NACCO Industries Inc (NC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2005 NACCO Industries earnings conference call. My name is Candace 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. Please proceed, ma'am.

Thank you. Good morning everyone and thank you for joining us today. Yesterday we distributed a press release and filed our 10-Q outlining the company's results for the second quarter ended June 30, 2005. If anyone has not received a copy of this earnings release or would like a copy of the 10-Q, please call me at 440-449-9669 and I will be happy to send you this information. You may also obtain copies of these items on our web site at www.nacco.com.

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 to the quarter and then open up the call to your questions. Before we begin, I would 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 was set forth in yesterday's press release and in our 10-Q. I will now turn the call over to Al Rankin. Al?

Good morning. I'll begin with an overview of the earnings release which was sent out last evening. As you know, this complements the 10-Q which was also released last night and which is available on the NACCO web site. Second quarter net income was $11.3 million, or $1.37 per share, compared with net income of $6.4 million, or $0.78 per share for the second quarter of 2004.

The individual business results vary significantly so I will discuss the second quarter results and outlooks of each separately, beginning with NACCO Materials Handling Group Wholesale, followed by NMHG Retail, Housewares and North American Coal Corporation.

Turning to NACCO Materials Handling Group wholesale, reported net income was $8.9 million on revenues of $575 million for the second quarter of 2005, compared with net income of $4.4 million on revenues of $445 million for the second quarter of 2004.

The revenues increased 29% in the second quarter of 2005 compared with the second quarter of 2004. Lift truck shipments increased to 21,997 units in the second quarter of 2005 from 18,772 units in the second quarter of 2004. The worldwide backlog decreased to 23,900 units at June 30, 2005, from 24,700 units at June 30, 2004 and 27,500 units are March 31, 2005.

The declines in backlog from the prior year second quarter and previous quarter were primarily due to increased shipments but also reflect actions taken to ensure that bookings remain in line with available capacity as the company completes its plant restructuring programs and the rearrangement of its production lines for the introduction of new lift truck models.

The significant increase in NACCO Materials Handling Group Wholesale's 2005 second quarter net income compared with its 2004 second quarter net income, which included the benefit of temporary suspension of the 2004 second quarter management fee paid to NACCO and $1.5 million tax benefit realized in the prior year was the result of increased parts and unit volume, favorable shift in mix to higher margin lift trucks in the Americas and Europe and price increases totaling $22.7 million pretax which were partially offset by increased material costs of $17.4 million pretax, particularly as a result of increase costs for steel.

Operating expenses also increased as a result of higher marketing expenses related to the preparation for the launches of the two to three ton pneumatic lift trucks and the one to two ton cushion and pneumatic lift trucks in the third quarter of 2005 and increased employee-related expenses.

NACCO Materials Handling Group Wholesale continues to expect global lift truck markets, which are growing and they grew in the second quarter of 2005 and we're hopeful that those increased levels are going to be sustained and they're going to continue to improve going forward and we expect stronger lift truck markets in the remainder of 2005 in the Americas and Asia Pacific and relatively flat lift truck markets in Europe compared with prior periods.

We expect that unit volume, unit shipment levels for the last half of 2005 compared with the last half of 2004 will continue to increase but at controlled rates to accommodate the phase in of newly designed products.

Despite the stronger lift truck markets, NACCO Materials Handling Group Wholesale expects the remainder of 2005 to be challenging. Results of the third quarter are historically lower than the second quarter as a result of summer vacation plant shutdowns. In addition, pricing challenges will continue as the company continues to work to continue to moderate the effective increases in material costs, which are largely related to supplier price increases for steel.

Price increases implemented by NACCO Materials Handling Group during 2004 and in early 2005 are expected to continue to offset the effect of anticipated material costs in the second half of 2005, although the company does not anticipate full recovery of the accumulated cost increases incurred since the beginning of 2004 by the end of 2005.

Further, the company continues to monitor change in material costs which appear to have begun to trend down to peak levels at the end of 2004 and to evaluate the need and potential for future price increases in the context of managing backlogs.

In addition, although the dollar strengthened during the past quarter, past currency movements are expected to continue to affect current operations. As a result, the company continues to work actively to change the sourcing of components from British pound sterling and euro areas to U.S. dollar and low cost areas, on the assumptions that currencies are likely to stay at levels that are not advantageous to NMHG Wholesale.

Wholesale is currently completing several significant initiatives that will benefit the company long term but are expected to increase costs and inefficiencies in the near term, especially in development and manufacturing restructuring activities.

The company introduced the first of the new one to eight 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. As a result of these ongoing initiatives, product development and product introduction costs are expected to continue at high levels throughout the second half of 2005 as the introduction of the new lift trucks continues on schedule with the launches of the two to three ton pneumatic lift truck and the one to two ton cushion and pneumatic lift trucks in the third quarter of 2005.

At the same time, costs attributable to startup inefficiencies and the ongoing manufacturing restructuring programs are expected to continue as some production moves to different facilities. The introduction of these new products continue to put pressure on earnings in the third quarter of 2005 and this pressure should be significantly alleviated by the end of the year as assembly lines move into full production of this first wave, the one to three and a half tons products, internal combustion engine products.

The company expects to complete the majority of the rearrangement of the layout of its assembly lines in the Americas in the third quarter of 2005, resulting in a reduction in manufacturing costs and improvement in productivity in 2006.

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

Overall, wholesale's various long term programs, particularly significant new product development programs are expected to enhance profitability and generate growth increasingly as they mature in 2005, in the 2006 to 2008 period.

NACCO Materials Handling Retail, which includes the required elimination of inter-company transactions, reported a net loss, a lower net loss for the second quarter of 2005 of $1.4 million, compared with a net loss of $1.9 million for the second quarter of 2004. The reduction in Retail's net loss compared to the second quarter of 2004, which included an $800,000 tax benefit realized in the prior year, is mainly attributable to the gain on the sale of a French dealership during the second quarter of 2005 and reduced interest expense as a result of lower inter-company debt.

In the last half of 2005, NMHG 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 in 2005 without achieving the full benefits of these programs until future years.

I'll turn now to NACCO Housewares Group. The group, which includes NACCO's Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries reported an increase in net income to $1.6 million for the second quarter of 2005 on revenues of $132 million compared to net income of $1.3 million for the second quarter of 2004 on revenues of $121 million.

The revenues at Hamilton Beach/Proctor-Silex increased in the second quarter of 2005 compared with the second quarter of 2004 predominantly due to improved sales volumes in U.S. consumer markets. In the second quarter of 2005, revenues at Kitchen Collection increased compared with the second quarter of 2004 due to sales from new stores and an increase in sales at comparable stores due to an increase in average sales transactions.

These improvements were partially offset by a continued reduction in customer visits at comparable stores, mainly as a result of lower traffic at outlet malls due to higher gasoline prices. The number of Kitchen Collection stores increased to 191 at June 30, 2005 from 185 the same time the year before.

The increase in net income at NACCO Housewares Group in the second quarter of 2005 compared with the second quarter of 2004 which included a half million dollar income tax benefit realized in the prior year quarter, was a result of an increase in net income at Hamilton Beach/Proctor-Silex partially offset by an increase in the net loss at Kitchen Collection.

The increase in net income at Hamilton Beach is primarily attributable to the increase in sales volume combined with lower manufacturing costs as a result of the 2004 manufacturing restructuring program and a continued shift to sourcing products in China.

The NACCO Housewares Group outlook is encouraged by current market conditions - and the group is moderately optimistic that markets for its consumer goods will strengthen in the last half of 2005 compared to 2004.

Continued product innovation, strong brands and tightened channel efforts by Hamilton Beach/Proctor-Silex are expected to help NACCO Housewares Group maintain and strengthen its leading market positions. New products already being introduced by Hamilton Beach are expected to generate additional placements and continued margin improvements throughout the second half of 2005, resulting in positive effects on revenues and operating profit.

Hamilton Beach/Proctor Silex is continuing programs including manufacturing restructuring and cost reduction programs begun in earlier years which are designed to reduce operating costs and improve manufacturing efficiencies.

The manufacturing restructuring program implemented in 2004 and increased sourcing of additional products from China have already favorably affected margins and are anticipated to continue contributing to improved operating results. Both of these programs are expected to be largely completed by mid 2006.

These programs and others initiated by Hamilton/Beach Proctor-Silex are expected to increasingly improve results in 2006 and 2007 and with the increased sourcing of products from China, Hamilton Beach/Proctor-Silex continues to monitor the effect of the revaluation of Chinese yuan. However, Hamilton Beach/Proctor-Silex has contracts with its Chinese suppliers in U.S. dollars which are expected to defer the effect of this revaluation for the near term.

Kitchen Collection expects strong sales for the second half of 2005 compared with the second half of 2004 primarily as a result of increased store locations. However, continued high gasoline prices during the remainder of 2005 and the effects of hurricanes in the southern United States could adversely affect the number of customer visits to Kitchen Collection stores and thus its operating results.

Longer term, Kitchen Collection expects to continue its program to enhance its merchandise mix, store appearance, optimize store selling space, close non-performing stores and prudently open new stores and expand Internet sales and then offer private label lines, including Hamilton Beach and Proctor-Silex branded non-electric products and develop new store formats including formats for enclosed malls, while aggressively managing costs.

At North American Coal, net income for the second quarter of 2005 was $3.2 million on revenues of $28 million compared with net income of $3.7 million for the second quarter of 2004 on revenues of $27 million. The decrease in net income for the second quarter compared with 2004's second quarter is primarily the result of increased startup costs, offset by increased yards sold at our lime rock dragline mining operations and the startup costs are largely related to two new dragline services contracts signed in the first quarter of 2005 and increased costs related to new dragline equipment that has been put into service.

Also contributing to the decrease in net income were higher commodity costs for diesel fuel, which are expected to be recovered in future periods through contractual price escalation, increased costs at the Red River Mining Company, which incurred expenditures that were previously delayed as the mine worked through adverse geological conditions. And increased costs at the Mississippi Lignite Mining Company as this mine continues working through adverse geological conditions.

North American Coal expects as part of its outlook seasonally normal levels of lignite coal deliveries in the last half of 2005. Results, however, are expected to continue to be temporarily adversely affected by moderately increased costs at Mississippi Lignite Mining Company as this operation works through adverse geological mining conditions in 2005.

Lime rock mining startup costs are also expected to continue to affect comparisons between the last half of 2005 and the last half of 2004 as a result of the two new dragline mining services contracts signed during the first quarter of 2005 and another new dragline mining services contract signed during the second quarter of 2005.

Two of these operations are expected to commence in the third quarter of 2005 and the third in late 2006, early 2007.

Over the longer term, results at North American Coal are expected to improve, specifically in 2006 and 2007 as a result of improved operating conditions at Red River Mining Company and Mississippi Lignite Mining Company. Contract changes at the San Miguel lignite mining operations and as more lime rock mining operations become operational and begin to have a more significant impact.

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 dragline mining services projects.

Overall, a good quarter, got challenges in the second half and good prospects increasingly in 2006, 7 and 8.

And to elaborate on that, I do have a few thoughts on the company's overall prospects and outlook. If you previously participated in these quarterly updates, you will remember my references to NACCO's annual reports for 2002, 3 and 4. In those reports, my CEO letters and the subsidiaries CEO letters particularly focused on the key strategic and operating programs we have in place at each business to enhance profitability and to generate growth. These programs have the objective of meeting each business' 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 2007-8 period or before depending on when each business' programs mature.

Likewise, my CEO letters in the annual reports have 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 from 2002 to 2004 timeframe.

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 the entire period, during 2003 and they remained so in 2004 and the remained so in the first half of 2005.

However, I do want to emphasize that while we are obviously one more quarter close to maturity, their effect still will not happen overnight. The program maturity in one case extends out as far as 2008 with the rest of the programs maturing variously over 2006, 2007 and 2008.

In overview, 2005 will continue to be a year of preparation for what we hope will be a significant impact in 2006 and again in 2007 from these programs which, overall, as I've indicated, are designed to achieve our long term minimum financial and growth objectives.

I do, however, once again want to note that while we believe prospects for the next two years are excellent, other events could intervene. Markets and competitive conditions are always uncertain. For example the increased raw materials pricing which now shows beginning signs of abating and the dramatic strengthening relative to the dollar of the euro, the British pound and the yen, which has now backed off to some degree, are having a significant effect on our short term profitability at NMHG.

As I've noted in the past, if these conditions appear likely to continue over the long term we will need to take additional actions to bring costs and margins in line with our targets. Indeed, we have now concluded that we should actively implement, as I indicated earlier, additional procurement and sourcing programs in 2006 and 2007.

On the other hand, we do expect in 2006 that material cost increases will be quite moderate and that the impact of earlier pricing actions will have a significant impact on margin recovery in 2006.

Generally, 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 is now 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 NMHG 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 overall over the remainder of 2005.

The pace of these returns, 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 Material Handlings 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 would like now to turn to questions.

Ladies and gentlemen, if you wish to ask a question please press star followed by one on your touchtone telephone. If your question has been answered and you wish to withdraw your question, please press star followed by two.

Please press star one to begin.

Our first question comes from George Nissan of Merrill Lynch. Please proceed.

Yeah. Thank you very much. Obviously it has been very challenging not only for you guys but for all your competitors as well in this raw materials driven economy. Over the last year a lot of your competitors have been implementing some new strategic initiatives to reduce their raw material cost by establishing a better line of communication with their supplier base. I am interested if you could provide your color and kind of give your opinions on the call today as well as to what you plan on doing in the future for NMHG Group and also Housewares Group as to what you plan on doing to reduce raw material costs by opening up a better line of communication with your suppliers.

Well, we have been working pretty diligently over the last few years on the general area of supply chain management. I think we have had in both Hamilton Beach and NACCO Materials Handling Group very good programs in effect. We do see the opportunity to enhance our supplier programs at NACCO Materials Handling Group, but frankly the biggest impact of those efforts may be on the efficiency and smooth operation of our manufacturing plants.

I think the actions at NACCO Materials Handling Group in the procurement and the supply chain area that will have the biggest impact for us will be continuing to work to ensure that as cost increases of materials moderate that we gain back improvements in price right away and our people are very diligent about working that approach with our suppliers and in certain areas already moving in our direction.

And then, finally, working to think through the opportunities for shifting the sourcing of certain products from one geographic area to another, and particularly into low cost countries where our costs are simply lower.

At Hamilton Beach/Proctor-Silex, the situation is really a little bit different because we're sourcing and will be sourcing essentially entirely completed products from Chinese suppliers and so the supply chain issues really involve working closely with them and their suppliers to help ensure that they have a good supply chain structure and good relationships with their vendors and - but those are all programs that are relatively mature.

Perhaps the most important thing that you will have noted from my comments that in the second quarter price increases compared to the second quarter of 2004 amounted to $22.7 million and material cost increases in that same period were $17.4 million. So we gained on the cost increases in that quarter. Now, we haven't gained back all that we lost in the 2004 quarters and even a little bit - even in the first quarter of 2005. But our expectation is that as we go through the remainder of 2005 and into 2006, that the comparative increases in material costs will either be very low or begin to start turning down at the same time that the level of price increase will continue to flow through and so we should increasingly gain back the margin that we had before 2004.

That certainly is our objective. There are a lot of forces at work in the marketplace that have an effect on that, but that's our objective overall.

One thing I noticed over the last four or five plus years I've been following your company is that quality has always been the top priority with your organization. That is why you guys have the cheap quality goods that gain in results. How are you guys making sure that your suppliers are living up to your quality standards? Are you score carding them on a quarterly basis or meeting with them to supply forms (ph)? What are you doing to make sure that your suppliers are meeting your very stringent guidelines?

We have a very disciplined program of supplier performance measurement in both NACCO Materials Handling Group and then Hamilton Beach/Proctor-Silex. In fact, just last week within China, with several of our suppliers we reviewed their quality results and they're measured weekly and performance is reported back to them on scorecard. It involves both end of line audits and issues coming up on the line as well as audits later on in the cycle.

At NACCO Materials Handling Group we have a very stringent program in place for measuring supplier quality but I think in NACCO Materials Handling Group that the biggest improvement impact is likely to come from the quality of the new products that are now being introduced in comparison with their predecessors. The reliability testing, reliability growth testing, the general standards of quality and reliability that have been built into those products and the assembly techniques that are used to ensure that quality is double checked at each step along the way on the assembly line is significantly advanced over any previous products that we have had.

The initial indications in the marketplace, and it’s early days yet, are very encouraging in that regard.

And one final question. What is your supplier feedback in both groups? Are they then open to some of these partnerships? You guys sound like you have got a lot of great initiatives on your plate to improve profitability. What's in their feedback?

In these businesses if suppliers are not responsive on quality they don't continue. Period.

Okay, so sometimes you would be dropping certain suppliers and they know that they have to meet your strict guidelines?

Absolutely.

Okay. Thank you very much. Good luck down the road.

Thank you.

Again, ladies and gentlemen, that's star one to ask a question.

Our next question comes from Patrick Dunkerley of Victory Capital Management. Please proceed.

Good morning. Greetings from Cleveland.

Good morning.

Good quarter.

We're just looking at your coal division and considering - If I interpreted your 10-K correctly, you have got about 1.3, maybe 1.4 billion tons of uncommitted lignite. Is that correct?

I don't have that in front of me, but dimensionally, that's right.

Well, we were comparing that to the industry leader, which has about 8 billion tons and thinking that division alone might be worth more than half your market cap. Would you agree with that and has the board ever considered maybe taking a strategic step like a partial IPO that might highlight the value there? We see a lot of value.

Well, I think the best way to answer that is to say that we're in the business in our coal company of making long term contractual relationships which take advantage of those reserves and so while there's some theoretical basis to the notion that the reserves have great value, really, reserves are not of real value until they are turned into a coal mining operation.

Now, I think the prospects for additional coal fired electrical generation have improved significantly in the last few years. High natural gas prices reinforced by high oil prices have meant that a whole series of opportunities have arisen which are not limited just to power generation but also include the potential for gasification and even liquefaction in terms of certain kinds of diesel fuels and other things from coal.

Those are all activities that we're pursuing and we're hopeful that at some point opportunities will come to bear that will turn those reserves into operating contracts with revenue streams.

That is, in fact, the way our coal business has worked for many years. Most of our operations have been - have grown out of having reserves which have then been turned into long term, often 30 to 40 year contracts that pay us for mining the coal and in effect for the value of that coal at that period of time.

We are not a merchant coal producer. We haven't been a merchant coal producer for a very long period of time.

Well, I'm glad you're exploring those opportunities. I would agree with you that there is a lot of change going on and there could be a lot of opportunity to make deals like get a third party to build a power plant next to one of your mines or other such technological changes that you mentioned, like diesel or gasification.

Yeah. Well, we're more encouraged than we have been for quite some time about those prospects and I think it's worth nothing that during a period when there were not a lot of new coal deals and natural gas prices were very low and there was uncertainty in the regulatory environment that the folks in our coal company really did an outstanding job in terms of developing a new and different business.

We had no Florida lime rock mining business until just a few years ago and now we have a very significant business with prospects of substantial profit and cash flow generation over the next number of years so folks are not idle in looking at ways to develop their - to use their skills to develop new projects even if at some times they don't happen to be coal projects.

Patrick, just to go back to your 2.4 - we have 2.4 billion tons of coal reserves, 1.3 billion of those are committed to customers which would leave 1.1 billion uncommitted, just to make sure we get the numbers right.

Okay, great. 1.1 million.

1.1 billion.

1.1 billion.

I had a follow-up question regarding your backlog on the lift truck side. Could you just discuss your backlog and how you see the sell through on your non-owned retailers?

Well, we are in a complex period because over half our volume comes from the new line - the line of forklift trucks which are currently being replaced and it - we have changeover periods, we have periods of startup of the new lines, we have periods of closure of the old lines when those trucks are not available, so it's a very tricky process to manage the backlog and the throughput and then to come up the efficiency curve in producing those new products.

So we're concentrating a lot on that. Also I would just note that the backlog levels that we're now at are a lot more comfortable from our point of view because they're not so extended in total and we're a little more market competitive right at the moment and we think that's a balance that we need to strike here.

And so our objective will be to use our marketing programs, including pricing, to ensure that as we have the capacity available for production that we're keeping it reasonably filled up.

All right. Thanks guys.

I just want to comment on - the industry leader of coal has about 8 billion tons of reserves and their market cap is 8.7 billion so you can see why we get - we start to use our imagination about the value of your 1.1 billion tons of coal reserves. It's only about - it's about 16% of what the industry leader has and they have an 8.5 billion market cap.

I think though there are some things - I appreciate the comparison - some things that are probably worth keeping in mind. Remember, we're in the lignite coal mining business. We're not in the bituminous coal mining business so there is a significant difference here.

Second, we don't have merchant coal operations that are where we take the price risk and in many cases we do not have the capital investment in our coal mines, someone else does. That's why the sales volumes of our coal mining business today are as low as they are. The accountants consider that a good portion of what we do is really a service-based business as opposed to a sort of consolidated mining business so I think you always have to look in any of those companies perhaps partially at the reserves but more important at the current tonnage production, the investment that is in place to create the opportunity to sell that and then into long term returns to the equity capital that they have invested in that business.

So I'd just say there are some other factors that mean that a comparison has to be carefully drawn.

Understood. Thank you very much.

Okay.

Again, ladies and gentlemen, that's star one to ask a question.

Sir, I see no further questions at this time. Please proceed to your closing remarks.

Okay. I thank you all for joining us very much. Christy, do you have anything to say in closing?

I just want to say that we appreciate everyone's interest and if there are any additional questions, please feel free to give me a call at 440-449-9669. Thank you.

Thank you all very much.

Thank you for your participation in today's conference. If you wish to access a replay, the toll free number is 888-286-8010. Again, that number is 888-286-8010 with a replay access code of 93073986. Again, that number is 93073986.

Again, thank you for your participation and have a great day.