NACCO Industries Inc (NC) 2006 Q3 法說會逐字稿

Good morning. Welcome to the NACCO Industries Inc. Third 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.

In connection with the proposed transaction, HB-PS Holding Company, Inc. has filed a registration statement on Form S-4 with the SEC containing a proxy statement/prospectus/information statement relating to the proposed transaction. Investors are urged to read the definitive proxy statement/prospectus/information statement regarding the proposed transaction when it becomes available because it 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 Third Quarter Earnings Release.

Applica Incorporated and HB-PS Holding Company, Inc., 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 is included in the Registration Statement on Form S-4 in the Proxy Statement/Prospectus/Information Statement included within the registration statement on Form S-4, as well as in other relevant documents filed with the SEC. 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.

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

Good day, ladies and gentlemen, thank you for your patience, and welcome to the third quarter 2006 NACCO Industries Earnings Conference Call. My name is Fab, and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, 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 third quarter ended September 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 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 to all of you. I'll begin with an overview of the earnings release which was sent out last evening, and that compliments the 10-Q which was also released last night and is available, as Christy said, on the NACCO website. Third quarter net income was $18.8 million, or $2.28 per share, compared with net income of $13.6 million, or 1.65 per share for the third quarter of 2005. Individual results vary significantly, so I will discuss the third 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.

I'll begin, however, by noting two significant events which occurred in the third quarter or shortly thereafter. First, on August 28, the company's Kitchen Collection subsidiary purchased the assets of Le Gourmet Chef for approximately $14 million. Results of the operations of the Le Gourmet Chef business have been included in Kitchen Collections' third quarter results since the date of acquisition.

Second, as previously announced, on October 19, NACCO received a notice from Applica Incorporated in which Applica claimed to exercise its right to terminate its merger agreement with NACCO and HB-PS Holding Company, Inc. If the merger agreement has been terminated, NACCO is entitled to a $6 million termination fee under the terms of the merger agreement. Applica Incorporated has tendered the $6 million termination fee, which NACCO has placed in a segregated account. NACCO has reserved all of its rights in relation to this matter.

Transaction costs incurred since the beginning of the transaction through September 30, totaled $6.6 million. For the nine months ended September 30, $2.5 million has been expensed, $2.3 million of which was expensed in the third quarter. The remaining transaction related costs incurred to date of $4.1 million have been recorded on the Company's consolidated balance sheet. NACCO Industries is currently evaluating its options related to this notice from Applica. However, a decision on any further course of action regarding Applica has not been made at this time.

I'll turn now to NACCO Materials Handling Group Wholesale. NACCO Materials Handling Group Wholesale reported net income of $13.3 million on revenues of $550 million for the third quarter of 2006 compared with net income of $5.7 million on revenues of $516 million for the third quarter of 2005. Revenues increased in the third quarter compared with the third quarter of 2005. The third quarter shipments increased to 20,758 units from shipments of 19,122 in the third quarter of 2005. Backlog was approximately 25,700 units on September 30, compared with 25,600 a year ago and 25,900 on June 30.

Net income increased significantly compared with the prior year third quarter, primarily as a result in an increase in operating profit and lower interest expense. Operating profit increased due to increases in volumes and price, more favorable effective foreign currency rates in 2006 than in 2005 and a reduction in employee related expenses.

These benefits were partially offset by lower gross profit as a result of an unfavorable shift in mix toward lower margin products and increased cost of materials, including lead, rubber and copper. Interest expense decreased as a result of the refinancing of the senior notes with the new term loan agreement with a variable interest rate that has been hedged, resulting in a lower effective fixed interest rate than the senior notes.

Looking ahead, for the fourth quarter of 2006 and 2007, the company expects continued growth in the lift truck markets in Europe and Asia-Pacific and a moderate year-over-year decrease in the Americas. With these market prospects and the successful launch in 2005 of the one to three ton series of lift trucks, the highest volume portion of the newly designed one to eight ton internal combustion engine lift truck line, NACCO Materials Handling Group Wholesale anticipates that unit booking and shipment levels in the fourth quarter of 2006 will be higher than in the fourth quarter of 2005, while the company expects modest increases in unit bookings and shipment levels in 2007 compared with 2006. Shipments of the newly designed 4 to 5 1/2 ton ICE lift truck series, which was introduced in the third quarter of 2006 and the six to eight-ton ICE lift truck series, which is expected to be introduced in early 2007 will be at controlled rates to accommodate the phase-in of these products.

Previously implemented profit improvement and growth programs are expected to continue to deliver significant benefits in the fourth quarter of 2006. The newly designed one to three ton ICE series is expected to continue to effect results positively during the remainder of 2006 and further benefits are expected to be realized in 2007 and 2008 with the introduction of the remaining ICE lift trucks.

The effects of the new product introductions, product cost and expense reduction efforts already implemented or underway, and increased efficiencies in the America attributable to the completion of the restructuring and rearrangement of assembly lines are expected to be increasingly positive and provide significant profitability improvements in the last quarter of 2006 compared with the same period in 2005.

In addition, NMHG Wholesale's manufacturing restructuring activities are approaching maturity and are expected to require less expense than in prior periods. The previously noted benefits are expected to be partially offset in the fourth quarter of 2006 and in 2007 by incremental product development and related product introduction costs and start up manufacturing and efficiencies related to the new lift truck series to be launched, as well as costs attributable to the remaining portion of the previously announced Irvine manufacturing restructuring and production line movements which the company expects to complete in the fourth quarter of 2006.

Results in the fourth quarter of 2006 and in 2007 are also expected to be effected by increases in material costs. Price increases implemented in 2006 and prior periods are expected to largely offset the effective anticipated higher material costs in the fourth quarter of 2006 and in 2007. Although steel costs increases and energy prices have stabilized over the last quarters, increases in these and other commodities such as lead, rubber and copper are expected in 2007 and could result in further increases in cost of components and materials. Accordingly, the company will continue to monitor economic conditions and their resulting effects on cost to determine the need for future price increases.

Unfavorable foreign currency movements over the past four to five years have effectively lowered current annualized profitability, excluding the effects of hedges, by approximately $60 to $65 million more than would have been the case if the currency rates of early 2002 existed in 2006. The full effect of these currency movements is expected to be felt in 2007 when a number of favorable 2006 foreign currency hedge contracts will have expired, with some of the hedge contracts replaced by newer hedge contracts with less favorable exchange rates. The result is expected to be somewhat more adverse effective currency rates in 2007 than in 2006. As a result, the company is working actively to shift the sourcing of components and other activities from high-cost British pounds sterling in Euro countries to lower cost areas. Further, development of additional programs to respond to the current -- to the current currency environment is underway with implementation expected over the next few years.

NACCO Materials Handling Group Wholesale will benefit, however, in 2007 from significantly lower interest rates and from the absence of the charge to earnings for the early retirement of debt of approximately $17.6 million, or $10.7 million after a tax benefit of 6.9 million incurred in 2006.

Overall, NMHG's Wholesale's investment and long term programs, particularly its significant new product development and manufacturing programs, are expected to continue to effect results positively during the fourth quarter of 2006 and in 2007 and 2008, but adverse currency is expected to moderate the effect of these improvements and is likely to extend the period of time necessary to achieve NMHG Wholesale's 9% operating profit goal.

Turning to NMHG Retail, which includes the required elimination of inter-company transactions between NMHG Wholesale and NMHG's wholly owned retail dealerships. Retail reported a net loss for the third quarter of $2.8 million compared with a net loss of $1.2 million for the third quarter of 2005. The increase in the net loss was primarily attributable to an increase in operating expenses and lower gross profit margins in Asia-Pacific, partially offset by the gain on the sale of the European retail dealership in the third quarter of 2006.

Retail has implemented changes in its retail management structure, and plans to streamline its activities in Australia and in French operations to reduce costs, improve operational efficiency and enhance customer service to these markets, ultimately improving the long term financial performance of these operations. These programs are expected to begin to have an impact in 2007 and 2008 and have been put in place in order to meet Retail's longer term strategic objectives, which include achieving breakeven results while building market position.

Turning now to NACCO Housewares Group. The Housewares Group, which includes NACCO's Hamilton Beach/Proctor Silex and Kitchen Collection subsidiaries reported net income of $4.3 million for the third quarter of 2006 on revenues of $170 million compared with net income of $5.9 million for the third quarter of 2005 on revenues of $153 million. Revenues of both companies increased in the third quarter compared with the third quarter of 2005. At Hamilton Beach, revenues increased to $136 million from $128 million primarily as a result of sales of higher-priced products to the US consumer and international markets, driven by increased product placements at its customer retail stores. Also, contributing to the improvement in revenue was an increase in unit volumes in 2006 compared with 2005.

Kitchen Collection's revenues grew to $34.5 million from $25.8 million in 2006, primarily as a result of the acquisition of the Le Gourmet Chef business in August 2006, and Kitchen Collection's current operation of 77 Le Gourmet Chef stores. Revenue also benefited from an increase in the number Kitchen Collection stores to 202 from 194 a year ago, an increase in comparable store sales as a result of an increase in the number of transactions, a rise in customer visits and higher average sales transactions.

Net income at Hamilton Beach/Proctor Silex decreased while Kitchen Collection experienced a slight increase in net loss in the third quarter compared with the 2005 third quarter. Hamilton Beach reported net income of $5 million in the third quarter compared with a $6.4 million in 2005. The decrease was primarily attributable to an increase in the company's environmental reserves of approximately $2.1 million or $1.3 million after a tax benefit of $800,000, mainly as a result of revised remediation estimates relating to previously occupied sites. Kitchen Collection's loss of 700,000 was moderately higher than the net loss of 400,000, primarily -- in 2005, primarily as a result of start-up losses at the recently acquired Le Gourmet Chef business.

Increased sales at new and existing Kitchen Collection stores due to the favorable effects of adjustments made to its product offerings and merchandising approach, as well as favorable weather patterns and a moderation in gasoline prices late in the quarter contributed to improvement in Kitchen Collection's operations.

Looking ahead, NACCO Housewares Group is moderately optimistic that markets for its consumer goods will strengthen in the fourth quarter of 2006 as the holiday season begins and in 2007 compared with prior periods. Current economic conditions affecting consumers, such as energy costs, gasoline costs and interest rates have stabilized in the third quarter and are expected to continue to remain stable in 2007.

Over time, continued product innovation, promotions and branding program at Hamilton Beach are expected to strengthen the businesses market positions. As a result of its ongoing focus on innovation, Hamilton Beach/Proctor Silex has a strong assortment of new products being introduced in the fourth quarter of 2006 and planned for introduction in 2007.

The company expects pricing pressure for the fourth quarter of 2006 and 2007 from suppliers due to increased commodity costs for resins, copper and aluminum. Hamilton Beach will work to mitigate these increased costs through prices increases where justified as well as through programs initiated in prior years to reduce costs.

Hamilton Beach/Proctor Silex implemented manufacturing restructuring programs in 2004 and 2005, which were designed to reduce operating costs and improve manufacturing efficiencies. These programs, along with increased sourcing of products from China, increased volumes and other programs recently initiated are expected to continue to improve results in the fourth quarter of 2006, in 2007 and over time.

The restructuring programs are expected to be completed by the end of 2006. The transfer of the manufacturing of commercial products from North Carolina to China is expected to be completed in December 2006 and by the end of 2006 the Mexican manufacturing operation is expected to be producing only blenders and coffeemakers for the Mexican and Latin American markets.

Kitchen Collection expects an increase in revenues in the fourth quarter of 2006 as a result of the recent acquisition of the Le Gourmet Chef business, the opening of seasonal store locations during the holiday season and sales at new stores open since the fourth quarter of 2005. Kitchen Collection also expects modest improvements in operations in the last quarter of 2006 stemming from the effects of an adjustment in its merchandising approach, new product offerings and key programs already in place.

Le Gourmet Chef acquisition resulted in the addition of 77 stores that Kitchen Collection is currently operating and evaluating. Between now and the end of February 2007, the company will determine which of the 77 store leases will be assumed for the ongoing business. Kitchen Collection anticipates that the operating results for the Le Gourmet Chef business will improve as underperforming stores are closed and its synergies are achieved through the integration of the business into Kitchen Collection. As a result, Kitchen Collection expects the Le Gourmet Chef business will have increasingly improved results over the course of the fourth quarter of 2006, generally in 2007 and particularly in the fourth quarter of 2007.

I'll turn now to North American Coal. North American Coal's net income for the third quarter of 2006 was $5.9 million, and revenues of $38 million compared with net income of $3.3 million for the third quarter of 2005 on revenues of $28 million. The revenues increased as a result of improvements at all of the consolidated mining operations in the Limerock dragline mining operations.

The improvement in revenues at the consolidated mining operations primarily resulted from the increased production and sales to an additional customer at the Red River Mining Company, an increase in tons delivered and contractual price escalation at the Mississippi Lignite Mining Company and an improvement at the San Miguel Lignite Mining operation as a result of the amended contract that was signed in the second quarter of 2006. The increase in revenues at the Limerock dragline mining operations was a result of increased yards delivered in the third quarter due to a full quarter of production at all but one Limerock dragline mining operation.

The increase in net income for the 2006 third quarter compared to the previous year's third quarter was primarily the result of the increase in revenues at all locations, lower operating expense at the Mississippi Lignite Mining Company and a reduction in professional fees. This increase in net income was partially offset by an increase in expenditures of $1.4 million pre tax for the acquisition and development of additional uncommitted coal reserves.

Also, offsetting the improvement in net income was an increase in the effective income tax rate for 2006 compared with 2005 which increased primarily due to the tax effect of reduced percentage depletion for US income tax purposes resulting from a pension contribution made in the third quarter of 2006.

Looking ahead, North American Coal expects normal levels of lignite coal deliveries in the fourth quarter of 2006 and in 2007, absent any unanticipated customer power plant outages. The recently signed amendment at the San Miguel Lignite Mining Operation, is expected to continue to effect the fourth quarter of 2006 favorably. In addition, other programs implemented by the coal company to develop new business, increase efficiencies and reduce cost are expected to have a continuing positive impact in the fourth quarter 2006 with further improvement realized in 2007.

These improvements are particularly the result of more favorable conditions at the Mississippi Lignite Mining Company, increased sales to additional customers at Red River Mining and reaching a steady state of production at the newer Limerock dragline mining operations. Anticipated contract escalation adjustments are expected to continue to provide compensation for increased commodity costs for diesel fuel and steel at all consolidated mining operations.

Deliveries from the Limerock dragline mining operations are expected to remain stable in the fourth quarter of 2006 with a moderate decrease in 2007 as a result of a steady state of production at all Limerock mines, beginning in the fourth quarter of 2006 and customer projections for 2007 that reflect a leveling off in the housing market.

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

Over the longer term, North American Coal expects to continue its efforts to develop new domestic coal projects and is encouraged that more new project opportunities may become available including opportunities for coal liquefaction, coal gasification and other clean coal technologies given current prices for natural gas, the main competing fuel for power plants. Accordingly, expenses for acquisition and development of additional uncommitted coal reserves are likely to be higher in the fourth quarter of 2006 and in 2007 compared with prior periods.

A word also about the NACCO and other expense line or income line. NACCO and other, which includes the parent company operations and Bellaire Corporation reported a net loss of $1.9 million for the third quarter of 2006 compared to a net loss of $100 thousand a year ago. The increase in the net loss is primarily attributable to $2 million of transaction expenses in the third quarter of 2006 associated with the proposed transaction involving Hamilton Beach/Proctor Silex.

In conclusion then, I have a few thoughts which amplify and put in further perspective my earlier comments on the companies overall prospects and outlook. First, as I said before during these calls, in our recent annual reports, my CEO letters and the subsidiary CEO letters focus particularly on the key strategic and operating programs we have in place at each business to enhance profitability and generate growth. These programs have had the objective of leading each businesses long term minimum financial targets, minimum operating profit targets or return on capital employed target in the case of North American Coal, by the 2007- 2008 time period, depending on when each business' programs mature.

Likewise my CEO letters and our annual reports 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've noted in my CEO letters, reaching these objectives represents a very large financial opportunity in comparison to income levels of past years. Our key change programs have our full commitment.

At North American Coal we believe we are currently in a position to meet our financial goals and to focus on growth. San Miguel, Mississippi Lignite Mining Company and our Florida dragline operations are showing very significant operational improvement with, we hope, more ahead. Other operations are performing well. At the same time, North American Coal appears to have a very favorable market environment for developing or expanding development of its coal reserves. Accordingly the company is focused prudently on investing in these opportunities. Our return on equity and cash flow should be very sound.

At our housewares business, Hamilton Beach performed well in 2005 and is optimistic about performing better in both 2006 and 2007. Several of its programs have matured, and others are in place, which are designed to achieve its financial objectives fully by 2008. In addition, growth programs are in place and we continue to look for synergy opportunities in a consolidating industry. Return on equity and cash flow should be very sound.

Kitchen Collection is also performing better. Traditional KCI stores and profitability are improving and the addition of Le Gourmet Chef provides both synergy opportunities and a new platform for growth. We anticipate that Le Gourmet Chef can be fully integrated into KCI during 2007, with a combination of improving KCI results and Le Gourmet Chef driving sound results close to our financial goals by 2008. Return on equity and cash flow, again should be very sound.

At NACCO Materials Handling Group Wholesale, our programs are generally moving the business in the direction we had anticipated. We do however face a significant unanticipated long term headwind due to currency movements to which we must adjust.

As I indicated earlier, we have been implementing programs to adjust, address this currency change impact. But we now believe we need a more comprehensive program which we're currently developing. As a result, reaching our operating profit goal is likely to require time beyond 2008 when most of NMHG's other programs with their benefits have matured. We will have more to say on this in the coming months. But in the meantime, the business is very much moving in the right direction, with improving financial results and an anticipated positive cash flow in 2006 and 2007.

At NMHG Retail, as I implemented -- as I indicated, we are implementing significant program changes in 20007 to achieve our objective of at least breakeven results while building market position.

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. The dramatic strengthening relative to the dollar of the Euro, the British Pound and the Yen is certainly a prime example.

With that, I will now turn to questions.

[OPERATOR INSTRUCTIONS] There are no audio questions at this time.

Okay, if that is the case, we thank you very much. And Christy, do you have any closing comments?

I just wanted to thank everybody again for joining us. And if you do have any additional questions, please call me at 440-449-9669. Thank you.

The replay will be posted for this conference within one hour and will be available for eight days. The replay toll-free number is 1-888-286-8010 and the access code is 89743372. I would now like to conclude this call. You may now disconnect, and have a wonderful day.