NACCO Industries Inc (NC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 NACCO Industries earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host, 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 second quarter ended June 30, 2007. If anyone has not received a copy of this earnings release or would like a copy of the 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 -- I'm sorry, this morning's press release --and in our 10-Q.

In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2007 second quarter earnings release, which is available on our website.

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

Good morning. I'll begin with an overview of the earnings release, which was sent out last evening. This complements the 10-Q, which was also released last night and is available on the NACCO website.

Second quarter net income was $9.9 million, or $1.20 per share, compared with $4.7 million, or $0.57 a share, an increase of $5.2 million or $0.63 a share.

The second quarter reflected a number of items that need to be called out. First, were certain items that were recognized in the second quarter of 2007. Those included a restructuring charge of $1 million or $600,000 after-tax at Hamilton Beach/Proctor-Silex, incremental seasonal losses of $2.6 million or $1.6 million after-tax from Kitchen Collections Gourmet Chef stores which were acquired in August 2006, costs of $1.5 million or $1 million after-tax associated with the planned spin-off of Hamilton Beach/Proctor-Silex, and an arbitration award to North American Coal of $3.7 million or $2.3 after-tax.

The second group of items that the quarter reflected, were the absence of certain items that were recognized in the second quarter of 2006. Those included a charge for the early retirement of NACCO Materials Handling Group's senior notes of a $17.6 million or $10.7 million after-tax, a favorable product liability adjustment of $8.2 million or $5 million after-tax at NACCO Materials Handling Group, a one-time cumulative benefit of $3 million or $2 million after-tax from the amended San Miguel contract at North American Coal, and third and finally, the second quarter reflected improved operations at all subsidiaries in the parent company excluding the items noted above, and that resulted in an after-tax improvement to net income of approximately $2.4 million.

Our revenues in the second quarter were $830 million compared with $796 million a year ago. Revenues at NACCO Materials Handling Group and Kitchen Collection increased, while revenues at Hamilton Beach/Proctor-Silex and North American Coal decreased.

Some highlights included NACCO Materials Handling Group's net income which was $10.4 million compared with a net loss of $2 million in 2006. Overall operating results improved in 2007 excluding the impact of the prior year debt redemption charge which was partially offset by a favorable product liability adjustment.

NACCO Materials Handling Group Retail's net loss was $5.9 million compared with a net loss of $3.4 million in 2006. New programs to improve long-term financial performance were implemented in Australia during the second quarter of 2007 and costs for these programs contributed to the increased net loss.

Hamilton Beach/Proctor-Silex had a net loss of $400,000 compared with net income of $2.7 million in 2006, largely due to a restructuring charge for completing the closing of the Mexican manufacturing operation, increased interest expense and spin-off related costs of $600,000 pretax and the impact of unit volume declines.

Kitchen Collections' net loss of $2.8 million increased compared with the previous year's loss of $1 million as a result of seasonal losses from the acquisition of Le Gourmet Chef.

North American Coal's net income of $9.8 million was comparable to the previous year's net income. The absence of one-time benefits in 2006 from the amendment to the contract at the San Miguel Lignite Mining Operations was largely offset by an arbitration award in 2007 related to a failed power plant and mine development project in Turkey.

And finally, NACCO and Other's loss of $1.3 million was comparable to the loss in the previous year and included spin-off related expenses of $900,000 pretax.

Turning to the overall outlook for NACCO industries, we believe that the combination of favorable market forces and the results of improvement programs are expected to lead to 2007 net income in the general range of 2006 results excluding the 2006 extraordinary gain from the reduction in the company's estimated closed mine obligations and any potential future charges associated with the restructuring program currently being considered at NACCO Materials Handling Group Wholesale.

Improvements are expected to occur in the second half of the year which are attributable to higher expenditures in the first half as a result of specific programs at NACCO Materials Handling Group and Hamilton Beach, the seasonal nature of the housewares businesses and the increasing benefits from the integration of Gourmet Chef and the Kitchen Collection.

Results at NACCO Materials Handling Group Wholesale are expected to improve in 2007 due primarily to the absence of the debt redemption charge taken in 2006 as well as anticipated lower interest expense, but partially offset by the absence of the favorable product liability adjustments recognized in 2006. A plan for a further restructuring program is being considered, which could result in additional charges in the second half of 2007.

New programs at NACCO Materials Handling Group Retail implemented in the second quarter are expected to have an increasingly favorable effect in the second half of 2007. Hamilton Beach is expected to have stronger operating income resulting from a favorable mix of sales of higher priced products for the 2007 full year and the absence of an environmental charge taken in 2006.

Kitchen Collection's operations are expected to improve throughout 2007 as Le Gourmet Chef operations are integrated. However, achieving a net income level in 2007 similar to 2006 is unlikely because Kitchen Collection will recognize eight months of seasonal operating losses at Gourmet Chef during 2007, which were not incurred by Kitchen Collection in the previous year, because the acquisition didn't occur until August. It will also incur integration costs and increased interest expense resulting from additional borrowings for the purchase of Gourmet Chef.

North American Coal's operating results are expected to increase moderately over 2006 excluding the benefit of a dragline sale in 2006 for $21.5 million or $13.1 million after-tax.

NACCO and Other results are expected to increase in 2007 because of lower employee related expense, increased interest income, and the absence of significant Applica transaction fees.

Those are the highlights of NACCO's overall second quarter results and outlook and those of our four subsidiaries. Now I'll add a few supporting perspectives from each subsidiary.

At NACCO Materials Handling Group, worldwide shipments increased slightly to 22,192 units in the second quarter of 2007 compared to the first -- the second quarter of the previous year and worldwide backlog was approximately 30,000 units compared with 25,900 a year ago and 30,000 at the end of the first quarter.

The increase in net income in the second quarter of 2007 compared with the prior year quarter resulted from an improvement in gross profit, selling, general and administrative expenses and interest expense partially offset by unfavorable currency movements which increased costs of lift trucks and components for the U.S. market where they were sourced from countries with appreciated currencies. Gross profit improved primarily due to price increases and an increase in the sale of higher-margin units in Europe and higher-margin parts in Americas and Europe, partially offset by increased cost of materials including industrial metals and rubber and higher manufacturing costs.

In addition, excluding the impact of the favorable 2006 product liability adjustment, selling, general, and administrative expenses decreased primarily as a result of lower employee related costs and interest expense decreased because debt was refinanced in the second quarter of 2006 at a lower effective interest rate.

For the last half of 2007, NACCO Materials Handling Group Wholesale expects continued growth in lift truck markets in Europe and Asia and a moderate year-over-year decrease in the Americas, but growth in the South American market is expected to partially offset the expected decline in the U.S. portion of the market. As a result, the company expects modest growth in the worldwide market for the remainder of 2007.

Due to the manufacturing of trucks and components for sale in the U.S. market from countries with appreciated currencies, foreign currency movements have adversely affected earnings as the U.S. dollar continues to weaken against other currencies. During the first quarter of 2007, NACCO Materials Handling Group outsourced its welding and painting operations at its manufacturing facility in the Netherlands to a low-cost country. This action is result -- is expected to provide pretax benefits of $1.2 million during 2007 and $1.6 million annually thereafter.

The wholesale business also continues to evaluate other actions consistent with its stated long-term strategy of -- to manufacture products in the market of sale, which would reduce our currency exposures.

The company is currently reviewing a plan which, if it is approved, would shift a high-volume lift truck series from overseas assembly to assembly in its Americas market at sale, lessen NMHG's exposure to future currency exchange rate fluctuations and provide additional opportunities to source components from lower-cost countries. Decisions will not be made or announced until thorough analyses and discussions are completed and a plan is approved. Consideration of approval of a plan is expected, at this point, to occur during the third quarter of 2007.

As I think should be indicated by NMHG Wholesale's actions in the Netherlands, the company is committed to addressing the critical issue of unfavorable currency exchange rates, further reducing manufacturing component and other product cost and building global market share. Overall, Wholesale's full year 2007 results are expected to improve over 2006.

NMHG Wholesale's investment in long-term programs, particularly its significant new electric-rider truck, warehouse truck, and big truck product development and manufacturing programs are expected to continue to improve results in 2007 and 2008. The company continues to believe the programs are in place or under consideration, which will allow NMHG to achieve its 9% operating profit goal in the 2010 or 2011 timeframe.

The increase in NACCO Materials Handling Group Retail's second quarter net loss in 2007 was primarily attributable to lower new and used unit and rental margins as a result of increased repairs and maintenance expenses combined with increased employee related expenses related to new programs to improve long-term financial performance, which were implemented in the Australian operations during the second quarter of 2007. These new programs are expected to have an increasingly favorable effect in 2007 and 2008 and are being put in place to meet Retail's longer-term strategic objectives which include achieving at least breakeven results while building market position.

Hamilton Beach/Proctor-Silex's decrease in results was primarily due to the combination of reduced unit volumes and additional restructuring charge, increased interest expense and spin-off expenses, both of which were incurred in the second quarter of 2007, in connection with the spin-off and the dividend, which was a part of that overall transaction. The company completed the closure of the Saltillo, Mexico manufacturing facility in May, which resulted in an additional restructuring charge of $600,000 after-tax. In addition, Hamilton Beach paid a special dividend of $110 million, which resulted in an increase in borrowings with a related increase in interest expense compared with the prior year. Hamilton Beach also incurred pretax expenses of approximately $600,000 for professional fees related to the planned spin-off.

NACCO's Board of Directors approved the plan to spin-off NACCO's Hamilton Beach/Proctor-Silex business to NACCO's shareholders, as we had previously announced. The plan is progressing and the spin-off is expected to occur during the third quarter of 2007.

Current economic conditions affecting U.S. consumers, such as increasing gasoline prices and depressed home sales, appear to be among factors unfavorably affecting sales at key retailers and providing challenges to the small electric household appliance market. These challenges are expected to continue throughout the remainder of 2007. Nevertheless, in spite of these challenges, Hamilton Beach has secured strong placements and implemented important promotional programs for the second half of 2007.

As I've already indicated, Hamilton Beach has completed its transition out of manufacturing and moved the production of all products to third-party manufacturers. This transition and other programs initiated by Hamilton Beach, as well as anticipated increases in sales resulting from an improved mix of higher priced products, are expected to have a favorable impact on operating results over time.

At Kitchen Collection, the net loss increased in the second quarter of 2007 primarily because of the acquisition of the Gourmet Chef business and carrying the seasonal losses for a number of extra months. Operating results for the second quarter of 2007 at Kitchen Collection stores were comparable to the second quarter of 2006.

Modest sales growth is expected in the outlet mall market for the second half of 2007. In addition, gasoline prices and weather patterns will continue to affect consumer traffic to outlet mall locations.

Kitchen Collection anticipates a continued increase in revenues during 2007 as a result of a full year of operation of the Le Gourmet Chef business and that operating results for the Le Gourmet Chef business will improve as the company works to offer the right mix of inventory in the Le Gourmet Chef stores and to rebuild the customer base. The integration of Le Gourmet Chef is on schedule. It's expected to be completed by the end of 2007 with the exception of the distribution function, which is expected to be completed in late 2008.

As a result, Kitchen Collection expects the majority of the synergy benefits, excluding distribution synergies, to be achieved by mid-2008, however achieving a level of net income in 2007 similar to 2006 is unlikely because Kitchen Collection well recognize eight months of seasonal operating losses at Le Gourmet Chef during 2007, which were not incurred in 2006. It will also recognize integration costs and increased interest expense resulting from the additional borrowings for the purchase of Le Gourmet Chef.

At North American Coal, net income for the second quarter was comparable to the 2006 second-quarter. The revenue decline and a decrease in the earnings of unconsolidated mining operations due to fewer tons delivered in the second-quarter of 2007 were largely offset by the receipt of an arbitration award of $2.3 million after taxes as I previously indicated.

North American Coal expects a moderate increase in total lignite coal deliveries in 2007 as a result of planned customer power outages, that's a moderate decrease compared with 2006 as a result of planned customer power plant outages, the majority of which occurred in the first half of 2007 and lower sales to third-parties at Red River Mining.

North American Coal expects an improvement in operating results excluding the benefit of a gain on the sale of a dragline of $21.5 million or $13.1 million after-tax as a result of continued strong results at most of its mining operations and a reduction in selling, general and administrative expenses. Contractual price escalation adjustments are expected to continue to provide compensation for increased material, supplies and labor costs at all mining operations.

The effective income tax rate in 2007 is also expected to decrease compared with 2006 as a result of the absence of items that unfavorably affected the 2006 effective income tax rate. Royalty income, however, is expected to decrease in 2007 from 2006 levels and is expected to decrease further in 2008, primarily as a result of the expiration of a royalty contract during 2007. Deliveries from the limerock dragline mining operations are expected to decrease moderately in 2007 as customer projections for 2007 continue to reflect the decline in the housing market.

In addition, in July of this year a federal district court ruling ordered that mining cease in selective previously permitted areas in South Florida mined by North American Coal for its customers. However, North American Coal's operations are not expected to be materially effected by the ruling. North American Coal's customers intend to challenge this ruling vigorously and have appealed the unfavorable decision to the Federal District Court -- of the Federal District Court.

Overall, North American Coal expects strong performance from its current operations over the next few years, and 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 coal-to-liquids, coal gasification and clean coal technologies. Accordingly, the expenditures for the development of additional uncommitted coal reserves are likely to be higher in 2007 than they were in 2006. Further, the company continues to pursue additional non-coal mining opportunities.

In the second quarter, North American Coal, in a 50-50 joint venture with one of its customers, Great River Energy, has formed a new company. The purpose of Great American Energy is to develop, construct and own and operate a lignite coal beneficiation plant that will be located adjacent to both the Falkirk Mining Company, an unconsolidated project mining subsidiary, and Great River Energy's Coal Creek Station electric generating plant located near Underwood, North Dakota. The facility is expected to be completed in late 2008 and is expected to supply beneficiated coal to a proposed new power plant being constructed in conjunction with an ethanol plant and the expansion of a malting facility.

In conclusion, then, I have a few thoughts which amplify and put in further perspective my 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. More fundamentally, income growth will now need to come largely from business growth. Hamilton Beach is focused on innovative products on new placement activity with a very professional team. KCI 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 fire plants, gasification for power plants, coal-to-liquids energy ventures and lignite beneficiation projects. North American Coal is optimistic that some of these new projects, in addition to the recently announced lignite beneficiation project, can be concluded in 2007 and that the environment for others in later years is quite good.

Second, NACCO Materials Handling Group remains the biggest source of profit improvement opportunity for the company. Wholesale operating profit results are well below the company's long-term objective of 9% operating profit margin. Retail net losses are also significant well below its near-term profit objectives of breakeven. While external factors have arisen, particularly significant currency driven cost increases and material costs increases, we view these as simply factors which cause delay in achieving our objectives 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 underway in NACCO Materials Handling Group's Australian retail operations, which was implemented at the end of the second quarter and of the manufacturing and sourcing change programs which are now being analyzed 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 before new undertakings, as it was in 2006. Further, the company is hopeful that the new project opportunities for investing available capital at sound rates of return will be achievable particularly at North American Coal.

In general, then, we believe that our companies can operate in the general range of the enhanced profitability level achieved in 2006, excluding the extraordinary gain, and then move gradually toward a new plateau by 2010 and 2011. 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 been doing at NACCO Materials Handling Group this year.

Fortunately, at each of our businesses, we will be addressing our programs and any further 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 like to turn to any questions that you may have now.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Frank Magdlen of Robins Group. Please proceed.

Good morning.

Morning.

Hey, Al, when I'm looking at the data that you show for Wholesale in the Americas and Europe, are you maintaining your market share in both geographic regions?

I think the general answer to that is yes. My pause is really relates to the situation in Europe, where you have to define what you mean by the marketplace. In the traditional older parts of Europe, our shares have not changed significantly, perhaps a tiny bit better. Eastern Europe, however, has been growing quite rapidly and our share has been lower in Eastern Europe than in the older part of Europe. We are working to improve our position in Eastern Europe, but the effect of that is to make to share number outlook lower.

Secondly, on a global basis, the situation is even more dramatic in that sense. In the countries where we have traditionally participated, our shares have not changed very much. However, the Chinese market has exploded in the last three or four or five years, and our share in the Chinese market is low. About 50% of the Chinese market is really in the hands of two major Chinese companies, and then the rest is split between smaller Chinese companies and a number of Western and Japanese manufacturers. So, in that sense, our global share has been going -- has decreased because the markets in which our share is lower have been growing more rapidly.

In China, we do have our own manufacturing operations, and are building a market position. However, we -- the -- a significant portion of that market is likely to be inaccessible to us on a long-term basis because it simply involves producing a type of truck that does not have the quality that we believe the Hyster business has to have and that is satisfactory in the eyes of a significant portion of the Chinese market at this time. Over time we think that will change and the market will move more in our direction, but that's kind of a long answer to your question, but those are the factors at work.

All right, and then just looking at the operating profit for the balance of the year, the majority of your improvement, is that expected to be -- to continue to come from Europe?

All right, it'll be -- we -- the third quarter is always a period that is influenced by vacations and we have shutdowns at our plants in the third quarter, so those numbers are not as meaningful. The fourth quarter has historically been by far the strongest quarter for NACCO Materials Handling Group and we would expect that that pattern will continue in 2007 and that we'll be seeing enhanced results at both Americas and Europe.

Thank you very much.

Yes.

(OPERATOR INSTRUCTIONS)

Okay, it sounds to me as if there are no more questions at this time. I believe Christy will close with some remarks indicating that she can answer further questions and there is more information in our earnings release. We try to make those earnings releases as comprehensive as we can. We issue the 10-Q at the same time. That has additional information in it, which I commend to everyone. And Christy. you want to close, then?

Yes. Thank you for joining us today, we appreciate your interest and if you do have any additional questions, please call me at 440-449-9669. Have a good day.

Ladies and gentlemen, a replay of this conference call will be made available approximately two hours after the completion of this call. The replay information is 888-286-8010 with the access code being 22443320. Again, thank you for joining the conference, you may now disconnect. Have a great day.