NACCO Industries Inc (NC) 2006 Q2 法說會逐字稿

Good morning. Welcome to the NACCO Industries Inc. Second Quarter Earnings Conference Call. Before we begin, I would like to remind participants that NACCO Industries previously announced, the tax-free spin-off of NACCO's Hamilton Beach/Proctor-Silex business and merger of Applica Incorporated with and into Hamilton Beach/Proctor-Silex to form an independent public company to be named Hamilton Beach Inc.

Investors and security holders are urged to read the registration statement on Form S-4 and the Proxy Statement/Prospectus/Information Statement included within the Registration Statement on Form S-4 when they become available, and any other relative documents filed with the SEC in connection with the proposed transaction, because they will contain important information about the proposed transaction and the parties thereto.

Investors and security holders may obtain free copies of these documents, when they become available at the website maintained by the SEC at www.sec.gov. And directly from any of the parties to the transaction at the telephone numbers, mailing addresses or website addresses set forth at the end of our Second Quarter Earnings Release. Applica Incorporated and Hamilton Beach/Proctor-Silex, their directors and certain other members of their management may be deemed to be participants in the solicitation of proxies from Applica stockholders with respect to the proposed transaction.

Information regarding the interest of these officers and directors in the proposed transaction will be included in the Registration Statement on Form S-4 in the Proxy Statement/Prospectus/Information Statement. In addition, information about Applica's directors, executive officers and members of management is contained in Applica's most recent Proxy Statement, which is available on Applica's website and www.sec.gov.

Additional information, regarding the interest of such potential participants will be included in the Registration Statement on Form S-4 and the Proxy Statement/Prospectus/ Information Statement.

You will now begin the replay broadcast of the NACCO Industries Second Quarter Earnings Call.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 NACCO Industries Earnings Conference Call. My name is Mike, and I'll be your operator today.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Christina Kmetko, Manager of Finance. Ma'am over to you.

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 second quarter ended June 30, 2006. If anyone has not received a copy of this earnings release or would like a copy of our 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 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 was set forth in yesterday's press release and in our 10-Q.

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

Thanks, Christy. Good morning to all of you. I'll begin with an overview of the earnings release, which was sent out last evening. This compliments the 10-K, which was also released and is available on the NACCO website. Second quarter net income was $4.7 million, or 57 cents per share, compared with net income of $11.3 million or $1.37 cents per share for the first quarter of 2005.

The 2006 results include the company's NACCO Materials Handling Group subsidiary's redemption of its $250 million 10% senior notes due in 2009, which resulted in a charge to earnings for the retirement of debt of approximately $17.6 million, or $10.7 million after a tax benefit of $6.9 million. The write-off is for the redemption premium, and the write off of the remaining unamortized original bond issue discount and deferred financing fees related to the senior notes.

The individual business results vary, so I will discuss first the -- I will discuss the first quarter results and outlooks of each subsidiary separately beginning with NACCO Materials Handling Group Wholesale followed NACCO Materials Handling Group Retail, Housewares and North American Coal. NACCO Materials Handling Group Wholesale reported a net loss of $2.0 million on revenues of $581 million compared with net income of $8.9 million on revenues of $575 million for the second quarter of 2005.

Second quarter 2006 results include the 10.7 million after tax charge for early retirement of the senior notes that I discussed in my opening remarks. Revenues increased in the second quarter of 2006 compared with the second quarter of 2005, but very modestly. Second quarter shipments increased to 22,175 units from shipments of 21,997 in the second quarter of 2005. Backlog was approximately 25,900 units at June 30, 2006 compared to 23,900 at June 30, 2005, and approximately 23,600 units at March 31, 2006.

Net income decreased compared with the prior year's second quarter primarily as a result of a modest reduction in gross profit and a $17.6 million charge for the early retirement of NMHG senior notes. Gross profit decreased as a result of higher initial costs on newly-introduced products. And also affecting gross profit, was a return-to-normal manufacturing efficiency levels in Europe compared with the prior year when manufacturing efficiency was more favorable as a result of higher manufacturing throughput due to the building of inventory in the second quarter of 2005 in anticipation of the rearrangement of production lines in Europe as NMHG shifted to the production of new products during the third quarter of 2005.

More than offsetting the gross profit decrease were improvements in selling, general & administrative expenses as a result of a favorable product liability adjustment in the Americas during the second quarter of 2006 of $8.2 million. The product liability adjustment was the result of a reduction in the estimate of the number of claims that had been incurred but not reported and the average cost per claim due to more favorable claim experience than previously estimated. This improvement in selling, general & administrative expenses was partially offset by higher employee-related expenses and unfavorable foreign currency movements net of the effects of hedging due to higher costs from the strengthening of the US dollar against the British pound Sterling and the effect of the weakening US dollar against the Brazilian real.

For the remainder of 2006, in terms of output, the company expects strong lift truck markets in Europe and Asia Pacific and moderate year over year increases in the Americas. With these market prospects, and the successful launch in 2005 of the one to three ton internal combustion engine series, the highest volume portion of the newly designed one to eight ton ICE lift truck line is complete and NACCO Materials Handling Group anticipates that unit booking and shipping levels in the last half of 2006 will be substantially higher than the second half of 2005. However, shipments of the newly designed four to eight ton lift truck series, which are expected to be introduced during the remainder of this year 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 the last half of 2006. These newly designed one to three ton combustion engine series launched in 2005 is expected to continue to affect results positively during the remainder of 2006. Further benefits are expected to be realized in 2007 and 2008 with the introduction of the four to five ton series in the second half of 2006 and the eight ton series in early 2007.

The effects of the new product introductions, product costs and expense reduction efforts are already implemented or underway and increased efficiencies in the Americas attributable to the completion of restructuring and rearrangement of the assembly lines are expected to be increasingly positive and provide significant profitability improvements in the last half of 2006. In addition, NMHG Wholesale's manufacturing restructuring activities are approaching maturity and are expected to require less expense than in previous years.

Price increases implemented in the current quarter and prior periods are expected to offset the effect of anticipated higher material costs in 2006. While these pricing actions taken in prior periods 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, the company continues to work actively to shift the sourcing of components from high cost British Pound Sterling and Euro countries to low cost areas. This will become particularly important in 2007 when a number of currently favorable currency hedge contracts will have expired, leaving a smaller proportion of British Pound Sterling and Euro purchases hedged against the US dollar than in 2006.

Overall NMHG Wholesale's investment in long term programs, particularly it's significant new product development and manufacturing programs, are expected to effect results positively during the second half of 2006, as is volume, and in 2007 and 2008. But adverse currency could moderate the effect of these improvements.

NMHG Retail, which includes the required elimination of inner company transactions between wholesale and NMHG's wholly owned retail dealerships reported a net loss of $3.4 million compared with a net loss of $1.4 million for the second quarter of 2005. The increase in the second quarter loss compared to the 2005 second quarter was primarily attributable to increased expense in 2006 for obsolete inventory in Asia Pacific and operating expenses in Asia Pacific and importantly the gain on the sale of a European retail dealership in the second quarter of 2005.

Looking the to the future, NHMG Retail expects its existing programs as well as other programs being put into place to enhance performance of its fully owned dealerships although the full benefit will not be achieved until future years. These programs were put in place in order to meet longer term strategic objectives, which include achieving at least break even results while building market position.

NACCO Houseware's Group, which includes NACCO's Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries reported net income of $1.6 million for the second quarter of 2006 on revenues of $135.7 million compared with net income of $1.6 million for the second quarter of 2005 on revenues of $132 million.

The Houseware's Group's second quarter net income was comparable to the 2005 second quarter net income. Hamilton Beach/Proctor-Silex reported net income of $2.7 million in the second quarter compared with $2.8 million in 2005. This change was off set by a moderate reduction in Kitchen Collection's loss. The slight increase at Hamilton Beach/ Proctor-Silex was primarily attributable to increased advertising expenses in the second quarter of 2006, supporting a new marketing campaign, and an increase in other expense primarily from unfavorable foreign currency movements due to the strength of the US dollar in the second quarter of 2006, partially off set by the increase in revenue.

Turning to the NACCO Houseware's Group outlook, as we previously announced, NACCO plans to spin off its Hamilton Beach/Proctor-Silex business to the company's shareholders and immediately after the spin off, Applica Incorporated will merge into Hamilton Beach/Proctor-Silex. It is NACCO's objective to complete this transaction by the end of the third quarter of 2006, subject to required regulatory approvals and approval of the merger by Applica stockholders.

NACCO Houseware's Group is moderately optimistic that markets for its consumers goods will strengthen in 2006 compared with prior years. Over time, continued product innovation, promotion and branding programs at Hamilton Beach/Proctor-Silex are expected to help it strengthen its market positions. Through its ongoing focus on innovation, Hamilton Beach/Proctor-Silex has a strong assortment of new products planned for 2006 and 2007.

The new products planned for 2006, as well as those introduced in 2005, are anticipated to generate additional product placement at retailers resulting in increased revenues and operating profits. Our volume prospects are difficult to predict because current and new products are dependant on the consumers need for an acceptance of the company's products as well as the availability of retail shelf space.

Hamilton Beach/Proctor-Silex expects pricing pressure in the remainder of 2006 from suppliers due to increased commodity costs for resins, copper and aluminum. Additionally the company expects transportation costs in the second half of the year to be higher compared with the same period in 2005 as a result of higher fuel prices. Hamilton Beach/Proctor-Silex will work to mitigate these costs increase through price increases, where justified, as well as through programs initiated in prior years to enhance product offererings and reduce 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 results over time. The restructuring programs are expecting to be largely completed during the third quarter of 2006. These programs and others initiated at Hamilton Beach are expected to continue to improve results in the last half of 2006 and in 2007, but are likely to be partially offset in 2006 by additional costs necessary to complete the programs.

Kitchen Collection expects modest increases in sales and improvements in operations in the last half of 2006 stemming from the affects of an adjustment in its merchandising approach, new product offerings and key programs already in place. However results are not expected to reach peak levels of 2002 and 2003 until economic conditions improve which may lead to increased customer visits to factory outlet malls.

Turning to North American Coal, net income for the second quarter of 2006 was $9.9 million on revenues of $39.2 million compared with net income of $3.2 million for the second quarter of 2005 on revenues of $28 million. The increase in net income for the 2006 second quarter compared with the 2005 second quarter was primary the result of a $5 million increase in San Miguel Lignite Mining Operations operating profit as a result of a contract amendment that was signed in the second quarter of 2006 but was retroactive to January 1, 2006. The retroactive adjustment under the amended contract which applied to the first quarter of 2006 but was recognized in the second quarter was $3 million. The remaining $2 million improvement was for the second quarter 2006 results under the amended contract compared with the second quarter of 2005.

Also contributing to the increase in net income were reduced expenses at the limerock dragline mining operations as a result of several operations maturing beyond the start-up phase and reaching steady production levels, and reduced operating expenses at the Mississippi Lignite Mining Company as a result of improved productivity in the second quarter of 2006 compared with the prior year quarter. These increases were partially offset by an increase in the effective income tax rate for 2006 compared with 2005.

Looking to the future, North American Coal expects normal levels of lignite night coal deliveries in the last half of 2006, absent any unanticipated customer power plant outages. The programs implemented by North American Coal to increase efficiencies and reduce costs are expected to have a considerable impact in the remainder of 2006, with further improvements realized in 2007. These improvements are particularly the result of more favorable operating conditions in the Mississippi Lignite Mining Company and an expected significant improvement in operations at San Miguel Lignite Mining Operations, as a result of the recently signed contract amendment. In addition, anticipated contract escalaction is expected to continue to recover an increasing amount of commodity costs for diesel fuel, tires and steel at all consolidated mining operations.

Deliveries from 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, as compared with 2005. However, deliveries and operating results in the long term could potentially be reduced as a result of a federal court decision affecting customers' mining permits in South Florida. North American Coal believes its customers intend to vigorously challenge and appeal this ruling.

Over the long term, North American Coal expects to continue with efforts to develop new domestic coal projects, and is encouraged that more new projects may become available, including opportunities for coal liquefaction, coal gasification, and other clean-coal technologies, given the current high prices for natural gas, the main competing power plant fuel.

Further, the company continues to pursue additional non-coal mining opportunities.

In conclusion, I would simply note that our programs are continuing to pay off as we had hoped they would, and North American Coal current quarter results reflect significant advancements of major programs at San Miguel and Mississippi, and our limerock operations. At Hamilton Beach/ Proctor-Silex major programs are drawing to a conclusion in 2006, and at NMHG product and manufacturing programs are on track, although currency fluctuation and resourcing programs are highly active.

In addition, cash flow prospects are anticipated to be strong. We remain optimistic about our change programs becoming increasingly visible in our financial performance in 2006, 2007 and 2008. And that concludes my prepared remarks. I'd now open up the discussion for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. And our first question comes from the line of Roel Gooskens with Franklin Mutual. Please proceed.

Good morning. This is Roel Gooskens from Franklin. Hello.

Good morning.

Just a question, looking at your EBIT margin at the manufacturing operation, the lift work manufacturing operations, comparing those with Linde or Toyota, you are lagging by quite a way, percentage wise. Now I know your ambitions are for much higher profitability at your Materials Handling Group, but the markets are already quite buoyant you could say, so why is there so much delay in reaching your long-term targets at the lift truck operations. When are we going to see, I think, the predictive 9% EBIT margin from material handling growth, is there any light you can shine on that?

Well, as I indicated we are pursuing the new product introduction programs. Those are expensive. There's always a period of take-down and manufacturing costs associated with the introduction of a product line which, as of yet, is not complete and which deals with more than half the revenue of our units for the business. We are still completing the manufacturing restructuring programs and implementing a number of other programs in the marketing area as well.

So I think we are working hard to achieve the objectives that we have set out. We think that the basic programs are working but I would caution that currency has moved against us. I think also pricing increases were higher in some cases in the United States and where we have substantial business than in some area of the world and so, it takes a while for pricing increases and cost reduction efforts to have an impact on those numbers.

So I really can't give you any more than that except to say, that we continue to feel that we have the right programs and we're working on those. But we are also taking steps to try to look at sourcing alternatives and other ways to mitigate the impact of the high cost of the products and components that we bring in particularly from Europe including the UK and relative to unit prices. So that has been a burden and we have some work to do in that area.

I want to thank you.

And the next question comes from the line of David Lieberman with South Point Capital. Please proceed.

Hello. Thank you for taking my call. I have a few questions here, let me just start at the top. You talk about 9% peak margin and in order for investors to properly value the company, what I would like, you know, we'd like to hear from you what you believe mid cycle or trough margins maybe are for NMHG?

I'm sorry, but there was just something going on. Could you just repeat that question for us?

Yes sure. You talk about 9% peak margins for the Materials Handling business, and in order for investors to properly value the company, it's much more helpful to hear what you think mid cycle margins are for the material handling business, if you're operating efficiently? Or at least the trough margin so we can take on an average peak/trough?

Well, I do not have a lot to add from what I said before. We are taking a long term view, we are implementing the kind of programs that can pay off for us and we are optimistic that they are going to pay off and that the impact of those programs will be increasingly felt in the next couple of years. I will really leave it at that point, in terms of our description in terms of where we are and where we are headed.

Can you tell us what you think the industry's mid cycle margins are for just a company that recently [inaudible] business?

It is very difficult to talk about these things because first of all, there is not one industry here. There are combinations, in many ways, 3 different industries if you look at the competitors. First there is the wholesale truck business, second there is the parts business, and third there is the retail business. The wholesale parts and units business tend to come together, but the one is driven by market conditions very significantly and the other, parts, is driven by population at least as much as market conditions.

Many of the other lift truck companies own their own retail. We have very little retail ownership. We operate through independent dealers and finally, while we participate in financing activities we do not undertake the core financing ourselves. We have arrangements with outside financial providers to assist in that entire process, and others do it for themselves.

So really it is to not easy to compare others with us and their structures can be very, very different than ours and I just really leave it with the comments I have about the programs that we have going forward, and on product launch, on manufacturing and purchasing resourcing and to some degree on marketing and distribution activities as well.

Okay and then let us just move on to another question. I guess, can you talk about NMHG in the quarter? If you take out the $8.2, I think of an accounting change or non-cash change there, it looks like sequentially the business was down in operating income like 40% on quarter Q2 over Q1 - and was down year-over-year. Which surprised us considering the fact that, based on you have said in the past that this year would at least the first half of '06 should be better than '05. Could you talk a little bit about what happened in the quarter?

I think there are a couple of comments I will make. First, I think we have pretty much consistently said that the biggest impact in 2006 will be in the second half. We continue to believe that the prospects for the second half will increase the volume and the impact of our programs will be substantial. So, I think I would look somewhat less at the second quarter than at the prospects for the third and the fourth quarters with the maturing of some of these programs.

With that said, we have had adverse currency effects that we discussed in our review of the results. We had additional manufacturing variances that we expect will slip away with more efficiency as the new products come through the pipeline and then also with increased true up and we had some increases in our administrative costs that are not necessarily continuing. I think there are a whole variety of factors that we think can come to bear in future quarters that overcome some of the head winds of the second quarter.

The margins before the manufacturing variances were not significantly out of line with our previous quarters, so the base structure we think is there for the improved results as we look forward.

Could you talk a little about SG&A being a little bit higher, I mean excluding the $8.2 product liability item, it looks like SG&A increased maybe $6 million or so.

We have certain accruals that are based on expectations for the year and we had some changes in those which we wouldn't necessarily expect to be repeated that are related to compensation and other such matters.

If you will, another question here. I saw the press release on the resignation of the CEO, Mr. Eklund and presumably maybe he is the architect of the turn around in material handling, maybe he is not and you can inform us if he is not. But, it is I guess a little surprising that he leave in the middle of a multi-year project.

I do not think it is surprising at all. At 66, he is entitled to retire and we have had every expectation for some considerable time, several years, that this would happen at this time. So this was not in any way unanticipated. In addition, we have had a very cohesive team of people and have a very orderly succession process that has occurred and we have an extremely experienced former leader of our product development and our European operations, international operations, as Chief Executive, and as Chief Operating Officer we have the former leader of our Americas operations, our biggest business and I think the combination of these two people as successors to one of the most experienced people in the industry is outstanding.

And I would say that all of them and many others are all together on the execution of the programs that we have and really there is no change in what we plan to do other than the one area that I pointed out, which is the impact of currency. That's an area where we, it's one of those areas where you certainly can't forecast exactly what is going to happen in the future but it is a very significant impact. I think if you look at the second quarter, the impact of currency for us was substantial. Ken, I think you have that number and then we can give that to you later on. That is a significant number for us.

That's good to hear about the CEO and your thoughts there. Is there a sales force turnover problem at MHG?

No. We have relatively limited sales force. As I indicated earlier, we operate through independent dealers.

I meant on a national account side. Sorry.

No, no.

Okay, great. And just one final question, I guess you talked about the second half having, your programs having a significantly larger impact in the second quarter. What do you mean by significant?

I really leave it at that. Let me just add it isn't just the programs but volume will be flowing through at higher levels than in the third and fourth quarters than we certainly expect than was the case a year ago.

Right but just for general, I mean, just because the second quarter did come in just a little bit off, I'm curious does significant mean 50 bits of margin improvements or does it mean 100 or 200 bits? Just what end of the spectrum are you at there?

Well, I tell you, we just have never really given that kind of forecast and we really try to outline the programs that we have underway rather than indicate precisely what the earnings impact of those will be as far as the future is concerned.

Yes. It's just hard for investors -- they see a word, significant, and if you don't give anymore -- or any detail on what that means, it's hard for investors to understand what that word means.

Well, we felt it gave the kind of indication that we were comfortable giving with regard to future prospects in comparison to 2005.

Alright, thank you very much.

Yes.

The next question comes from Michael Marone with Candela Capital. Please proceed.

Good morning, thank you. Most of my questions actually were covered by the prior questioner. I did have a few more. The 1 to 3 ton trucks introduced in '05, when did they start making their way into backlog and shipping?

Well, they were introduced over the course of the year, and they have been shipped, I think as we have consistently said in these earnings releases, at moderated rates depending on the -- in order to bring along in an efficient way, our factory throughput. So that process is still gaining momentum and we are still working to further reduce the cost -- the cost objectives that we had. We normally go through a process where there are somewhat higher costs of products when they're first introduced, and we try to bring that down over a period of time. That process is well underway. We have all of the normal follow-up programs that we would expect, so this business of introducing new products is not a simple one-moment perspective.

It's a process that goes on, where they begin to be sold, and then the volume increases, and where cost issues that emerge are addressed by our new product development activities. Then, we have the overlay of some of the currency issues that we also have to take into account. So that whole process is well underway. I think we have more of these products, as I said in my remarks, the 4 to 5 ton products will be introduced toward the end of this year. Their volumes will really not get up to full production levels until 2007.

And then in 2008, we will begin to introduce a new line of electric trucks. So we are continuing to expand on the basic program concept that we have been undertaking for several years now, with the internal combustion engine line, extending it. These are expensive costs to maintain when you undertake as broad a program as these are, but we feel that they can set us apart from the industry and position the company extremely well for the future.

So, if we look at the backlog that you reported today, what percent would be the new truck lines?

That's not a number that I have

The 1 to 3 ton series and those volumes are still ramping up. Is that correct?

Correct.

Okay. And presumably you're selling older lines of the 1 to 3 ton truck of the series at the same time, or no?

No.

No. Okay. So would we actually be able to see margin improvement as we progress through this year because as you start layering into 4 or 5 ton trucks and the higher costs of those initial launch will, I mean, that will presumably will obscure, you know the improvements coming into 1 to 3 ramping up. Is that correct?

I think we do in our --. I did note in my comments in the press release itself. If I did say that there are some expenses that will continue to be incurred in the last half of the year but, we certainly expect that the impact of the volume and the impact of the efficiency improvements will be much stronger than those additional costs that are being carried into the second half.

Okay, and if you look at the volume growth for the first half versus last year, it probably was in line with the lift truck market in general. So what gives you comfort? And I know you don't want to put a number on what substantial increase will be for margin and or back log in the second half. But what gives you comfort that we will see a substantial increase in those areas?

Well I think if you look at our back log numbers, these are levels at which we can run our plants quite efficiently in the second half. And so I think that's one of the real keys here.

Okay. Thank you.

And the next question comes from the line of [Frank Macklin] with the Roberts Group. Please proceed.

Good morning. Al, in the back log, is there any sale pricing? You know, you've been raising prices and I just don't have a good feel for how far in advance that back log is booked.

I'm sorry, I'm not quite sure what your question is.

Okay, when you look at your back log. Is it all, like, current prices or do you have some items in the back log?

Those are back logs at the prices that the products are...are you talking about the units or the dollar? The unit back logs are what we give you and we know what the prices are that those trucks are booked at, if that's your question.

Right. And my question is, of all the units that you have in your back log, is most of that with current pricing? Or do you have what you might call something you might have prices 3 quarters ago?

There will definitely be -- I think the best way to answer that is the price increases of earlier periods are still coming through in the third and fourth quarters relative to the costs. And to the extent that we have net price increases from the recently announced price increase, those would come through in future periods and certainly not in the third and probably only to a limited degree in the fourth quarter, and would have their biggest impact next year. I think that's the response to your question.

Alright.

And the next question comes from the line of Brian Gonick with Corsair Capital. Please proceed.

Hello. Can you tell us when you expect the lift truck cycle to peak?

Volumes are quite strong right now. At this point I think it would be fair to say that we see gradual increases and we don't see the signs at this stage of the game of overheated markets for this kind of capital goods product. Our hope would be that we may see periods of moderation but that we're hopeful that we'll continue to see increases but certainly they will be much more modest in terms of market size growth than what we've been seeing over the last couple years.

Right. If your target is 9% operating margin by 2008, does that mean you would expect that the operating margins in '07 will be significantly higher than they will be in the back half of '06?

I think-- First of all, let me say that we have the 9% as an objective and we felt that we had the programs when they are properly tweaked and up and running fully to accomplish those objectives. But, I have to caution that we have always said that unforeseen circumstances can have an impact and they require us to think in terms of new projects.

And the biggest unforeseen circumstance so far, in our view, is the currency impact. If we had the currency levels which prevail and I can't give you the precise year but say 2001 or so 5 years ago, our profit prospects would be quite different than they are right at the moment. That's an issue that we are trying to work our way through and it is certainly a head wind for us and something that we are going to have to work hard on.

Is there any way you can kind of translate the '01 currency environment to your target margin. That is, if you were operating with an '01 currency, would the 9% margin equate to a 7% margin?

I really couldn't give you those numbers off the top of my head and I don't think that's information that we put out in the general market environment. It's a very significant substantial number though.

Okay. So at 9% target margins, what sort of exchange rate do you assume?

Well, I think we have to take the currency exchange rates that the market is giving us. We can have all kinds of views about what's under valued, what's over valued and at the end of the day we have to deal with it and that's what we are doing now. We have major plans in providing products in the UK to the United States, we have a major plan in the Netherlands providing product to the United States and we have a substantial number of euro-based suppliers of important components and those are situations that we have to try to work through in terms of balance in particular component sourcing.

Presumably in your modeling and getting to that 9% you had some assumption on the exchange rate for the Dollar to the Euro, can you share a range of exchange rates that would equate to?

I really can't do that without -- and I just say that no matter what the exchanges are our objectives will still be the same. I do think that there are some trade offs that we're going to have to think very carefully about because building population in the field to enhance share can also be very attractive particularly from the long term because this is a parts driven business in terms of the long term profitability of the business.

I think what I would simply say is we'll expect enhanced results as we look forward particularly in 2006 and 2007. Although in 2007, because we don't have as much hedging in place, we've got a bit of a headwind in terms of having all of the program impacts flow through as much as we might hope. So we have some of our own recalibrating to do too -- in the near term and I think we consistently said that if things come up we'll have to deal with it.

Sure.

And that's really what we're doing now.

Last question is can you tell us what the relative contribution from the limerock operation is? If there is some risk there that that business could go away, help me understand how much they are contributing.

We -- first of all, let me just say that I think it's extremely unrealistic to think that it would go away. Whether our growth prospects will come to pass as much as we hope, there's probably the more practical question, and so we don't see the basic structure that we have in place being significantly changed. But it certainly would remove uncertainty and create more opportunities if we can get resolution of that situation. At the moment, there has been a finding with regard to the litigation -- with regard to certain newly permitted limerock areas and that doesn't apply to all limerock permitted areas and -- the judge has still not even indicated how this process should be worked through in terms of remedies.

So the next step really is to have a decision for which hearings have already been held, on what the remedies will be. And our expectation is that there will be some sort of appeal process and that will be undertaken. But in the meantime, even the Florida Legislature moved to mediate certain aspects of the concern, particularly with respect to water quality that were raised in the case.

So, there are a lot of moving parts and from an overall point of view the limerock is vital to the economy of South Florida in terms of construction of all kinds, road building, homes, and so I think our point of view would be that whatever negative impact it would have would not be a material impact on the company. But that certainly -- we continue to be hopeful that that'll get resolved and that its core it is a political issue which is subject to a resolution and negotiation. And in the meantime, as I've indicated, this has more to do with some of our further growth prospects that we were hoping for, than our existing operations.

And importantly I might add that the contracts that we have in place generally have a minimum return provision in them which are, were always designed to deal with the possibility that volumes might be lower than anticipated so there is an element of take or pay in these contracts which gives us considerable protection as well.

That's very good to hear. Sorry, I do have one more question and that is, what are you plans with the $100 million in cash I saw you're going to be taking out Hamilton Beach -- in the form of a dividend? What are your, can you talk about what you're going to do with the cash?

At this point, we have not made any decisions about what we're going to do with cash. We are entirely focused on completing the transaction and as you can imagine, in any transaction of this nature, there's just a tremendous amount of work that has to be done following the time that core terms of the deal are set. And so, that issue, lies ahead of us.

Thank you.

Yes.

And our next question comes from the line of [Avril Asque] with Impco. Please proceed.

Yes, can you give me an indication of what your CapEx for the materials handling business was for the quarter and year-to-date?

I don't have those handy. Ken you there?

Let me pull those up quickly as your asking a question. I don't track those by division.

Okay that's fine.

Let me get back on the call with the number. In a sec, ask any other questions.

And then, yes and then also can you give me a comparison from year-to-year on that?

On CapEx again?

Just on CapEx.

Okay, Ken will work on that and we'll respond directly to you. Ken, if you will interrupt when you have the information.

Let me interrupt. Second quarter whole sale, it is on page 20 of our Q, we have a table that lays out capital expenditures by segment. $8.4 million of capital expenditures at NMHG Wholesale and the prior second quarter we had $7.9 million. Through the 6 months we are a little less than 15 and a little more than 15 last year. There is also in our MD&A discussion, we do list out the expected capital expenditures for each of our business units and that may be the best place you might want to look if you are looking at this on a segment basis to calibrate capital expenditures.

Okay, thanks.

I think for NMHG it is on page 30 and we expect to spend an additional $30.7 million for whole sale over the remainder of 2006.

Thanks.

Does that provide you with what you need?

Yes, it is.

And we have a follow up from the line of David Lieberman. Please proceed.

Yes, I was curious. What percent of your sales are to lease or to lease companies I guess?

The leasing companies?

You know the question is, what percent of your unit purchases are leases?

You know that is not a number I have available. We offer financing services but they are provided by others and those are readily available. And what we really do in the main is try to sell fork lift trucks through our national accounts and our dealers and then they will work with the customers and our financing affiliates and financing associates to finance them in whatever way the customer wants to finance them. Now this situation is a little bit different in Europe.

The terms and conditions tend to be more toward facilitating leases but we have the same kind of arrangements under way in Europe. And to some degree, those are not numbers that we would track because our dealers are arranging for some of that, so at least we would not track it directly. Some of it is being done through financing groups, some of it through financing groups with which we participate and that is really the best answer I can give you, but it is a significant business.

Right, I guess it is in your 10-K, I have seen it and that fact or so, the subsidiary, it seems like they bought 10% of your units. But it sounds like they are just one of a number of options releasing to your customers.

Yes, they are the one that we work most closely with and where we provide certain services and we are compensated for those and others provide other services and are compensated for those. You are absolutely right, that is the main one, but others can be financed by dealers and customers, dealers and ultimate customers through their own financial intermediaries.

Any concern that since most leases are on 5-year cycles, and I guess the last peak was around 2000 or so, and the trough was like 2002, you may be coming up in 2007, on a soft year?

Well, we have not seen that, and are hopeful that that is not what is going to happen.

No indications that that is occurring, though?

No.

Have you seen this 5-year cycle? I mean, is that, meaning, is that a real phenomenon?

Well, if you are talking about a five-year leasing cycle --.

Yes, yes, exactly. And that may impact --.

I think what currently happens there is, that it is not as if there is a great jump from one year to the next. There is a proportion of whatever the market is, that is financed through leasing. As the market rises, that proportion goes up. So, presumably, the amount of leasing that is active today is significantly higher than was the case five years ago. But, to the extent that trucks are rolling off those leases, that is kind of a normal phenomenon.

They are all sorted into the used truck market, sometimes for light duty applications, sometimes just in a plain used truck market. And, it is part of the normal cycle and evolution in the business. But we certainly see that as a normal phenomenon and a part of the regular process that you would expect with, in fact, somewhat lower levels rolling off, and may be the case five years from now, because the market is high now.

Yes. The -- I guess, my thoughts on that were, just the fact that since the market was at a peak, you know, prior peak in 2000, you would assume, like you said, there were a lot of leases occurring then. It just creates natural demand in 2005 period for people that are rolling off of leases, while that demand will not be nearly the same from people that sign up leases, the percent that signed up leases in 2002. Obviously, that absolute number is going to be lower, because of the trough in the market, and there is less demand in '07. But that -- going through the math here, you would think maybe there would be a lot less demand in '07, because of that five-year cycle?

Well, I think whatever influence that portion of the five-year cycle might have, is probably overcome significantly by just the plain old strength of the unit market. And I would be inclined to focus more on the unit market, and I would suggest that the -- we have seen the highest growth rates, but we are hopeful that we are going to see moderated, but continuing upturns in the business.

I did not comment earlier, but certainly to the extent that the industries that are buying forklift trucks now are engaged in warehousing, and distribution, and all of the things, in both America and in Europe, that relate to increased imports. You find that the industry mix is changing, and has perhaps more stability than the old-fashioned capital goods cycle, when you have a very cyclical, or cyclical manufacturing industries that were a much bigger portion of the market than is the case today.

But -- and I think our toll -- our point of view would be more that the markets are continuing to be strong. We certainly hope that interest rates don't go up in a way that chokes off purchases of new trucks and leasing of new trucks. But to us, the most important indicator is the size of the total market rather than the portion that relates to five years ago maturing in the -- in leasing -- leasing side of it.

Okay. And just my last question, I had asked prior about SG&A being at, I think, 66 million or so excluding the one-time item this past quarter. If I look at the past 5 or 6 quarters, it literally jumps back and forth between each quarter from 60 to 65 per round. I'm just curious, are we going to continue see that pattern, which or which numbers, the one we should be thinking of, is it 60 or 65 per quarter in SG&A?

I think it's really tough to think in terms of quarterly patterns. We have certain kinds of programs that occur that are expensed at different times. I really think the year-to-year trends --

Yes.

Are more important. And having said that there is an intense focus on ensuring that we're as efficient and cost effective as we can possibly be in our SG&A. And I think that the fluctuations are just due to natural one-time events that occur periodically in all the 4 quarters. It's -- it's probably some notion that I haven't really focused of some underlying run rate, which has been added to -- with some of these one-time expenses.

And having said that, there are some expenses associated with the launch of new products. Certainly that's been the case in the past. It'll be the case to some degree as we launch the 4 to 5 ton in the remainder of this year, and I expect that we'll see some of that as we continue to put these new products in the marketplace.

So, there's some elevation related to that. But in the end, the new product business is -- we're in it all the time and perhaps not as comprehensively as we have been for the last few years and expect to be in -- for the remainder of this year and then again in '08 with other products. But still, it's always with us.

All right, thank you very much.

Yes.

Currently, no other questions.

Okay. I would just conclude by thanking all of you for joining us and again to say that we continue to focus on the programs that we've been discussing. With those of you that have been on these calls for some time, we do see increasing maturity of them and are hopeful that they're going to continue to have the impact that we hope they're going to have as we look to the future. So with that, I thank you all.

Thank you, we appreciate your interest and if you do have any additional questions, please feel free to give me, Christina Kmetko, a call at (440) 449-9669.

Ladies and gentlemen, this does conclude today's presentation and you may now disconnect. Thank you, very much.