and in 2006 and 2007. We further expect in 2006 that material cost increases will be quite moderate. And that the impact of pricing in 2006, will have a significant impact on our margin recovery program.

Generally in a broad sense we believe that the key strategic programs outlined in our 2003 and 2004 annual reports 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've already said, I want to emphasize that 2004 was and 2005 will continue to be time of significant continued preparation for future years, as we incur high expenses to implement programs that will significantly benefit the future. This is particularly true at NACCO Materials Handling Group and to a lesser degree in Hamilton Beach/Proctor-Silex and North American Coal.

Further as I've already indicated, we expect the results of our programs to be increasingly visible and be quite visible in our financial performance beginning in 2006, and continuing in, on in an increasing way in 2007 and 2008. 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 clear.

Nevertheless, our near term challenge is to continue to execute our programs effectively. And at NACCO Materials Handling Group to recover raw material cost 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.

[Operator Instructions]

And your first question comes from a line of Tom Klamka of CSFB. Please proceed.

Good morning, Al.

Good morning Tom.

It seems like you're making some pretty good progress on bringing out the new products in -- at the same time that the market has been showing a very strong recovery at NMHG. I guess my concern would be, you've got a very strong market that you haven't been able to capitalize on, earnings wise because of this reinvestment in the business, which is fine. But how do you look at the business, if at a time when these products are ready and coming on into the market, the economy starts to slow and unit starts to drop again. Where does that leave you, I guess just far as the new product line and the plants set up the way they are -- in a sort of, an earning potential basis versus where it was before?

A couple of thoughts on that. First, we don't see a decline coming in the near or intermediate term. Increase in the growth of the markets may subside. But at this point we don't really see that scenario evolving in the near term.

Perhaps, more important I think, we will be immeasurably better equipped to go through any slowdown in the future with the new product lines and the new manufacturing cost structure that we are putting in place.

So I think, in terms of the broader interpretation of our ability to weather effectively and at higher profitability, the cycles that come in the forklift truck business that we are better positioned, we will be better positioned.

And I think it's also important to distinguish the some of the longer-term factors from the shorter-term factors. The most important short-term factor is material cost increases. And those, we are hoping to recover increasingly, as we move through to 2006. And we think that's enough time either to cost reduction programs or price improvement programs to get our margins to the levels that we would like them to be at.

I think the added piece is that if the currencies stay where they are and our operating assumption for the current, for the moment is that they will stay where they are, then we need to take some actions to change our procurement sourcing patterns. And those actions are in motion.

Currency has had a significant impact on NACCO Materials Handling Group over the last -- really since 2003, even since 2002. And the cumulative impact is substantial enough that it's appropriate to look at adjusting some of those sourcing patterns. That's a very active effort that's underway right now. As is the continuing program to pull through the price increases as the, at the same time that material cost increases are beginning to moderate, at least from a perspective of a year on year basis.

We've seen in variety of these capital goods companies, some pretty good realization on price increases and whether it's aerials or cranes or anything like that. It's actually been netting out at this point almost the majority of the steel cost increases. Why is there less of an offset possible in a forklift market at this point? And what are your -- how are your competitors seeing this? Are you, it sounds like they are just willing to take the hit on earnings and absorb steel prices.

Well, that's a really good question. And it's a source of some frustration. I think that the folks in construction equipment industry perhaps have been best positioned because of lengthening lead times and extreme demand for heavy construction equipment to pass along price increases.

I think in the forklift truck business that our approach has been to be a price leader. We have been, not only in America but around the world. And to work very hard to realize at the bottom line the effect of the nominal price increases. We think that the period when our competitors perhaps had -- particularly those associated with the automotive industry or some European longer-term contracts -- have begun to expire that the cost increases are having a bigger effect now on some of our competitors. And that they delayed, perhaps beyond when we did some of their price increases. We're in the more wall -- we have a heavier position in the more volatile U.S. markets. And perhaps have had somewhat more larger impact from those price increases sooner.

I think that the broader view that I have is that in theater by theater the major competitors are relatively similarly positioned in terms of the impact in due course of these cost increases. So we feel that, in that context, that well it's slower than we would like that we will be able to recover those cost increases through price increases. We are not counting, however, on being able to recover the impact of currency on -- through a price increase on our cost structure. And so it is necessary for us to take the other moves in addition.

I think the one sort of perspective that I would give you is that absent currency change and the cost increases, we would be enjoying a remarkable upturn and profitability. Even in, while we carried out these were expensive programs that are going on right now. So it's a, it is a frustrating period. But we're doing everything we can to try to get, be a leader in getting price realization in the industry.

And how disruptive would these production moves be in order to address the euro issue?

The, they are, they're fairly disruptive. We are restructuring our appliance very considerably. The assembly line structures are different. It's going to be a -- result in a significant improvement in quality. The assembly concepts are somewhat different. The -- in the location of some of the products, as moving from one plant to another plant in certain cases.

What we will end up with, however, is that the plants will be focused on products that have the maximum amount of component commonality in them and efficiency from a point of view of production activities.

Another consequence that I might just mention along the way here, is that we not only have inefficiencies as we in effect stop production activities temporarily and then begin a phased approach to bringing the new product online at the same time that we've stopped the old products. But another impact of course is that our inventory requirements during that transition period go up very substantially. We have had some quite significant inventory increases in the end of the first quarter. Obviously some of that is related to the unit volume increase.

But a significant portion of it is also related to the fact that we're still inventorying the old product mainly in a completed form and we have all the supply material coming in for the new product and the new product lines. And so there is almost a doubling up of inventory, as we have a phase-out phase-in process. I just give the guys in the business an awful lot of credit though for managing an extraordinarily complex program in an effective and orderly way.

We also feel that by and large we're through the period when some of our suppliers have production threatening shortages. We are making lot of progress in that regard. But we still have a significant inventory that will come out by the end of the year.

Thanks, Al.

[Operator Instructions]

And your next question comes from the line of Viva Hyatt (ph) from Sancity (ph) Advisors. Please proceed.

Hi, it's Viva from Sancity Advisors. I was wondering if you can give us a little more information on how you expect the working capital levels to fluctuate during the year. I know you just mentioned something on inventory. But do you expect the use of the cash that we saw this quarter to eventually reverse. And will working capital eventually be a source or use for 2005.

I think we're going to be hard pressed to have working capital be a major source of funds in 2005. The volume increases obviously at NACCO Materials Handling Group on their own are demanding considerably more working capital.

I think in Hamilton Beach/Proctor-Silex that probably the working capital requirements will be neutral or come back toward -- could even be positive during the course of the year.

Inventories are up at in Hamilton Beach at the end of the first quarter. But that's a temporary, quite a temporary situation. And we have brought in additional material. And it should be flowing through the distribution system over the next 2 or 3 months. And we are bringing those levels back down. So I don't see a lot of difference at Hamilton Beach/Proctor-Silex over the course of the year. And some opportunity for net improvement.

At NACCO Materials Handling Group, obviously payables are going to go up, as well as receivables in inventory. But I think that would be a net requirement over the course of the full year, in comparison -- a net requirement from the volume increase. And -- but we maybe in a period where the addition that occurred in the first quarter may began to moderate by the end of the year.

Sir, just a follow up on that, for NMHG, can you give us kind of a ballpark in terms of what type of cash requirement you're thinking for the year? I mean -- just ...

No, I really I think, I've said about as much, I want to say at that point. Our Q will give you a full outline of whatever we're prepared to say at this time about the future.

OK. Thanks.

Ladies and Gentlemen, this concludes your question and answer session.

I would now like to turn the presentation back over to management for closing remarks.

We thank you all for participating and look forward to keeping you posted on the progress of programs, which, as I've emphasized several times are in a critical period as we move toward increasing impact from them over in the 2006 and 2007 and 2008 time period.

So I thank you very much. We'll keep you posted.

Thank you. If you do have any further questions you can reach me at 440-449-9669.

Ladies and Gentlemen, as a reminder, a replay of this presentation will be available in about an hour from now. And the phone number for that is 1-888-286-8010. And the access code is 31435564.

And thank you for your presentation in today's conference.

This concludes the presentation. You may now disconnect. Good day.