NACCO Industries Inc (NC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 NACCO Industries earnings conference call. My name is Shanique and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mrs. Christina Kmetko, Manager of Finance. Please proceed.

Thank you. Good morning, everyone, and thank you for joining us, today. Yesterday, a press release was distributed, outlining the Company's results for the first quarter ended March 31, 2006. 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 a copy 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 forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here, today. Additional information regarding these risks and uncertainties were set forth in yesterday's press release and in 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. This compliments the 10-Q, which was also released, last night, and is available on the NACCO website.

First quarter net income was $12.7 million, or $1.54 per share, compared with net income of $5.2 million, or $0.63 per share, for the first quarter of 2005. Individual business results varied significantly, so I will discuss first quarter results and outlooks of each, separately, beginning with NACCO Materials Handling Group Wholesale, followed by NACCO Materials Handling Group Resale Housewares, and finally, North American Coal Corporation.

NACCO Materials Handling Group Wholesale reported net income, $10 million - on revenues, $573 million for the first quarter compared with net income of $2.8 million - on revenues, $536 million for the first quarter of 2005. The revenues increased in the first quarter of 2006 compared with the first quarter of 2005, primarily as a result of increased unit volume, mainly in the Americas and the effect of price increases implemented during 2004 and 2005 and increased parts volume. First quarter 2006 shipments increased to 21,718 units from shipments of 19,909 in the first quarter of 2005. NACCO Material Handling Group Wholesale's backlog was approximately 23,600 units at March 31 of '06 compared with 27,500, a year ago, and 23,500 at December 31. The increase in net income is primarily attributable to improvement in operating profit from $8.9 million in the first quarter of 2005 to $18.7 million in the first quarter of 2006, mainly as a result of the increased sales of units and parts and price increases of $11.7 million, pretax, which more than offset increased material costs of $2.0 million, pretax, in the first quarter of 2006.

Over the remainder of 2006, the Company expects strong lift-truck markets in the Americas and Asia-Pacific, and moderate, year-over-year increases in Europe, although there's some indication that the first quarter was stronger than we expected in Europe. With these market forecasts and the successful launch of the highest volume portion of the newly designed 1 to 8 ton internal combustion engine lift truck line, the 1 to 3 ton series, in 2005, as a backdrop. NACCO Materials Handling Group Wholesale anticipates that unit booking and shipping levels will be substantially higher in 2006 than in 2005. However, shipments at the newly designed 4 to 8 ton ICE lift truck series, which are expected to be introduced in 2006 and early 2007, will be at controlled rates to accommodate the phase-in of those products.

Previously implemented improvement programs are expected to deliver significant results in 2006 and the Company's newly designed 1 to 3 ton ICE series, launched in 2005, is expected to continue to affect results positively in 2006 and further benefits are expected to be realized with the introduction of the 4 to 5 ton series in the second half in 2006, and the 6 to 8 ton series in early 2007. The expected increasingly positive effects of these new product introductions, product costs and expense reduction efforts already implemented or underway, and increased efficiencies in the Americas attributable to the completion of the restructuring and rearrangement of assembly lines are expected to provide significant profitability improvements in 2006. The 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 since the end of 2003 is not anticipated until 2007. Although cost increases have leveled off in the past few quarters, higher energy prices could result in further increases in the cost of raw material and higher fuel cost could raise shipping costs. Accordingly, the Company will need to monitor economic conditions and their resulting effects on cost and evaluate the need and potential for future price increases.

In addition, the Company continues to work actively to shift the sourcing of components from high cost British pound sterling, and euro countries to U.S. dollar and low-cost countries on the assumption that currency exchange rates are not likely to return to the favorable levels that existed in the 2000 to 2003 time period. Overall, NACCO Material Handling Group Wholesale's investment in long-term programs, particularly its 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.

Additionally, NACCO Material Handling Group has elected to redeem all $250 million, aggregate principle amount, of its 10% Senior Notes. The Company expects to pay $1,050 per $1,000 principle amount of the Senior Notes, plus accrued and unpaid interest to the registered holders of the Senior Notes on May 15, 2006. As a result, NACCO Materials Handling Group expects to recognize a pretax charge of approximately $17.6 million, or $10.7 million after the tax benefit of $6.9 million, during the second quarter of 2006 for the call premium and the write off of the remaining discount and deferred financing fees related to the Senior Notes. Subsequent to the redemption of the Senior Notes, interest expense is expected to be lower than current interest expense because NACCO Materials Handling Group's new term loan, which is going to be used to finance the redemption of the Senior Notes, has a lower interest rate than the Senior Notes.

At NACCO Materials Handling Group Retail, which includes the required elimination of inter-company transactions between wholesale and NMHG's wholly-owned retail dealerships, net income reported for the first quarter of 2006 was $1.4 million compared with a net loss of $2.5 million for the first quarter of 2005. The increase in first quarter net income compared with the previous year was primarily attributable to a pretax and after-tax gain of $3.7 million on the sale of the European retail dealership during the first quarter of 2006.

Turning to NACCO Housewares Group, which includes NACCO's Hamilton Beach/Proctor-Silex, and Kitchen Collection subsidiaries, the group reported a net loss of $1.2 million for the first quarter of 2006 on revenues of $118 million compared with a net loss of $1.1 million for the first quarter of 2005 on revenues of $115 million. Revenues at both Hamilton Beach/Proctor-Silex, and Kitchen Collection increased slightly in the first quarter of 2006 compared with the first quarter of 2005, and the net loss of the Housewares Group in the first quarter of 2006 was comparable to the net loss of the first quarter of 2005.

NACCO Housewares Group is moderately optimistic that markets for its consumer goods will strengthen in 2006 compared to prior years despite Wal-Mart's recently announced inventory reduction program. However, current economic conditions affecting consumers such as increased energy and gasoline costs and rising interest rates could unfavorably affect retail sales of Hamilton Beach/Proctor-Silex products in 2006 and result in reduced 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.

Hamilton Beach/Proctor-Silex expects pricing pressure in 2006 from suppliers due to increased commodity costs for resins, copper, aluminum, steel, and increased transportation costs resulting from higher fuel prices. Hamilton Beach/Proctor-Silex will work to mitigate these increased costs with price increases where they're justified, as well as group programs initiated in prior years to enhance product offerings and reduced costs. Hamilton Beach/Proctor-Silex implemented manufacturing restructuring programs in 2004 and 2005, which are designed to reduce operating costs and improve manufacturing efficiencies. These programs, along with increased sourcing of products from China, are expected to provide continued improvements to the Company's operating results, over time. The restructuring 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 an adjustment in its merchandising approach, new product offerings, and key programs already in place. Although results are not expected to reach the peak levels of 2002 and 2003 until improved economic conditions lead to increased customer visits to factory outlet malls.

North American Coal's net income for the first quarter of 2006 was $3.7 million on revenues of $33.7 compared with net income of $4.3 million for the first quarter of 2005 on revenues of about $29 million. The revenues increased primarily due to increased deliveries at the Limerock Mining Operations as a result of the startup of two new limerock drag line operations in the third quarter of 2005, contractually required price escalation at the Mississippi Lignite Mining Company, increased revenue for cost reimbursement at Red River Mining Company, and increased royalty income. The decrease in net income over the 2006 first quarter compared with the 2005 first quarter was primarily the result of reduced operating profit at the consolidated coal mining operations and higher professional service fees. The reduction in operating profit was mainly due to lower operating results at the San Miguel Lignite Mining Operations as a result of a shift in mix to less profitable mining services and increased expenditures for labor and repairs and maintenance. These unfavorable changes were partially offset by an increase in earnings at the unconsolidated project mines due to contractual price escalation, increased royalties, and decreased interest expense.

North American Coal expects normal levels of lignite coal deliveries in 2006 without any unanticipated customer power 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. These improvements are particularly the result of more favorable operating conditions at the Mississippi Lignite Mining Company and expected significant improvement in operations at the San Miguel Lignite Mining Operations, beginning in the second quarter of 2006, if a new contract amendment is consummated, as expected. As currently proposed, the amendment would be effective retroactively to January 1, 2006 and extend through 2010. In addition, anticipated contract escalation is expected to recover an increasing amount of commodity costs for diesel fuel, tires, and steel at all consolidated mining operations.

The deliveries from limerock dragline mining operations are expected to continue 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 dragline mining operation that is expected to commence in 2007. However, we do want to note that deliveries and operating results could potentially be reduced as a result of a Federal Court decision affecting customers' mining permits in South Florida. North American Coal believes that its customers intend to vigorously challenge and appeal the ruling.

Over the long 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, including opportunities for coal gasification and clean coal technologies, given current high prices for natural gas.

At NACCO and Other, which includes the parent company operations and Bellaire Corporation, a wholly-owned, non-operating subsidiary of the Company, reported a net loss of $1.2 million for the first quarter of 2006 compared with net income of $1.7 million in the year-ago quarter. The reduction in income is primarily attributable to lowered tax expense in 2005 due to recognition of the tax benefit related to previously generated losses in Europe.

In conclusion, then, I have a few thoughts which amplify and, I think, put in further perspective my earlier comments on the Company's prospects and outlook. First, as I've said before at these calls - in our annual reports, which now include the 2005 annual report, my CEO letters and the subsidiary CEO letters, we are particularly focused on the key strategic and operating programs we have in place at each business to enhance profitability and generate growth. These programs have the objective of meeting each business's long-term minimum financial targets over the next few years. The objective is to reach these minimum operating profit targets or return on capital employed target in the case of North American Coal by the 2007-2008 period or before, depending in when each business's programs mature. Likewise, my CEO letters in our annual reports outline our focus on cash flow and our broad objective of being a substantial positive cash flow generator before financing, over time, as we generally have been since 2002.

As I've noted in my CEO letters, reaching these objectives represents a very large financial opportunity in comparison with the income levels of past years. Our key change programs have our full commitment. They were generally on track during 2005 and the first quarter of 2006. However, I want to emphasize that while we are obviously one year closer to maturity than a year ago, their effects still will not happen, overnight. Program maturity in a few cases extends out as far as 2008 with the rest of the remaining uncompleted programs maturing variously over 2006 and 2007.

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

We believe that the key strategic programs outlined in our annual reports are the right programs and that our challenge is the execution of those programs. I do, however, once again, want to note that while we believe prospects for the next few years are excellent, other events can always intervene. Markets and competitive conditions are always uncertain. For example, increased raw material pricing, which now signs - the beginning signs of abating and the dramatic strengthening relative to the dollar, the euro, the British pound, and the yen, which had backed off to some degree, but is now, once again, significant. It had a significant effect on 2004 and 2005 profitability at NMHG. As a result, we implemented additional procurement and sourcing programs that will impact 2006 and 2007. On the other hand, we do not expect, in 2006, that material cost increases at NMHG will be substantial and we do think that the impact of the earlier pricing actions will have a significant impact on margin recovery.

Again, as I've 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 NACCO Materials Handling Group and to a lesser degree, at Hamilton Beach/Proctor-Silex and North American Coal. We expect the results of these programs to be increasingly visible in our financial performance in 2006, 2007, and 2008, despite their continuing near-term implementation costs.

We continue to believe that we will be executing these programs in a period of recovering markets. Near term, we're hopeful that our consumers and consuming capital bench markets will continue to strengthen. Nevertheless, our near-term challenge is to continue to execute our programs, effectively, and at NACCO Materials Handling Group, to recover raw material cost increases through price increases and cost reductions, a process we expect will have significant increasing impact over the course of this year.

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

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of J.B. Groh with D.A. Davidson. Please proceed.

Hi. Good morning. Thanks for taking my call.

Good morning.

I had a question on your material handling. You - it seems like you have a fairly high degree of confidence in 2006 being pretty strong. Is that overall market conditions? Is it market share gains? How would you characterize your thoughts on 2006?

Well, I think, for us, what I was focusing on in my remarks was twofold. Market conditions are healthy, right now, and we're optimistic that they will continue. And second, we are seeing increasing maturity of the various programs that relate to product, product cost, material cost, recovery through pricing and cost reduction. And, generally, the manufacturing restructuring and a whole variety of programs that I've been discussing, now, for some considerable period of time. Those are the factors I would most point to.

So, good market conditions, as well as some operational improvements on your part?

Yes.

And in terms of the overall market, is there - if you break it down by lift truck classes across the board, strength for any particular areas that are doing better than others?

I haven't seen the full market numbers for the first quarter, but generally, it's strong across the board. The warehousing markets, so-called Class II and III, are strong in the United States and so are the counterbalance markets for both internal combustion engine trucks and electric trucks. In Europe, I think markets are strong, as well. And it's a little tough to look at it from a quarter-to-quarter perspective, but at this point, we see pretty general market growth across the spectrum.

Okay. Thank you very much for your time.

[OPERATOR INSTRUCTIONS].

You have no additional questions, at this time.

Okay. With that, then, I think we'll conclude this conference call and thank everyone very much for participating. We appreciate your listening in and hope that you'll be with us, a quarter from now, when we have our second quarter update. Thanks a lot. Bye.

If you have any additional questions, please feel free to call me at [440] 449-9699. Thank you.

Ladies and gentlemen, if you wish to hear the replay for this call, it will be available one hour after the conclusion of today's conference. To access the replay, please call toll-free [888] 286-8010 or outside the U.S. [617] 801-6888 with the replay access code 385 85 051.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.