NACCO Industries Inc (NC) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2005 NACCO Industries Earnings Conference Call. My name is Andrea and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of today’s conference.

[Operator Instructions].

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host of 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 we distributed a press release and filed our 10Q outlining the company’s results for the third quarter ending September 30, 2005. If anyone has not received a copy of this earnings release and would like a copy of the 10Q 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 website 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 of the quarter 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 forwarding 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 our 10Q.

I will now turn the call over to Al Rankin. Al?

Good morning I will begin with an overview of the earnings release which Christy referred to which was sent out last evening and which compliments the 10Q which was also released last night and is available on the NACCO website. Third quarter net income was $13.6 million, or $1.65 a share, compared with net income of 13.4 million or $1.63 per share for the second quarter of 2004.

The individual business results vary significantly so I will discuss third quarter results and outlooks of each business separately beginning with NACCO Materials Handling Group Wholesale, followed by NMHG Retail, Housewares and North American Coal Corporation. NACCO Materials Handling Group Wholesale reported net income of $5.7 million, on revenues of $516 million for the third quarter of 2005, compared with net income of $5.1 million on revenues of $449 million for the third quarter of 2004.

Revenues increased 15% in the third quarter of 2005, compared with the third quarter of 2004 primarily as a result of a favorable shift in mix, the effective prices implemented during 2004 and in early 2005, increased unit volumes primarily in the Americas and, increased parts volume. Lift truck shipments increased to 19,122 units in the third quarter, from 18,691 in third quarter 2004. Wholesale’s worldwide backlog was approximately 25,600 units as of September 30, 2005, compared with 26,800 units September 30, 2004, and 23,900 at June 30, 2005.

The increase in NACCO Material Handling Group Wholesale’s 2005 third quarter net income compared with the 2004 third quarter net income is primarily a result of a $8.2 million increase in operating profit from $4.7 million in 2004 to $12.9 million in 2005. Contributing to this increase were price increases totaling $16.1 million pre-tax, which more than offset the current quarter’s increase in material costs of $7.8 million pre-tax,a favorable shift in mix to higher margin lift trucks and increased sales of parts.

Wholesale achieved this operating profit increase despite the continued burden of manufacturing inefficiencies, although they were incurred at a lower rate then the prior year, and net unfavorable overhead rates in operating costs associated with the initial manufacturing and launch of the newly designed 2-3 ton pneumatic and 1-2 ton cushion and pneumatic internal combustion engine lift trucks.

NMHG Wholesale’s net income in 2005 was negatively affected by the absence of a $6.7 million pre-tax anti-dumping settlement award from U.S. Customs received in the prior year third quarter.

Turning to NMHG Wholesale’s outlook, global lift truck markets continued to strengthen in the third quarter 2005. NMHG Wholesale is hopeful that these increased levels will be sustained and possibly continue to improve going forward.

The company expects strong lift truck markets in the fourth quarter of 2005 and in 2006 in the Americas and Asia-Pacific, and moderate year over year increases in Europe. With these market prospects and the successful launch of the newly designed 1-3 ton internal combustion engine lift trucks throughout 2005, NMHG Wholesale anticipates that its unit shipment levels for the fourth quarter of 2005 and in 2006 compared with the prior period will be higher, while shipment levels for the newly designed 4-7 ton internal combustion engine lift trucks expected to be introduced in 2006 and early 2007, will be at controlled rates to accommodate phase in of each of these products.

Despite stronger lift truck markets, NMHG Wholesale expects the fourth quarter of 2005 to remain challenging. Price increases implemented in prior periods are expected to continue to offset the effect of anticipated higher material costs in the fourth quarter of 2005 and in 2006. While these pricing actions are expected to have a significant impact on margin recovery in 2006, full recovery of the accumulated cost increase as incurred since the beginning of 2004 are not anticipated until 2007.

In addition, although the dollar continues to strengthen, past currency movements still leave NMHG Wholesale in an unfavorable position compared with the favorable currency environment that existed in the period ending in 2002. As a result, the company continues to work actively to shift the sourcing of components from British Pound Sterling and high cost Euro countries to U.S. dollars and low cost areas on the assumption that currency exchange rates are likely to stay at levels that are not advantageous to NMHG Wholesale.

The company introduced the highest volume portion of the newly designed 1-8 ton internal combustion engine lift truck line, the one to three ton series in 2005. The remainder is expected to be largely introduced by 2007, with the introduction of the 4-5 ton series in 2006 and the 6-7 ton series in early 2007. While the full effect of these products will not be realized until the series has been introduced, the new products that have already been introduced are expected to affect results positively in the fourth quarter of 2005 and 2006.

The increasingly positive effect of these new product introductions, pricing initiatives, expense reduction efforts already implemented, increased efficiencies in the Americas as a result of the completion of the restructuring and rearrangement of assembly lines and the resulting reduction in manufacturing costs are expected to provide significant profitability improvements in 2006. In addition, NMHG Wholesale manufacturing restructuring activities are moving closer to maturity.

These benefits are expected to continue to be partially offset by one time product development and related introduction costs, as well as start up manufacturing inefficiencies in the fourth quarter 2005 related to the lift truck series recently launched, and in 2006 related to the new lift truck series to be launched. Also offsetting the favorable effect of the new lift trucks, but to a lesser extent, are costs attributable to the remaining portion of the previously announced urban restructuring program and production line movement which will take place in the second half of 2006.

NMHG Wholesale is considering the repatriation of earnings as permitted by the American Jobs Creation Act of 2004, which could result in a tax charge of as much as $2.5 million in the fourth quarter of 2005. Also, excluding this special tax charge, NMHG Wholesale expects to have a higher effective income tax rate in the fourth quarter of 2005 compared with the fourth quarter of 2004, and a higher tax rate in 2006 compared with 2005. Overall NMHG Wholesale’s investment in long term programs, particularly significant new product development and manufacturing programs are expected to enhance profitability and generate growth increasingly as they mature in the 2006 to 2008 period.

At NMHG Retail, which includes the required elimination of inter-company transactions between NMHG Wholesale and NMHG wholly owned retail dealerships, a net loss for the third quarter 2005 of $1.2 million was reported compared with the net loss of $700,000 for the third quarter 2004. The increase in retail’s third quarter net loss compared with the same quarter in 2004 was primarily attributable to lower operating income from Asia-Pacific as a result of lower rental margins and increased employee related operating expense.

In the fourth quarter of 2005 and in 2006 NMHG Retail expects to continue its programs to improve the performance of its wholly owned dealerships in order to meet its longer term strategic objectives which include achieving at least break even results while building market position. However improvement programs will continue for the remainder of 2005 without achieving the full benefit of those programs until future years.

NACCO Housewares Group, which includes NACCO’s Hamilton Beach/Proctor Silex and Kitchen Collection subsidiaries, reported an increase of $1.5 million in net income to $5.9 million for the third quarter 2005 on revenues of $152 million compared with net income of $4.4 million for the third quarter of 2004 on revenues of $143 million.

Revenues at Hamilton Beach/Proctor Silex increased in the third quarter compared to the third quarter of 2004, mainly from improved sales volumes in U.S. consumer and commercial markets. Kitchen Collection experienced increased sales from new stores in the third quarter of 2005, along with an increase in the average sales transition. However these increases were offset by reduced customer visits at comparable stores as a result of diminished traffic in areas affected by hurricanes and high gasoline prices.

The increase in net income at NACCO Housewares Group in the third quarter 2005 was due to an increase in net income at Hamilton Beach/Proctor Silex partially offset by a decrease in net income at Kitchen Collection. The increase at Hamilton Beach was mainly attributable to the increase in sales volume combined with lower manufacturing costs as a result of the 2004 manufacturing restructuring program, a continued shift to sourcing products from China and favorable currency movements.

Looking at Housewares outlook, the Housewares Group is moderately optimistic that markets for consumer products will strengthen in the fourth quarter 2005 and in 2006 compared with the prior period. However current economic conditions affecting consumers such as increased energy and gasoline costs and rising interest rates could unfavorably affect retail sales at Hamilton Beach/Proctor Silex products during the 2005 holiday season. Over time, continued product innovation, strong brands and heightened channel sales programs by Hamilton Beach are expected to help NACCO Housewares Group maintain and strengthen its market positions.

New products currently being introduced by Hamilton Beach/Proctor-Silex are anticipated to generate additional product placement at retailers and continued margin improvements throughout the fourth quarter 2005 and in 2006 resulting in increased revenues and operating profit. Hamilton Beach/Proctor Silex’s 2005 fourth quarter results compared to the same period in 2004 are expected to be affected by greater advertising expenses supporting the company’s new product offerings and by the absence of favorable product liability adjustments due to improved claims experience and inventory adjustments which occurred in the fourth quarter 2005.

Hamilton Beach/Proctor Silex is also continuing programs begun in early years, including manufacturing restructuring programs which are designed to reduce operating costs and improve manufacturing efficiencies. The manufacturing restructuring program implemented in 2004 and the increased sourcing of additional products from china have already favorably affected margins and are anticipated to continue to contribute to improve 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, but are likely to be offset in the first half of 2006 by increased costs to fully implement these programs. Kitchen Collection expects additional sales in the fourth quarter 2005 as a result of the opening of an increased number of temporary stores locations for the holiday season and as a result of sales at new stores opened since the fourth quarter 2004. However, continued high gasoline prices during the remainder of 2005 could adversely affect the number of customer visits and sales levels at Kitchen Collection stores and results of 2006 are not expected to reach historical levels unless improved economic conditions lead to increased customer visits to factory outlet malls.

North American Coal’s net income for the third quarter 2005 was $3.3 million on revenues of $28.2 million compared with net income of $5.2 million for the third quarter of 2004 on revenues of $29.8 million. The decrease in net income for the 2005 third quarter compared with the net income for the 2004 third quarter is primarily the result of reduced income at the consolidated coal and dragline mining operations. The decrease in net income at the Consolidated Coal Mining Operations was primarily the result of high commodity costs, mainly for diesel fuel, which are expected to be recovered to some extent in future periods through contractual price escalation, increased cost to perform repairs and maintenance at the mines and fewer tons delivered at the Mississippi Lignite Mining Company.

The reduced net income at the Limerock Dragline Mining Operations primarily related to increased start up costs as a result of the commencement of two new dragline mining operations in the current quarter. These lower income levels were partially offset by an increase in earnings at the unconsolidated project mines due to contractual price escalation and increased tons delivered as well as increased royalties.

North American Coal expects normal levels of lignite deliveries in the fourth quarter 2005 and in 2006, absent unanticipated weather conditions or customer power plant outages.

However fourth quarter 2005 earnings at the Consolidated Lignite Mining Operations are expected to reflect the same pressures experienced in the third quarter although the effective income tax rate is expected to be more favorable then in the fourth quarter 2004. North American Coal’s earnings are expected to improve considerably in 2006 primarily as a result of improved results at the Mississippi Lignite Mining Company and the San Miguel Lignite Mining Operations.

The Mississippi Lignite Mining Company expects an increase in earnings as a result of the completion of mining in an area which required the removal of an unusually large amount of overburden to reach the lignite coal below, as well as improvements in productivity as the mine implements a solution on mining through adverse geological mining conditions. Improvements at the San Miguel Lignite Mining Operations are expected as a result of a more favorable margin mix of revenue components.

However results in 2006 are expected to continue to be unfavorably effected by increased commodity costs for diesel fuel, tires and steel at all consolidated mining operations. Royalty income is expected to remain at an increased level in the fourth quarter 2005, it then decreases moderately in 2006.

Deliveries from the Limerock Dragline Mining Operations are expected to increase in the fourth quarter of 2005 and in 2006, as a result of the commencement of new operations in the third quarter of 2005. These new Limerock Dragline Mining Operations are expected to have a significant impact on 2006 earnings, although results will be partially offset by additional start up costs for another operation that is expected to commence in late 2006 or early 2007. Results in 2007 at North American Coal are expected to continue to increase as a result of improved operating conditions at the Mississippi Lignite Mining Company and a more favorable mix at pricing on tons sold at the San Miguel Lignite Mining Operations.

In addition, the Limerock Dragline Mining Operations are expected to have a more significant impact on earnings. Over the longer term, 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 in the competing power plant fuel. Further the company continues to pursue additional non-coal mining opportunities including additional limerock dragline mining services projects.

In conclusion then I have a few thoughts which amplify and put into further perspective my earlier comments on the company’s overall prospect and outlook. First, if you have previously participated in these quarterly updates you may remember my references to NACCO’s 2002, 2003, and 2004 annual reports. 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 generate growth.

These programs have the objective of meeting each businesses 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 is programmed to mature. Likewise my CEO letters and the annual reports have outlined our focus on cash flow and our general objective of being a substantial cash generator, positive cash flow before financing over time as we were in 2002, 2003, and 2004.

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 remained so in 2004 and in the first three quarters of 2005. I want to emphasize that while we are obviously one more quarter closer to maturity there effect still will not happen over night. Program maturity in one case extends out as far as 2008, with the rest of the programs maturing variously over 2005, 2006 and 2007.

An overview of 2005 will continue to be a year of preparation for what we hope will be a year of significant impact in 2006 and then again in 2007 on these programs which overall are designed to achieve our long term financial and growth objectives. Generally we believe that the key strategic programs outlined in our annual reports and our strategy presentation located on our website are the right programs and that our challenge is now execution of these programs. I do however once again want to note that while we believe prospects for the next few years are excellent, other events could intervene.

Markets in competitive conditions are always uncertain. For example, increased raw materials pricing, which now show beginning signs of abating and the dramatic strengthening relative to the dollar, the euro, British pound and the Yen, which has now backed off to some degree are having significant effect on our short term profitability at NMHG. As I have noted in the past, these conditions appear likely to continue over the long term, or if others emerge we will have to take additional actions to bring costs and margin in line with our targets.

Indeed we have now concluded that we should actively implement additional procurement of sourcing programs in 2006 and 2007. On the other hand we do expect in 2006 that material cost increases will be moderate and the impact of earlier pricing actions will have a significant impact on margins. Again as I have already indicated 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 particularly true at NMHG and to a lesser degree at HBPS and North American Coal. Further as I have already indicated we expect the result of our programs to be increasingly visible in our financial performance over the 2006, 2007 and 2008 time period. 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 and in 2006.

The pace of these upturns, of course, are uncertain but the direction seems clear. Never the less our near term challenge is to continue to execute our programs effectively and at NACCO Materials Handling Group to recover raw material cost increases, to replace increases and cost reductions. A process we expect will, in due course, have a significant impact especially beginning in 2006. With that I would now like to turn to questions.

[Operator Instructions].

Your first question comes from William Ruder (ph) from Banc of America Securities. Please proceed sir.

Hi, good morning. Couple questions for you. The first question is regarding your Housewares Division and strategy there. I was wondering whether you guys had any thoughts, for strategic moves, such as acquiring, growing the division or alternatively divesting it?

If we did we wouldn’t comment on those kinds of considerations. And I hope I outlined in my remarks that our focus is on the improvement programs for those businesses.

Okay. In terms of, you know the high raw material prices that we’re kind of seeing across the board, I was wondering if you guys have had what your experience has been with regard to trying to get price increases?

Well the most important issue is at NACCO Material Handling Group and costs of raw materials, particularly steel, went up quite steeply over the course of 2004 and early 2005. Cost increases have moderated, price increases were put in place during those periods of time, but it’s much stickier on the price increase side and it is taking us time to get full recovery of the cost increases that have had an impact on us over that whole period of time. As I indicated in my remarks we made progress on the margin issue in the third quarter and we certainly hope to make further progress in each quarter in the future.

Okay. And just one last question. I was wondering whether just in general if you guys have seen your market share in the Housewares Division increasing or decreasing and if you have a perspective on that?

I have to comment pretty carefully on that because the information that we have on market share is much less good then it used to be. Industry data is just not… it makes it very difficult to answer a question like that with certainty. However, I would note that our volume at Hamilton Beach/Proctor Silex was up. And we feel very good about the programs we have in place about new product placements.

We have a lot of new products coming along. We have our BrewStation, Big Mouth Food Processor, a very important line of products are Wave Logic and Wave Station blenders that incorporate the company’s wave action blending technology, a whole line of new products and I think if you look at some of our competitors in any event you will find that their sales are not going up, they’re going down. So in that context we feel good about the position that we are in, and we feel that we have the right products and features to position over the next couple of years to give us a very good chance at having additional placements at our customers.

Okay. Great, thanks a lot. I appreciate it.

[Operator Instructions].

Your next question comes from Frank Magdlen from The Robins Group. Please proceed sir.

Good morning.

Good morning.

In the Materials Handling side, has the mix changed in your backlog or, do you have more activity in certain industries than others?

I would say that the mix and the backlog has changed a little bit but it’s more a function of the launch pacing and the management of our volumes on the new internal combustion engine product line, then on fundamental changes in the industries. I would say that we have done some, I think, thoughtful work on industry positioning and the mix of industries has had a pretty neutral effect on our businesses, despite the fact that we have different shares in different industries. And certainly there have been certain areas of heavy industry that have been less buoyant in this upturn and certainly transport of goods is continuing to increase in the economy as the imports increase. But on balance it hasn’t had a dramatic impact on us.

Then do you feel your market shares are stable? Going up? Going Down?

We feel that our prospects are very solid right now. You know we have to manage the introduction of these new product lines because we have to phase out one product line and phase in the other, these are very different and in some cases we’ve been changing production plants as well as the products. In addition we have certainly under those circumstances have not been chasing business at the margin because there is a certain amount of business which is pretty much a bid business and is available if you want to take it at the price it is available at.

And we have enough activity going in our plants that we haven’t been focused on that. In addition, I would certainly like to leave the impression that we have been in a position of announcing price increases relatively quickly as cost increases have had a impact on us and there are always some competitors who wait a little longer then others, and we feel that our best long term interest is in being pretty disciplined and we’re focused on margin recovery and we think our new products will increasingly drive share. We are very pleased with the reception so far of our new products, they’re exceeding our expectations in terms of customer performance capabilities.

Alright. And one other question, in the material handling are you operating your plants at relatively rated (ph) capacity or close to rated capacity or however you want to look at that?

We still have substantial room to move, it depends on which product line, it certainly depends on what time frame you’re talking about because we’re still moving some product as we introduce new products. Less movement between plants and certainly in the Americas that process is pretty much complete. But we still have new products coming in, and that constrains your ability and capacity from a short term point of view. But we still have some flexibility to move up in response to increase levels of the market for share increased opportunities from some of our new products.

Okay. Just to put some brackets around that, could you increase shipments another 20%?

I really wouldn’t be prepared to kind of put those out. It varies substantially, highly dependant on the mix, and I wouldn’t want to comment any further.

All right. Thank you.

Yes.

Ladies and gentlemen this does conclude your question and answer portion of today’s call. It is my pleasure to turn the presentation back to your speakers for closing remarks.

Al, do you have any further comments?

No I have no further comments, except that we’re optimistic about 2006, it’s increasingly upon us and our major change programs appear to be moving us in the direction that we had been hoping that they would move us in. That’s all that comments that I have Christy.

Okay. Thank you for joining us today we appreciate your interest. If you have any additional questions please feel free to call me at 440-449-9669.

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude your presentation, you may now disconnect. Good day.

Okay, thanks a lot.