NACCO Industries Inc (NC) 2005 Q4 法說會逐字稿

Welcome to the fourth quarter 2005 NACCO Industries earnings conference call. My name is Liz and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host for today's presentation, Ms. Christina Kmetko, Manager of Finance. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO results for the fourth quarter and the year ended December 31, 2005. If anyone has not received a copy of this earnings release or would like a copy of our 10-K, 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 full year, and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference may contain certain forward looking statements. These statements are subject to a number of risks and uncertainties that can 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-K.

I will now turn the call over to Al Rankin.

Good morning, to all of you. I'll begin with an overview of the earnings release which was sent out last evening. This complements the 10-K, which was also released last night and which is available on the NACCO website. As the release indicates, fourth quarter net income was $32.4 million or $3.94 per share, compared with net income of $32.6 million or 3.97 per share for the fourth quarter of 2004. Income before extraordinary gain was $27.7 million or $3.37 per share, compared with $32.1 million or 3.91 per share for the fourth quarter of 2004.

These extraordinary gains are related to adjustments at our non-operating Bellaire subsidiary's estimated obligation to the United Mine Workers of America combined benefit funds. The extraordinary gains are specifically attributable to lower inflation on premium payments and a lower estimated number of assigned beneficiaries, resulting in a decrease in expected future obligations.

Full year 2005 net income was $62.5 million, or $7.60 per share, compared to $47.9 million or $5.83 per share in 2004. Income before extraordinary gain for 2005 was $57.8 million or $7.03 per share, compared with $47.4 million or $5.77 per share for 2004. Consolidated cash flow before financing was $18.9 million in 2005, compared to $85.9 million in 2004.

Before turning to the detailed business results, I'd like to preface this discussion by noting that results for NACCO Materials Handling Group Wholesale have been revised to include the NACCO management fees that were not charged during 2004 as a reclassification of selling general and administrative expense from NACCO and other, the NACCO Materials Handling Group Wholesale and a capital contribution by NACCO to NMHG. As a result of the reclassification, 2004 operating profit and net income results for these two segments have been revised. The net impact on NACCO Industries from the adjustment -- there has been no net impact from these adjustments on NACCO Industries' results.

The individual business results vary significantly. So I will discuss fourth quarter results and outlooks of each separately, beginning with NACCO Materials Handling Group Wholesale, followed by NACCO Materials Handling Group Retail, Housewares and North American Coal Corporation. NACCO Materials Handling Group Wholesale reported net income of $8.6 million on revenues of $587 million for the fourth quarter of 2005, compared with net income of $8.8 million on revenues of $545 million for the fourth quarter of 2004. Revenues increased markedly in the fourth quarter of 2005, compared with the fourth quarter of 2004.

Fourth quarter shipments of 22,333 units were comparable to fourth quarter 2004 shipments. NACCO Materials Handling Group Wholesale's worldwide backlog was approximately 23,500 units at December 31, 2005, compared with 25,700 units at December 31, 2004. Net income was favorably affected by an increase in operating profit from $14.1 million in 2004 to $15.2 million in 2005, primarily as a result of price increases totaling $15 million pre-tax, which more than offset the fourth quarter's increase in material costs of $7.1 million pre-tax and favorable foreign currency movements of $6.4 million pre-tax.

These benefits were partially offset by incremental manufacturing expenses associated with the manufacturing and launch of newly designed internal combustion engine lift trucks, and increase in operating expenses as a result of increased employee related expenses. However, despite these operating profit improvements, net income decreased slightly as a result of a $2.5 million tax associated with the repatriation of earnings from foreign subsidiaries during the fourth quarter of 2005, partially offset by a favorable shift in income subject to lower tax rates.

For the full year ended December 31, NACCO Materials Handling Group reported net income of $26 million on revenues of $2.2 billion, compared with net income of $17.9 million on revenues of $1.9 billion for the year ended December 31, 2004.

Turning to NACCO Materials Handling Group Wholesale's outlook, global lift truck markets continued to strengthen in 2005, and in 2006, the company expects strong lift truck markets in the Americas and Asia Pacific, and moderate increases in Europe.

With these market prospects and the successful launch of the newly designed one to three ton internal combustion engine lift trucks, NACCO Materials Handling Group Wholesale anticipates that its unit booking and shipment levels in 2006 will be substantially higher than in 2005. However, shipments of the newly designed four to seven ton internal combustion engine lift trucks that are expected to be introduced in 2006 and early 2007 will be at controlled rates to accommodate the phase in of these products.

Previously implemented improvement programs are expected to deliver significant benefits in 2006. The company's one to three ton series, the highest volume portion of the newly designed one to eight ton internal combustion engine truck line, was introduced in 2005 is expected to positively affect results in 2006. The remaining series are expected to be largely introduced by 2007, with the introduction of the four to five ton series in 2006, and the six to eight ton series in 2007.

The expected increasingly positive effects of these new product introductions, expense reduction efforts already implemented, increased efficiencies in the Americas attributable to 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, NACCO Materials Handling Group's Wholesale's manufacturing restructuring activities are approaching maturity and are expected to require less expense than in prior years.

The previously noted benefits are expected to be partially offset by one-time product development and related introduction costs, as well as start-up manufacturing inefficiencies in 2006 related to the new lift truck series to be launched. Additional, however less material, offsets to the favorable effects of the new lift trucks are costs attributable to the remaining portion of the previously announced urban manufacturing restructuring program and production line movements which will take place in the second half of 2006.

Price increases implemented in prior periods are expected to continue to offset the effect of anticipated higher material costs in 2006. And while these pricing actions are expected to have a significant impact on margin recovery in 2006, full recovery of the accumulated material cost increases incurred since the end of 2003 is not anticipated until 2007. In addition, although the dollar continues to strengthen, past currency movements still leave NACCO Materials Handling Group 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 ship the sourcing of components from high cost British pounds sterling and Euro countries to U.S. dollar in low cost areas on the assumption that currency exchange rates are likely to stay at levels that are not advantageous to NACCO Materials Handling Group Wholesale. Overall, Wholesales' investment and long term programs, particularly the significant new product development and manufacturing programs, are expected to positively affect results in the first half of 2006, with a significantly larger impact during the second half of 2006 and in 2007 and 2008.

NACCO Materials Handling Group Retail, which includes the required elimination of inter-company transactions, reported a net loss for the fourth quarter of 2005 of $2.8 million, compared with a net loss of $2.6 million for the fourth quarter of 2004. For the full year, NACCO Materials Handling Group Retail reported a net loss of $7.9 million on revenues of $186 million, compared with a net loss of $7.2 million on revenues of $195 million.

In 2006, Retail expects the programs put in place to have a significant impact on the performance of its wholly owned dealerships, although the full benefit will not be achieved until future years. These programs were put in place in order to meet the longer term strategic objectives which include at least break even results while building market position.

At the NMHG consolidated level for the full year 2005, NACCO Materials Handling Group generated a negative consolidated cash flow before financing of $18.2 million, which was comprised of net cash provided by operating activities of $11.9 million less net cash used for investing activities of $30.1 million. The negative cash flow before financing activities in 2005 was driven by investments in working capital and support of higher sales volume.

Also, at the consolidated level, I should note that NACCO Materials Handling Group filed an 8-K on February 21, indicating that it is considering alternatives to enable it to refinance portions of its current outstanding debt, including the redemptions of its 10% senior notes due in 2009, in accordance with the terms and conditions of those securities. I would note there can be no assurances that NACCO Materials Handling Group will be able to secure financing in amounts or at terms that would enable NACCO Materials Handling Group to complete any contemplated refinancing. But that effort is underway.

Turning now to the NACCO Housewares Group, which includes NACCO's Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries. The group reported net income of $14.9 million for the fourth quarter of 2005, on revenues of $239 million, compared with net income of $18 million for the fourth quarter of 2004, on revenues of $232 million.

Fourth quarter 2005 results include a $3.8 million pre-tax charge, or $2.5 million after a tax benefit of $1.3 million, for a restructuring program currently being implemented at Hamilton Beach/Proctor-Silex’s Saltillo, Mexico manufacturing facility. This restructuring program completes the shift in sourcing of products for all areas except Mexico to China from Mexico and from the United States. Revenues at both Hamilton Beach/Proctor-Silex and Kitchen Collection increased in the fourth quarter of 2005, compared with the fourth quarter of 2004, despite both the weak market for housewares products and reduced customer visits at factory outlets malls.

Revenues at Hamilton Beach/Proctor-Silex increased to $193.4 million in 2005, from $191 million in 2004. Kitchen Collection experienced an increase in revenues to $47.7 million in 2005’s fourth quarter, from $43.2 million in 2004, due to an improvement at both new and comparable stores in the fourth quarter of 2005, compared with the same period in 2004.

The decrease in net income at NACCO Housewares Group in the fourth quarter of 2005 compared with the fourth quarter of 2004, was due to a decrease in net income at Hamilton Beach/Proctor-Silex from $14.8 million to $11 million in 2005, partially offset by a moderate increase in net income at Kitchen Collection. The decrease at Hamilton Beach was primarily attributable to the restructuring charge, which I've already mentioned and which was recognized in the fourth quarter of 2005 at $2.5 million after tax.

Also contributing to the decline in net income were greater advertising expenses in the fourth quarter of 2005 supporting the company’s new product offerings and the absence of favorable product liability adjustments due to improved claims experience and inventory adjustments that occurred in the fourth quarter of 2004. These unfavorable items were partially offset by a decrease in employee related expenses and favorable foreign currency movements. Kitchen Collection's net income increased moderately to $3.7 million from $3.2 million in 2004, primarily as a result of increased sales at permanent and temporary stores, as well as adjustments made to the merchandising philosophy and product offerings.

For the full year 2005, the Housewares Group reported an increase of $4.1 million in net income to $21.3 million on revenues of $639 million from $17.2 million on revenues of $614 million in 2004. Results for 2005 and 2004 include charges of $2.5 million after tax and $6.1 million after tax respectively that are related to restructuring programs implemented at Hamilton Beach/Proctor-Silex's manufacturing facilities.

During 2005, the Housewares Group generated cash flow before financing activities of $27.1 million, which was comprised of net cash before operating activities of $31.9 million, less net cash used for investment activities of $4.8 million. For the 2004 full year cash flow before financing activities was $9.4 million. Turning to the Housewares Group outlook, Housewares Group is moderately optimistic that markets for its consumer goods will strengthen in 2006, compared with prior periods. However, current economic conditions affecting consumers, such as increased energy and gasoline costs and rising interests rates, could unfavorably affect retail sales of Hamilton Beach/Proctor-Silex products in 2006 and continue to reduce customer visits at Kitchen Collection stores.

Over time, continued product innovation promotions and branding programs at Hamilton Beach/Proctor-Silex are expected to help the Housewares Group strengthen its market positions. New products are being introduced by Hamilton Beach/Proctor-Silex in 2006, along with products introduced in 2006, which together are anticipated to generate additional product placements at retailers resulting in increased revenues and operating profit.

Hamilton Beach/Proctor-Silex does expect pricing pressure in 2006 from suppliers due to increased commodity costs for resins, copper, aluminum and steel, and increased transportation costs resulting from higher fuel prices. The company will work to mitigate these increased costs or price increases where justified, as well as continue programs started in earlier years to enhance product offerings and reduce costs. Hamilton Beach/Proctor-Silex is also continuing programs begun in earlier years, including manufacturing restructuring programs which are designed to reduce operating costs and improve manufacturing efficiencies.

The manufacturing restructuring programs implemented in 2004 and 2005, along with increased sourcing of products from China, are expected to provide continued improvements to the company's operating results over time. These programs are expected to be largely completed by mid-2006. These programs and others initiated by Hamilton Beach/Proctor-Silex are expected to continue to improve results in 2006 and 2007, but are likely to be partially offset in 2006 by additional costs necessary to complete these programs.

Kitchen Collection expects modest increases in sales and improvements in operations in 2006 stemming from the effects of a change in merchandising program implementation, new product offerings and key programs already in place. However, results are not expected to reach peak levels of 2002 and 2003, until improved economic conditions lead to increased consumer visits to factory outlet malls.

At North American Coal, net income for the fourth quarter of 2005 was $5.4 million on revenues of $33 million, compared with net income of $3.9 million for the fourth quarter of 2004 on revenues of $28 million. Revenues increased primarily from increased deliveries at the limerock dragline mining operations as a result of the startup of limerock dragline operations in the third quarter of 2005, and an increase in deliveries of higher quality lignite at the Mississippi Lignite Mining Company.

The increase in net income for 2005's fourth quarter, compared with net income for 2004’s fourth quarter was primarily attributable to a more favorable income tax rate and an increase in royalty income and increase in earnings at the unconsolidated project mines due to contractual pricing escalation and increased tons delivered. The increase was partially offset by reduced income at consolidated coal mining operations, increased employee related costs, and higher professional service fees.

The decrease in net income at the consolidated coal mining operations was primarily caused by increased repairs and maintenance at the Mississippi Lignite Mining Company and higher commodity costs at all of the consolidated mines, mainly for diesel fuel, which are expected to be recovered to some extent in future periods through contract price escalation.

For the full year, North American Coal reported net income of $16.2 million on revenues of $118 million, compared with net income of $18.6 million on revenues of $110 million for the year ended December 31, 2004. For the 2005 full year, North American Coal generated cash flow before financing activities of $5 million, which was comprised of net cash provided by operating activities at $26.4 million less net cash used for investing activities of $21.4 million. For the 2004 full year, cash flow before financing activities was $25.8 million.

Looking to the future, North American Coal expects normal levels of lignite production in 2006, absent any unanticipated customer planned outages. The programs implemented by North American Coal to increase efficiencies and reduce costs are expected to have a considerable impact in 2006, with further improvement realized in 2007, primarily as a result of continued contract escalation at the unconsolidated project mines and 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 from the completion of mining in an area that required the removal of an unusually large amount of over burden to reach the lignite coal below, as well as operating improvements as the mine implements a solution for mining through adverse geological conditions. Results at the San Miguel Lignite Mining Operations are expected to improve under a potential contract amendment which if consummated, would be effective retroactively to January 1, 2006 and extend through 2010.

Deliveries from the limerock dragline mining operations are expected to increase in 2006 as a result of the commencement of new operations in 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 startup costs for another limerock dragline mining operation that is expected to commence in 2007. Results in 2007 at North American Coal are expected to continue to improve because of improved operating conditions at the Mississippi Lignite Mining Company.

Over the longer term, North American Coal is encouraged that more new project opportunities may become available given current high prices for natural gas, the main competing power plant fuel and expects to continue its efforts to develop new domestic coal projects. Further, the company continues to pursue additional non-coal mining opportunities, including additional limerock dragline mining services projects.

In conclusion, I have a few thoughts which amplify and put in further perspective my comments on the company's overall prospects and outlook. First, as I've said before at these calls, 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 key strategic and operating programs we have in place at each business to enhance profitability and generate growth. These programs have the objective of meeting each business' long term minimum financial targets over the next few years.

The objective is to reach these targets, minimum operating profit targets or return on capital employed targets at the case of North American Coal by the 2007/8 period or before, depending on when each business' programs mature. Likewise, my CEO letter in the annual report has outlined our focus on cash flow and our broad objective of being a substantial generator of positive cash flow before financing over time, as we have generally been since 2002.

As I noted in those letters, reaching these objectives presents a very large financial opportunity in comparison to 2005 income levels. Our key change programs have our full commitment. They were generally on track during 2005. However, I want to emphasize that while we are obviously one year closer to maturity than a year ago, their effect will not happen overnight. Program maturity in one case extends out as far as 2008/9, with the rest of the remaining uncompleted programs maturing variously over 2006 and 2007.

We expect to fully update our shareholders shortly on our profit cash flow and growth objectives and our anticipated progress toward them in the 2005 annual report. An overview, we expect significant impact in 2006, and then again in 2007 from these programs which overall are designed to achieve our long term financial and growth program objectives.

We believe that the key strategic programs outlined in our annual reports are the right programs and that our challenge is 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 always intervene. Markets and competitive conditions are always uncertain. For example, increased raw materials pricing, which now shows the beginning signs of abating, and the dramatic strengthening relative to the dollar of the euro, the British pound and the yen, which have now backed off to some degree, have had a significant impact on 2004 and 2005 profitability at NACCO Materials Handling Group.

As a result, we implemented additional procurement and sourcing programs with impact in 2006 and 2007. On the other hand, we do now expect in 2006 that material cost increases at NMHG will be moderate and that the impact of earlier pricing actions will have a significant impact on margin recovery. Again, as I have already noted, I want to emphasize that 2005 was a time of significant continued preparation for future years in which we incurred high expenses to implement programs that are designed to significantly benefit the future.

This is especially true at NMHG and to a lesser degree at Hamilton Beach/ProctorSilex and North American Coal. We expect the results of these programs to be increasingly visible in our financial performance in 2006, 2007 and 2008. We continue to believe that we will be executing these programs in a period of recovering markets. Near term, we are hopeful that are consumer and capital goods markets will continue to strengthen in 2006. 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. In the process, we expect we will have a significant impact beginning this year with increasing impact in the second half of the year.

With that, I would now like to turn to any questions that you may have.

[OPERATOR INSTRUCTIONS]

And you first question comes from the line of [Marianne Manzanillo].

Hi. Regarding your materials handling group, you made a comment that you may continue to shift from your high cost manufacturing to other perhaps dollar base or low cost manufacturing areas. Can you expand upon that a bit, you know, how much you plan to shift in 2006, from where to where, and the benefits you would expect to see, and the costs involved?

Well, I wouldn't really get into the details, but what I would say is that we do not intend to change our assembly locations. We feel very comfortable with the locations at which we assemble our products. They are near our markets and allow us to serve our customers very effectively and competitively. So I am really speaking about efforts to work with our suppliers to shift in some cases suppliers, and in other cases to shift the sources that our own suppliers are using to allow us to take advantage of better currency rates and lower costs absolutely.

Certainly, it's fair to say that our sourcing in Eastern Europe has been increasing, and secondly, our sourcing in China has been increasing, and we have active programs underway. But they are incremental and step-by-step. And given the nature of our engineered products, it is often not a speedy process to make those changes. But we do work hard on that and we expect increasing impact in 2006 and 2007.

If you take a look at your final product, how much would be outsourced, and approximately what would be breakdown be as far as what percentage would be perhaps from Europe; what percentage would be from the Americas?

I don't have answers to questions of that kind of detailed nature at my fingertips. Generally speaking, we have a philosophy of assembling our product in the market of sale. There are some exceptions to that. We manufacture our high volume two to four thousand pound pneumatic trucks in Craigavon, Northern Ireland. But we have manufacturing facilities that are spread around the world, several in Europe, several in the United States, and three in Asia.

So it's a very complex equation, and there's a lot of sourcing that moves from our own component operations in both directions, and from our suppliers in all directions. So I think the point really is we are focused on thinking about currency balance in absolute low cost countries, and we are continually trying to move that forward.

And when you said that with your one to three ton series which was introduced in 2005, that was your highest volume portion, what percentage of your sales or products does that represent?

I think I would answer that in a broader sense. The one to eight ton program, which in large measure will be completed in 2006, with a little bit drifting in, I believe to 2007, we're talking about in excess of 50% of the sales volume of our new unit sales volume of our company.

And that's internal combustion?

Correct.

And as far as a working capital or an investment in the four to five ton or the six to eight ton, is that going to require a large investment, as well in any way similar to what we saw for the investment in 2005 for the one to three ton product?

Well, we've made an -- it's very complicated to talk about investment in these products, because, of course, much of the investment is expense. And those products are well along and have been under development and are now reaching prototype stage and testing. So much of the expense has been incurred, but there are always new product introduction expenses when a new series comes along, and there are some capital expenses that are still associated with the tooling and other things that will be incurred.

But I think, in a broad sense, we are coming down the other side of the hill at this point in terms of total expense.

Thank you.

Your next question comes from the line of [Roel Gooskens]

Good morning. This is Roel Gooskens from Franklin. Just two questions, not really related. The first one was on the tax rate, which was somewhat lower than you predicted, I think, than earlier occasions. And part of that comes from adjustments because of foreign statutory rate differences, which is quite a substantial amount of $10.4 million I read from the filings.

If you can maybe elaborate on that. And secondly, assuring that Linde will go ahead in buying VOC gas business and then selling off its material handling group, could that lead to a next or last wave of consolidation in the industry and would you be participating or would you just stay on the sidelines?

Let me ask Ken to comment on the tax rate matters.

Looking at that schedule, I think you are referring to the footnote in the financial statement. This works in that you take your pre-tax income and you multiply it times the statutory rate. And there are a number of areas in the world where we pay a rate that is lower than that statutory rate. Because of the mix of incomes, where we earn it, we do have a benefit in a number of countries of either paying a lower rate, or we pay a higher rate in those countries, but we are able to utilize -- we're in a loss position in those countries such that it gives us a benefit. And again, what we were trying to do is reconcile back to a 35% U.S. rate. Looking the other way, of course, we did have a $2.5 million charge in taxes for the repatriation under the Homeland Investment Act, and that was also in this quarter in that table.

But the reconciliation is to the statutory rate, as opposed to suggesting that there be fundamental differences in those from year to year.

Could you maybe tell forward looking what you think will be the best rate for 2006?

We don't forecast out the tax rate, but I would say that our pattern of where we earn income is set as we discussed where our business is located, and we have in certain jurisdictions lower tax rates that we take advantage of that are lower than the 35% rate. We permanently reinvest those earnings so we don't have to tax them up to the U.S. statutory rate. So that situation will continue.

With regard to your question about Linde, Linde will have many hurdles ahead of it in terms of executing a program as ambitious as the one that they have outlined, and I think any comment on my part would just be totally speculative at this point; and I really don't have anything to add to what you already know.

You sound more bullish in your outlook for the Materials Handling Group than you have been for the last two or three years. Have you gained confidence or have you seen more evidence? What's causing your more outspoken belief with the result improvement getting to the margins than maybe we've read in the filings of the last few quarters?

I don't think I would be inclined to encourage you to interpret it that way. What I mean to be saying is that for several years we have been pursuing a series of programs, and they are now starting to come to maturity. We have indicated consistently, I think, that we saw substantial maturity of programs at the other businesses, but particularly at NACCO Materials Handling Group in 2006, 2007, and 2008.

We have certainly the added confidence that comes with another year's lapse and progress on the programs. So I think the way I would be inclined to put it is to say that the programs are coming to maturity, and we are encouraged by the whole process, absent any effects that we don't anticipate, which can always happen. But we feel good about the programs and what's happening, and the time has come for them to start to pay off.

Thank you.

[OPERATOR INSTRUCTIONS]

You have no further questions.

I thank all of you for joining us on this conference call, and we look forward to updating you at a conference call after the first quarter. Thanks a lot.

Thank you. And if you have any additional questions, please feel free to call me at 440-449-9669. Thanks, and have a great day.

Ladies and gentlemen, this concludes your conference call for today. If you would like to access a replay of this call you may dial toll number 617-801-6888 or toll free 888-286-8010. The access code for today's conference is 30869440. Once again, that access code is 30869440. Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation, you may now disconnect. Have a good day.