NACCO Industries Inc (NC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NACCO Industries 2006 fourth quarter earnings conference call. My name is Latisha, and I will be your coordinator for today. At this time, all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. At this time, I will now turn the presentation over to Ms. Christina Kmetko, Manager of Finance. Please proceed, ma'am.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed, outlining NACCO's results for the fourth quarter and year ended December 31, 2006. If anyone has not received a copy of this earnings release or would like a copy of the 10-K, please call me at 440-449-9669, and I will be happy to send you this information.

You may also obtain copies of these items on our website at www.nacco.com. Our conference call today will be hosted by Al Rankin, Chairman, President and Chief Executive Officer of NACCO Industries. Also in attendance representing NACCO Industries is Ken Schilling, Vice President and Controller. Al will provide an overview of the quarter and full year and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference 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-K. In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2006 fourth quarter earnings release, which is available on our website. 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 release which was sent out last evening. This complements the 10-K, which was also released last night and which his available, as Christy said, on the NACCO website.

Fourth quarter 2006 net income was $70 million, or $8.48 per share, compared with $32.4 million, or $3.94 per share in 2005. Income before extraordinary gain was $57.2 million, or $6.93 per share, compared with $27.7 million, or $3.37 per share in 2005. The extraordinary gain in 2006 relates to the phase-out over the next three years of the company's obligation to make premium payments to the UMWA combined benefit fund as a result of legislation passed by the U.S. Congress.

Full-year 2006 net income was $106.2 million, or $12.89 per share, compared with $62.5 million, or $7.60 per share for 2005. Income before extraordinary gain was $93.4 million, or $11.33 per share, compared with $57.8 million, or $7.03 per share in 2005. Net income included in the fourth quarter a net pretax charge of $2.7 million, related to the unsuccessful attempt to acquire Applica and an after-tax gain on the sale of two electric draglines of $13.1 million, and in the second quarter an after-tax charge of $10.7 million related to the early retirement of debt at NACCO Materials Handling Group.

Consolidated cash flow before financing activities in 2006 was $138.2 million, compared with $18.9 million in 2005 and $85.9 million in 2004. 2006 cash flow results include cash from the sale of two draglines of approximately $30 million and the purchase of certain assets of Le Gourmet Chef for $14 million.

The consolidated outlook for NACCO for 2007 is very encouraging. In 2006, NACCO's earnings were very strong, partially as a result of a number of nonrecurring positive items, which more than offset nonrecurring negative items. Overall, the company is hopeful that in 2007 the combination of favorable market forces and results of improvement programs can generally maintain overall profitability compared with 2006, excluding the 2006 extraordinary gain.

In 2007, NACCO expects improved revenues and gross margins at NACCO Materials Handling Group, Hamilton Beach/Proctor-Silex, and Kitchen Collection as a result of profit improvement and growth programs implemented in 2006 and prior years. Volumes are expected to decline modestly at North American Coal as a result of planned customer power plant outages and a stabilization in the limerock dragline mining operations.

In addition, the company anticipates improved or stable operating results at all subsidiaries in 2007, with many of these improvements occurring in the last half of the year, as a result of the seasonally cyclical nature of the Housewares business, higher expenditures in the first half of the year, as a result of specific programs at NACCO Materials Handling Group and Hamilton Beach and the increasing integration of Le Gourmet Chef into Kitchen Collection.

Individual results vary, so I will discuss fourth quarter results and the outlooks of each separately, beginning with NACCO Materials Handling Group Wholesale, followed by NACCO Materials Handling Group Retail, Housewares and North American Coal.

NACCO Materials Handling Group Wholesale reported net income of $22.4 million on revenues of $613 million, compared with net income of $8.6 million on revenues of $587 million in the fourth quarter of 2005.

NACCO Materials Handling Group Wholesale's worldwide backlog was approximately 27, 200 units at December 31st, 2006, compared with approximately 23,500 units at December 31, 2005, and 25,700 units at September 30, 2006.

Net income for the fourth quarter of 2006 increased significantly compared with the prior year fourth quarter, primarily from an increase in operating profit, a decrease in interest expense and favorable tax adjustments. Operating profit increased primarily due to a favorable product liability adjustment as a result of continued better-than-anticipated claim experiences and lower employee-related costs.

Interest expense decreased because the senior notes were refinanced with a new term loan facility at a variable interest rate that has been hedged, resulting in a lower effective interest rate than the rate on the senior notes. Also contributing to the increase in net income was a tax benefit of $7.9 million related to the recognition of previously recorded capital losses and the absence of a $2.5 million tax expense for the repatriation of $56 million of foreign earnings that occurred under the American Jobs Creation Act of 2004 in the fourth quarter of 2005.

For the full year ended December 31st, NACCO Materials Handling Group Wholesale reported net income of $43.7 million, compared with net income of $26 million for the year ended December 31, 2005. Included in the 2006 results is a charge to earnings for the early retirement of debt of approximately $10.7 million after tax related to the redemption of the senior notes in the second quarter of 2006.

I'll turn now to the outlook for NACCO Materials Handling Group Wholesale. In 2007, the company expects continued growth in lift truck markets in Europe and Asia-Pacific and a moderate year-over-year decrease in the Americas. Overall, Wholesale anticipates modest increases in unit bookings and shipping levels in 2007, compared with 2006, as a result of these market prospects and the launch in 2005 of the one to three-ton series of lift trucks.

Benefits are expected to be realized in 2007 and 2008, with the introductions of the newly designed four to 5.5 ton series of lift trucks launched in the fourth quarter of 2006 and the six to eight-ton series of lift trucks expected to be launched in early 2007. Results in 2007 are expected to be unfavorably affected by increases in material cost. However, price increases implemented in 2006 and prior periods are expected to more than offset the effect of anticipated higher material costs in 2007.

Due to the sourcing of trucks and components for the U.S. market from companies with appreciated currencies, unfavorable foreign currency movements since 2002 have effectively lowered current annualized pretax profitability, excluding the effect of hedges by approximately $70 million more than if the currency rates in early 2007 had been the same as early 2002.

In addition, without the benefit in 2007 of favorable currency hedges that NACCO Materials Handling Group had in place in 2006, the company is expecting an unfavorable impact on 2007 results if certain unfavorable currency exchange rates persist.

NACCO Materials Handling Group Wholesale is currently evaluating actions which are more consistent with its stated long-term strategy to manufacture products in the market of sale, which has the added benefit of minimizing currency exposure. The company is currently analyzing several alternatives, including the possibility of changing sourcing and assembly locations to more favorable regions, which would significantly lessen NMHG's exposure to currency exchange rate fluctuations.

Decisions will not be made or announced until thorough analysis and discussions are completed, sometime around midyear or before. The impact from these actions is expected to occur in 2008 and beyond. I'll turn now to NACCO Materials Handling Group Retail.

Retail, which includes the required elimination of intercompany transactions between Wholesale and Retail reported a net loss for the fourth quarter of $4.3 million, compared with a net loss of $2.8 million for the fourth quarter of 2005. The increase in the fourth quarter net loss was primarily attributable to lower-level margins and increased employee-related expenses in Asia-Pacific.

For the full year 2006, Retail reported a net loss of $9.1 million, compared with a net loss of $7.9 million in 2005. I'll turn now to the outlook.

NMHG Retail currently has retail operations in the United Kingdom, France, and Australia. Major changes have been implemented in France to reduce expenses, improve operational effectiveness and enhance customer service to these markets, which are expected to improve the long-term financial performance of these operations. Efforts to improve long-term financial performance are expected to be implemented in Australia in 2007. Improved results are expected in 2007 as a result of these changes. Overall, these programs are expected to have an increasingly favorable effect in 2007 and 2008 and are being put in place in order to meet retail's longer-term strategic objectives, which include achieving at least breakeven results while building market position.

In 2006 full year, the combination of NACCO Materials Handling Group Wholesale and Retail generated consolidated cash flow before financing activities of $54.2 million, compared to negative consolidated cash flow before financing activities of $18.2 million in 2005.

I'll turn now to the NACCO Housewares group. The group, which includes Hamilton Beach/ Proctor-Silex and Kitchen Collection, reported net income of $21.2 million for the fourth quarter of 2006 on revenues of $288 million, compared with net income of $14.9 million for the fourth quarter of 2005 on revenues of $239 million.

Fourth quarter 2006 and 2005 results include charges of $1.5 million, $900,000 after tax and $2.5 million after tax respectively, which are associated with restructuring programs implemented at the Hamilton Beach, Saltillo, Mexico, manufacturing facility in order to transfer all production from this facility to third-party manufacturers.

Revenues at both companies increased in the fourth quarter compared to the previous year. Hamilton Beach/Proctor-Silex increased to $201 million from $193 million, primarily as a result of increased unit volumes of higher-priced products in the U.S. consumer and international markets.

Kitchen Collection revenues grew to $89.5 million from $47.7 million in 2005. This was primarily the result of the Le Gourmet Chef acquisition in August of 2006. Kitchen Collection currently operates 77 Le Gourmet Chef stores. Revenue also benefited from temporary Kitchen Collection stores open for the holiday season, an increase in the number of Kitchen Collection stores to 203 at December 31st from 195 stores at December 31st, 2005, and also from increased 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 both Hamilton Beach and Kitchen Collection also increased in the fourth quarter compared to the previous year. Hamilton Beach reported net income of $14.7 million in the fourth quarter of 2006, compared with net income of $11 million in 2005. The increase was largely attributable to a $6.1 million improvement in operating profit, primarily as a result of higher gross profit from sales of higher-margin profits, a lower restructuring charge in the fourth quarter of 2006 compared with the fourth quarter of 2005 and decreases in advertising and employee-related expenses.

Kitchen Collection's net income improved to $6.3 million in the fourth quarter of 2006, from $3.7 million in 2005. Net income increased primarily from the addition of the Le Gourmet Chef business. Net income also improved as a result of increased sales at new and existing Kitchen Collection stores, due to the favorable effect of adjustments made to its product offerings and merchandising approach, as well as favorable weather patterns and a moderation in gasoline prices. Partially offsetting the improvement in net income was an increase in employee-related expenses.

For the full year 2006, the Housewares Group reported an increase of $4.6 million in net income to $25.9 million, up from $21.3 million in 2005. During 2006, the Housewares group generated cash flow before financing activities of $37 million, which was comprised of cash provided by operating activities of $45.9 million, less net cash used for investing activities of 8.9, which included cash paid for Le Gourmet Chef of approximately $14 million and proceeds from the sale of a building at Hamilton Beach/Proctor-Silex. For 2005, cash flow before financing activities was $27.1 million.

I'll turn now to the outlook for the Housewares Group. The group is moderately optimistic that markets for its consumer goods will strengthen in 2007 compared to prior periods. Current economic conditions affecting consumers, such as energy and gasoline prices and interest rates have stabilized and are expected to continue to remain stable in 2007. Over time, continued product innovation, promotions and branding programs at Hamilton Beach are expected to strengthen the company's market positions.

As a result of its ongoing focus on innovation, the company has a strong assortment of new products planned for introduction in 2007. These new products, along with products introduced in 2005 and '06, are expected to generate additional product placements at retailers, resulting in increased revenues and operating profit in 2007.

In 2004, '05, and '06, Hamilton Beach and Proctor-Silex implemented manufacturing restructuring programs designed to reduce operating costs, improve manufacturing efficiencies and increase the sourcing of products from third-party manufacturers. These restructuring programs, expected increases in volumes and other programs initiated by Hamilton Beach/Proctor-Silex are expected to favorably impact results in 2007 and future years. The transfer of the manufacturing of commercial products from North Carolina to China was completed in December 2006. By mid-2007, the Mexican manufacturing operations, which is Hamilton Beach/Procter-Silex's only remaining manufacturing operation, is scheduled to close and the production of blenders and coffee makers for the Mexican and Latin American markets will be supplied solely by third-party manufacturers.

The company anticipates additional pretax charges totaling up to approximately $1.1 million related to the Mexican manufacturing and restructuring program, which are expected to occur in the first half of 2007. These charges are in addition to the $1.5 million incurred in the fourth quarter of 2006. Kitchen Collection expects an increase in revenues in 2007 as a result of a full year of operation of the Le Gourmet Chef business. Kitchen Collection is currently operating and evaluating the Le Gourmet Chef stores and just recently the company has decided to assume approximately 69 of the 77 store leases for its ongoing business.

Kitchen Collection anticipates the operating results for the Le Gourmet Chef business will improve as underperforming stores are closed. Kitchen Collection also expects modest improvements in operations during the first half of 2007 from new product offerings and key programs already in place. In addition, integration of Le Gourmet Chef is expected to be completed by the end of 2007, with the exception of the distribution function, which will be an ongoing process over the following year.

As a result, Kitchen Collection expects increasingly improved results in the second half of 2007, with the majority of the synergy benefits from the integration of Le Gourmet Chef expected to be achieved by mid 2008. However, meeting 2006 results in 2007 will be challenging, because in 2006, Kitchen Collection only owned Le Gourmet Chef from September through December, the most profitable four months of the year. Accordingly, Kitchen Collection did not recognize the eight months of preaquisition normal operating results for the Le Gourmet Chef business.

I'll turn now to North American Coal. North American Coal's net income for the fourth quarter of 2006 increased to $20.2 million from net income of $5.4 million for the fourth quarter of 2005. Included in the 2006 fourth quarter results is a gain on the sale of two electric draglines of $13.1 million after tax. The increase in net income for the 2006 fourth quarter, compared with the 2005 fourth quarter was primarily the result of this gain on the sale of the draglines, but also included increases in revenues at all operations and lower operating expenses at the Mississippi Lignite Mining Company.

This increase in net income was partially offset by a decrease in royalty income and an increase in expenditures related to the development of additional uncommitted coal reserves. Also offsetting the improvement in fourth quarter 2006 net income was increased income tax expense, resulting from the shift in mix of pretax income toward entities with higher tax rates and the absence of favorable tax adjustments that resulted in an unusually low income tax rate in 2005.

North American Coal's net income increased to $39.7 million for the full year ended December 31st, compared with net income of $16.2 million for the previous year. For the full year 2006, North American Coal generated cash flow before financing activities of $42.9 million, which was comprised of net cash provided by operating activities of $38.7 million, plus net cash provided by investing activities of 4.2, which includes the proceeds of approximately $30 million from the sale of two electric draglines. For 2005, North American Coal generated cash flow before financing activities of $5 million.

Turning to North American Coal's outlook, the coal company expects a moderate decrease in lignite deliveries in 2007, as a result of planned customer power plant outages. However, other programs implemented by North American Coal to increase efficiencies and reduce costs are expected to have a continuing positive impact in 2007.

These improvements are expected to be primarily a result of more favorable operating conditions at the Mississippi Lignite Mining Company. Anticipated contractual price escalation adjustments are expected to continue to provide compensation for increased commodity costs at all consolidated mining operations.

In addition, the effective income tax rate in 2007 is expected to decrease compared with 2006 as a result of the absence of items that unfavorably affected the 2006 income tax rate. Royalty income, however, is expected to continue to decrease in 2007 from 2006 levels, and it's expected to significantly decrease in 2008 from 2007 levels, primarily as a result of the expiration of a royalty contract.

Deliveries from the limerock dragline operations are expected to decrease moderately in 2007, as customer projections anticipate a leveling off in the housing market. A pending federal district court decision may affect the company's customers' limerock mining permits in South Florida, but North American Coal believes that its customers intend to challenge this very vigorously and appeal any unfavorable decision in federal district court.

Overall, North American Coal expects increasingly enhanced performance from its current operations, including Mississippi Lignite Mining Company, over the next few years. Over the long-term, North American Coal expects to continue its efforts to develop new domestic coal projects and is very encouraged that more new project opportunities may become available, including opportunities for coal to liquids conversion, coal gasification and other clean coal technologies. Accordingly, expenditures for the development of additional uncommitted coal reserves are likely to be higher in 2007 than in 2006.

At the NACCO level, which includes the parent company and Bellaire, the company reported a loss before extraordinary gain of $2.3 million for the fourth quarter of 2006, compared with income before extraordinary gain of $1.6 million for the fourth quarter of 2005.

The net loss in the fourth quarter of 2006 is primarily attributable to higher employee-related costs, as well as expenses associated with the Applica transaction of $2.3 million pretax, net of NACCO's portion of the termination fee tendered by Applica. Also contributing to the 2006 loss before extraordinary gain was an increase in income tax expense for the reversal of previously generated capital gain benefits.

For the year ended December 31st, NACCO and Other had a loss before extraordinary gain of $6.8 million, compared with income of $2.2 million for the year -- for the previous year. For the year ended December 31st, the company expensed $4.5 million [company corrected following the call] of Applica transaction-related costs, net of the company's portion of the termination fee.

In 2007, NACCO and other expects a reduction in general and administrative costs and acquisition expenses compared with 2006. In addition, NACCO and Other does not anticipate a recurrence of the unfavorable tax adjustments experienced in 2006.

In conclusion, then, I have a few thoughts which amplify and put in further perspective my earlier comments on the company's overall prospects and outlook. First, Hamilton Beach, Kitchen Collection and North American Coal are all operating quite close to their target minimum returns. Programs are in place to close the remaining gap over the next two years or so.

But, more fundamentally, income growth will now need to come largely from business growth. Hamilton Beach/Proctor-Silex is focused on innovative new products and on placement activity, with a very professional team. Kitchen Collection is now focused on capturing the full potential of the Le Gourmet Chef format through growth in the number of stores in both outlet malls and traditional, largely enclosed, malls.

North American Coal is actively pursuing new opportunities related to traditional coal-fired power plants, gasification for power plants, coal to liquids energy ventures, and lignite beneficiation projects. North American Coal is optimistic that some of these new project negotiations can be concluded in 2007 and that the environment for others in 2008 and on is very good.

Second, NACCO Materials Handling Group remains the biggest source of profit improvement opportunity for the company. Wholesale operating profits in 2006 were $76.5 million, which equates to a 3.3% operating profit margin. This is roughly $132 million, or 5.7 percentage points, below the company's long-term objective of a 9% operating profit margin.

In addition, retail net income was a loss of $9.1 million, well below its nearer-term profit objective of breakeven. While external factors have arisen, particularly significant currency-driven cost increases and material cost increases, we view these simply as factors which cause delay in achieving our objectives, probably by two years or so to 2010/2011.

We believe that the programs are or will be shortly in place to move us forward toward our objectives increasingly in 2007 through 2011, particularly in the context of the new efficiency and consolidation program under way at NACCO Material Handling Group's Australian retail operations, and of the manufacturing and sourcing change programs now being analyzed and refined with the objective of lowering costs, including reducing euro and pound currency exposure.

Third, the company is optimistic that it can continue to be a substantial generator of cash flow before financing and new undertakings, as it was in 2006. Further, the company is hopeful that new project opportunities for investing available capital at very sound rates of return will be achievable, particularly at North American Coal.

Overall, then, we believe our companies can operate in the general range of the enhanced level of profitability achieved in 2006, excluding the extraordinary gain, and then move gradually toward a further new plateau by 2010, '11. I do, however, want to note that markets and competitive conditions are always uncertain. Although we do not currently expect it, forklift truck markets could go into a significant downturn. Currencies could worsen before our new sourcing patterns can be put in place. Customers could change their sourcing patterns.

If changes in the environment do occur, we would have to react constructively, as we have done at NACCO Materials Handling Group this last year and at the beginning of 2007. Fortunately, at each of our businesses, we will be addressing our programs and any future issues from a position of strength. Each of our companies is a real leader in its industry and each has, we believe, a very strong management team.

With that, I'd now like to turn to questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Frank Magdlen with the Robins Group. Please proceed.

Good morning, Al.

Good morning.

Since most of your profit improvement going forward may come from the lift truck or Materials Handing Group, can you give us a little more color as to maybe what's happened with your market share in the major industries that you're serving? And then maybe a little bit of background on how much price increases have taken hold over the last two or three years?

Well, let me just try to give you a generalized response to that. First, our market shares, generally speaking, in 2006, increased in comparison to 2005. And we're optimistic that further share improvements are possible for us. As we complete the introduction of the new one to eight ton internal combustion engine truck line and refine the pricing and performance feature positioning for those products, as they begin to mature in the marketplace, and that process is well under way. And we think that that line of trucks has been very well received in the marketplace and we feel very good about their prospects on a global basis.

Also, and this is a little bit farther out, we will be coming out with a new line of electric trucks in 2008 and '09, and those are designed to accomplish much the same sort of thing that we accomplished with the internal combustion engine line. Internal combustion is a little more than half of our wholesale unit volume. The electric counterbalance line is another very substantial piece. And, at the same time, we've just introduced a new reach truck, which has been very favorably received in the marketplace in narrow aisle product line category. And we have other new products in both narrow aisle and motorized hand product lines that are coming out.

So we feel that, increasingly, we're just going to have an excellent lineup of products that are well positioned in terms of their price, performance, features, capabilities and positioning in comparison to our competitors. And we think that we have in place a strong deal distribution network that can pull through those trucks, and where it's not as strong as we'd like, we are very focused on trying to enhance those capabilities as well.

So I think the stage is set there. We have been implementing price increases, to turn to the other part of your question, over the last few years, and if you review our press releases, our earnings releases, you'll find some fairly consistent reference to that. And as we look at 2007, we do see some much more modest material cost increases affecting us. They really roll through in the main of what's happened in previous years.

I think the balance of position between suppliers and us as an OEM has readjusted itself. And we feel that the price increases that we put in place in 2006 and earlier will be -- in conjunction with what I would call sort of normal level of price increase, some of which is associated with the introduction of new engine emission -- new engines to meet engine emission requirements which occurred right at the turn of the year.

And so there are some price increases associated with that, but, generally speaking, the roll-through effect should be a net positive in 2007. But the really critical program that's going to be coming down the track, in addition to the new product programs that I described earlier, is the manufacturing and sourcing change program to address the tremendous impact that adverse currency rates have had on us over the last five years.

And we believe we can accomplish this without major capital investments using the footprint we have, the benefits of the demand flow manufacturing technology that we put in place in terms of assembly in all of our manufacturing operations and getting the full benefit of those. We are also in the process of putting in place an advanced supply chain management process, which we think will provide very significant benefits beginning in 2007 and being enhanced as we look at 2008 and onward.

So we've got a number of major programs of that type that are underway that should enhance the operating profits. Obviously, we won't have in 2007 a repeat of the charge for early extinguishment of debt. On the other hand, we won't have the benefit of some of the tax adjustments which occurred in 2006. But when you put it all together, we feel that the operating profits will move in the right direction in 2006. And then it's certainly our objective and hope that they'll pick up speed in the course of 2008, '09, '10 and '11 as we get the new sourcing patterns in place.

That's perhaps a little more comprehensive answer to your question than you asked for, but I think it provides some color on what's going on.

That's appreciated. In looking at your goal of 9% operating margins, has currency been the biggest factor in the shortfall of getting there?

Well, I think if we put in my comments that the shortfall is 137?

Oh, oh, 132.

$132 million, and we believe that roughly $70 million of that shortfall is generated by currency.

All right, Al. Thank you, and I guess one other question, since it's somewhat trendy to talk about companies splitting themselves up into different parts, is that something the board has considered or would consider?

Well, in the Applica-proposed transaction, we thought we had a very attractive opportunity to put our company together with another company with very substantial synergy value as a separate public company in a Reverse Morris Trust transaction. Unfortunately, it didn't come to pass for us, but I certainly think that suggests that when we think there are good business reasons we have a willingness to look at all kinds of concepts that we think can enhance the market position of our businesses and their strategic capabilities.

Could you just update us briefly on where you are in the litigation regarding that?

It's still in very early stages. The process is likely to be a lengthy one in terms of the way this kind of litigation is conducted and it's, I think, way too early to know what the outcome would be.

All right, thank you very much.

And your next question comes from the line of [Bill Strong] with [Strong Management.] Please proceed.

Thank you. Hi, Al. Bill Strong.

Hi, Bill.

Two questions and a comment. I guess the Housewares division sale was off, and that's what was previously discussed in your previous question. But you would continue to look for further opportunities to use that asset and put it to work into the coal business. I think I keep hoping you will become an alternative energy company and use those assets that you've got to move forward into the future and develop them in the energy area. Is that a possibility?

And the last question is, what about a stock split, do you ever consider that?

I'll comment on the energy area. I think I mentioned in my remarks that we are looking at a whole range of potential transactions in the coal business. They all derive from the strength of our coal position. We have very substantial reserves of lignite in Texas, Louisiana, Mississippi, and North Dakota.

There are a lot of opportunities in the context both of capacity constraints or capacity shortfalls in power plant capabilities, and some of that could be served by new technologies, by gasification. There are shut-in natural gas power plant facilities that have been built, never operated, sitting idle, very near coal reserves. And we think the economics are there to provide synthetic natural gas at a much more predictable price than natural gas prices, which are so high they've caused these plants not to even go into operation. So there are a number of different possible opportunities that relate to power plants.

Second, there are opportunities to go further than gasification and to actually get into the business of what's called liquefaction and produce gasoline and high-quality diesel fuels. And I think that there are projects that are -- have a real possibility of going forward and we have a number of discussions underway with interested parties in those kinds of things and parties that would certainly seek to take advantage of some of the encouragements that the federal government is offering in order to get some of these new technologies into the marketplace.

In addition, we are involved with the so-called beneficiation of lignite, which changes its BTU per pound characteristics sufficiently that it's much more transportable fuel, that it has burning characteristics that are very attractive from the perspective of power plant operators. And so we see investment opportunities in those areas.

In addition, there are applications for mercury removal and the use of charcoal and we work with people who are interested in having coal that they can turn into materials that can be used for that kind of opportunity. So there is a range of possibilities, Bill, that are out there that certainly set an entirely different environment from, let's say, the 1990s, when gas prices were low and no coal-fired plants were developed and the technologies here were not available.

And if oil prices stay at $60 a barrel, the economics of these kinds of transactions are very attractive. So we are very optimistic about the future. In addition, I think it's worth adding that technologies continue to emerge for sequestering carbon dioxide. Our coal reserves are generally located in areas that are close enough to oil and gas fields for the carbon dioxide to be purchased from us and piped into those fields for secondary oil and gas recovery. And, indeed, in our Great Plains gasification project where we supply the coal, our customer not only makes synthetic natural gas, but also has a pipeline that is -- I've forgotten, 120 or 150 miles long into Canada that takes CO2 out of that operation.

So this isn't just pie in the sky stuff. We're already doing it. We know what's going on and we know that it can work. We're working very hard on a whole range of those kinds of alternative things and they're all coal based in that sense. But we think there's a lot of opportunity out there.

Well, that's great. I would encourage you, because when I was doing that, I did a lot of that with Basic in the old days and the price of oil was around $10, $12, $15 a barrel, you can't do anything. But given where you are today, it's a wonderful opportunity for the company, I would think.

That's the way we look at it.

Good. What about the stock split? Is that ever considered?

We consider those kinds of things from time to time as a part of our general process of just sort of governance and overview. So I really can't comment on it any further than that.

Okay, thank you, Al, doing a great job. Keep it up. That's great.

And your next question comes from the line of Erik Sonne with Steinberg Asset Management. Please proceed.

Hello, Al -- had a great year. One question. For 2006, you guys have achieved an increase on operating profit of almost 150 basis points and do you think that in the coming three years, if your business continues to operate at this pace, that you could increase operating profits at the same absolute level of 100 to 150 basis points?

Well, let me try to answer the question this way. First, the way we think about the company, it's very hard to look at the company as a whole. And so what I would be more inclined to do is just go very briefly through the businesses again.

I think at North American Coal we have the prospect of operating profit improvements at our Mississippi Lignite Operation, and also the tax treatment begins to shift from a higher tax rate to a depletion-adjusted tax rate, and that will be beneficial for us.

The other operations are soundly run and we expect them to continue to generate profitability that is reasonably comparable with past, with the exception that when we have unusual, extraordinary outages, obviously, the volumes go down in a year where each power plant cycles through periods of smaller outages for repair and maintenance and then every few years they have some larger outages.

And we will be facing a larger outage at our Red River operations in 2007, but that's just a one-year phenomenon. So I think in the coal business the prospects for good operating earnings are strong.

At Hamilton Beach, the numbers will largely be driven by volume growth. As I indicated, the profit-improvement programs have pretty much paid off. There's still a little bit more to go, but it's mainly going to be volume growth that's driving those operating profits.

At NACCO Materials Handling Group, I think I described the objective that we have in operating profits, which is to have a continuous improvement process that goes on for the next four or five years or so. And, as a result of the programs that I went through.

And, of course, at Kitchen Collection, the challenge is that the early months of the year are not only not very profitable, they're often unprofitable. And that's just the characteristics of that business. Most of the money, essentially more than 100% of the money, is made in November and December in that business. So those characteristics won't change, but we will have the added overhead for the full year from the Le Gourmet Chef business. I think that's the best overview I can give you.

Okay. On the material businesses, so you go now for 9% operating profit, you moved it to 2010 or 2011, right? What factors -- because initially you set those goals in 2002, and besides currency effects and your material cost pricing, are there any other factors that prohibited you from achieving that to your initial date of '09, or '08?

No, those are the major factors. I think I listed out the ones that would drive us toward the 9% with the old currency rates when I went through the share improvement and the product enhancements and getting those into the marketplace and fully digested and their cost structures settled down after they are introduced as new products.

And then the remaining portion is really the $70 million that I mentioned. And you don't re-adjust sourcing patterns overnight. It takes a period of time to do that. So we really can't get the full benefit from that until a fair amount of time has passed, but that's the set of programs that we're working on right now.

And then, finally, on material retail, if everything goes into place in your developments in France and Australia, would you think that -- Is it possible to break even by 2008 in that business?

That sure would be my objective, and there are no guarantees and we're just working through the implementation of the program right now, but believe me, that's at the highest priority level, and what I can say is that if we can execute that program properly, the numbers are there to do that.

Great, and do you have anything else to add on the coal side? It looks like from what I heard today it's pretty exciting.

No, I really don't have anything to add. I just would caution, as I always do in the coal business, that it's a long-cycle business and there is excitement when you sign up new deals. And that, of course, is what the coal company lives on. It has a small number of deals. It's not an open market participant in the general merchant coal business. It is a dedicated producer for customers, and so once we sign a deal, it's only the beginning.

And there's a lot of planning and time and effort, and some of those projects can take two, three, four years before they're really generating significant benefit, for some of them, even longer than that. But from our point of view, they start to become bankable as soon as we get them signed, and that's a critical component to the degree that we have to put capital in. So you will have noticed that we are a very high-return business in terms of returns on equity, returns on capital employed in that business. And we have a number of operations where we have a low level of capital and we're really providing services. We have other operations where there are cost escalators that provide pass-through mechanisms and so in a sense we're providing services there, although we do in some of the newer operations take capital risk, as well as the mining risks associated with the deals.

But, generally, that's the characteristics of the business and we're optimistic about new project opportunities.

Okay, that's great, thank you very much.

Ladies and gentlemen, this now concludes the question and answer session. At this time, I would turn the call over to Mr. Rankin for closing remarks.

I think I've indicated in my remarks all the way along that I feel that we had a really terrific 2006, an awful lot of things went our way, which was very gratifying. We feel that, broadly speaking, that the programs we've had in place for a few years have really been working very, very well for us, and we think that we should, absent unanticipated events, be able to maintain a new plateau level, roughly speaking, of profitability for the company and then have in sight a further set of opportunities, particularly in NACCO Materials Handling to improve our business profitability over time.

I would just note one caution. I think I made the comment that there are a number of things that we're doing over the first half of the year or so that will mean that, although we have a perspective on the full year that the quarters, as they evolve, may reflect earlier expenses and additional costs, including the Le Gourmet Chef overhead costs and other things of that nature.

In the first part of the year or so, the quarterly performance comparisons may not be as robust in the early part of the year as they will be for the full year, and I've really focused my remarks on the full year because that's the way we really think about the businesses. They have their own patterns, their own needs in terms of spending and so on and so forth over the course of the year. We're very encouraged with 2006 and we believe that the prospects look good for 2007.

So we appreciate all of you joining us, and I know that Christie will be happy to answer further questions if they come up. Christy?

We appreciate your interest, and if you have any additional questions, please feel free to call me at 440-449-9669. Thank you.

Thank you for your participation in the NACCO Industries 2006 fourth quarter earnings conference call. To access the replay, please dial 866-233-1854, toll free, or 617-614-4949 internationally. Please key the pass code 78954614. The replay will be available from one hour up to seven days following the call. This concludes the presentation. You may all disconnect and have a good day.