NACCO Industries Inc (NC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second Quarter 2008 NACCO Industries Earnings Conference Call. My name is Erica and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I will now like to turn the presentation over to your host for today's call, Ms. Christina Kmetko. You may proceed.

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 30th, 2008. 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 our earnings 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 2008 second quarter earnings release, which is available on our website.

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

NACCO had a difficult second quarter. And as you look forward, a number of the forces that were at work at the second quarter are going to be at work in the remainder of the year. So, these are turbulent and difficult times at least as reflected in the businesses that we have.

NACCO had consolidated net income for the second quarter of $2.4 million, or $0.29 a share, on revenues of $948 million compared with consolidated net income in 2007 of $9.9 million, or $1.20 per share, on revenues of $831 million. The decreased results reflected a decline in NACCO Materials Handling Group Wholesale's net income to $3.2 million versus $10.4 million in the previous year. At Kitchen Collection, the loss increased to $3.7 million from $2.8 million.

At the coal company, earnings were $6.4 million in comparison to $9.8 million in the previous year; and at the NACCO and other level, a loss of $3.2 million compared to the previous year at $1.3 million. Hamilton Beach was about the same with a loss of -- with essentially the same results and NACCO Materials Handling Group Retail was the only source of improvement with a loss of $600,000 as opposed to a $5.9 million loss in the previous year.

The economic environment continues to be very uncertain at this time for the consumer markets in which Hamilton Beach and Kitchen Collection participate and in the capital goods markets which NMHG participates. At NMHG, key improvement programs continue to be implemented to mitigate the unfavorable effects of the current environment. However, these programs will continue to incur significant costs during the remainder of 2008.

And price increases implemented to offset increased material and transportation costs at NMHG are expected to improve margin recovery over time. However, these price increases are not expected to fully offset the effect of the significantly higher costs being incurred during 2008 due to the price increase lag created by NMHG's fixed price unit backlog.

North American Coal and Hamilton Beach are likely to continue to have very difficult operating environments in 2008, which are expected to lead to significantly reduced results in those businesses compared with 2007.

As a result, NACCO's third quarter is currently expected to be very weak with results currently expected to improve in the fourth quarter. Of course, at the end of the day, that's contingent in a significant way on moderation of the price increase trends that we've been seeing and on material costs at both NACCO Materials Handling Group and Hamilton Beach in particular.

At NACCO Materials Handling Group, as I indicated, net income was $3.2 million in comparison with $10.4 million the previous years. Although revenues increased from $608 million to $742 million, the second quarter did include additional restructuring charges associated with the Irvine restructuring program of $800,000 pre-tax and additional costs for the second quarter of $1.2 million pre-tax or a total of $1.2 million net of tax. Those are primarily for accelerated depreciation and manufacturing inefficiencies as a result of the Irvine restructuring.

The revenues increased 22% compared with the previous year's quarter as a result of a favorable shift in sales mix to higher-priced trucks in Europe, favorable currency movements in Europe from the strength of the euro and British pound compared with the US dollar, and increased unit volume. In addition, higher parts sales volume and the effect of unit parts price increases implemented during late 2007 contributed to the revenue improvement.

Shipments were 23,370 units in the second quarter in comparison to 22,192 in the previous year. The backlog was approximately 28,400 units compared with 30,000 units the previous year and 29,100 units in March -- at the end of March.

The decrease in net income in the second quarter was primarily attributable to a decrease in operating profit. In overview, currency variation and material cost increases were not offset by more favorable movement in prices and a variety of other expenses, including selling and administrative expenses.

As you look at the -- turn to the outlook, Wholesale has very mixed growth prospects in the lift truck markets in the remainder of 2008 compared with previous year, with significantly slower growth or even moderate declines in Europe, moderate growth in Asia Pacific, and a year-over-year decrease in the Americas market.

Overall, the Company expects comparable to modest increases in shipment levels for 2008 compared with 2007. However, if US and European economic conditions deteriorate further, sales of units and higher-margin parts could decline in the second half of 2008, which would adversely affect revenues and profits.

Inflationary costs in materials, specifically steel and copper and fuel and freight costs are expected to continue to affect results unfavorably in 2008. Price increases that were implemented in 2007 and in July of this year are expected to offset higher costs increasingly in the second half of 2008, particularly in the fourth quarter. However, any further material cost increases are unlikely to be recovered in 2008 because of the fixed prices for units in the backlog.

Appreciation of currencies in countries where NMHG manufactures lift trucks for sale in US market and where NMHG Wholesale buys components for its US manufacturing operations had a significant adverse affect on earnings between the second quarter of 2008 and 2007 and total roughly $7.7 million.

To offset those, as is indicated in the press release, we recently completed a program in the Netherlands in which we've moved to lower-cost countries and had some other restructuring activities. And we've been moving forward with the program to restructure our urban facility in Scotland. And there are a number of related programs associated with that. That program is generating substantial expense at the current time. It should be complete sometime early in 2009, roughly around the end of the first quarter.

At maturity, we see very large annual savings exceeding $20 million a year. And in fact, those estimates were really put together when currencies were somewhat less adverse than they are today. So, we think this is a very important program for our future. But it is costly at the moment.

In addition, NMHG Wholesale is continuing to invest in the future, particularly its warehouse and big truck product development and manufacturing programs, and most importantly its significant new electric rider truck program, which is expected to bring a full line of newly designed products to market over the course of 2009 and including introducing the first of those products, a one- to two-ton electric counterbalanced truck in early 2009. And we think those really -- those programs all lay the groundwork for enhanced results in future years.

Turning to NMHG Retail, as I indicated earlier, the loss declined to $600,000 in comparison with $5.9 million in the previous year. And that was primarily the result of the realignment and improvement of operations in Asia Pacific. We also had increased revenues and improvements in service performance in our one remaining European retail dealership. The outlook continues to be to move toward at least breakeven for those businesses and while we continue to emphasize the programs that are designed to improve the strategic position of those retail operations.

At Hamilton Beach, there was a net loss of $500,000 compared to $400,000 in the previous year. Revenues increased largely due to a favorable shift in sales toward higher-priced products and some favorable foreign currency movements.

Net income, however, did not improve because increased sourced product and freight costs -- that is the supply costs from our suppliers in China and the freight costs of moving those goods from China to the United States -- more than offset the benefits of the revenue increase and a decrease in SG&A expenses in the same -- in that period.

Hamilton Beach expects 2008 in total and the remainder of the year to be a tough year. Results for the business as a whole in 2008 are expected to be well below those in 2007.

A number of factors are affecting the attitudes of US consumers. Those include rising food and gasoline prices, depressed home sales and mortgage debt concerns all are among factors that make it a very challenging retail environment. Most difficult, however, are the continued significant pricing increases from suppliers in China. All of that is because they have no choice but to pass on increased commodity costs for resins, copper, steel, and aluminum.

Freight costs, transportation costs, as I indicated earlier, are also increasing. And the Chinese currency is increasing. Clearly, we're very much focused on improving our prices, increasing our prices to our customers. We have some constraints as to what we can accomplish in 2008 in certain circumstances as a result of commitments to maintain prices as we go into 2009. However, we're hopeful that we can, through some combination of price increases and different product offerings, reposition ourselves to mitigate these increased costs that the Company is facing.

From a longer-term point of view, Hamilton Beach continues to focus on product innovation, cost reduction, promotional programs, and branding programs, all of which we think in the longer term are going to have a significant positive effect on the business.

Kitchen Collection reported a net loss of $3.7 million on revenues of $40 million compared with a net loss of $2.8 million on revenues of $39 million in the previous year. The net loss increased due to lower margins at the Le Gourmet Chef. All of that really resulted from increased mark downs on products that have been discontinued. And those mark downs are part of a program to completely restructure Gourmet Chef store product offerings and put those stores in a position to have new products presented in the stores in an appropriate way for the fourth quarter, the very important fourth quarter of 2008.

On the other hand, the uncertainty in the US economy and all of the factors I noted in connection with Hamilton Beach suggest that while we may see some modest increases in revenues in 2008 and some improvements in the operations of Le Gourmet Chef in 2008, and as I indicated, primarily in the fourth quarter, it's still going to be a tough year overall.

The integration of Le Gourmet Chef has or will have been largely completed when we complete this reset of the stores. And the distribution function is now also effectively consolidated in the general Chillicothe, Ohio, area, where our other distribution center is for Kitchen Collection. And we expect to see substantial benefits from that program, both in terms of availability in our stores and also in terms of costs. Again, we should see the full benefits or at least most of the benefits of that program in the fourth quarter of the year. But their biggest impact will come over the full course of 2009 and looking out into the future.

At North American Coal, net income declined to $6.4 million from $9.8 million the previous year. That was primarily the result of the absence of an arbitration award of $2.3 million net of taxes, which was received in the prior year quarter, plus lower royalty income, which comes from others mining and other activities that generate royalty income for us. There were also fewer limerock deliveries.

We had higher cost of sales at Mississippi Lignite Mining Company, primarily due to the capitalization of fixed costs over lower production levels and higher costs for diesel fuel and steel at all of the consolidated mining operations. Those increased costs haven't been fully recovered through contractual price increase provisions. And those were -- those unfavorable activities were partially offset by improved operations at Red River Mining and reduced SG&A expenses.

North American Coal expects results for the remainder of the year to be well below 2007. Lower delivery requirements and higher cost of sales because of lower production levels are expected to continue to reduce results at Mississippi Lignite Mining Company over the remainder of this year. And higher repair and maintenance expenses at Red River, increased commodity costs that I've already mentioned for diesel fuel and steel aren't going to be fully recovered during the course of the remainder of 2008, which will lead to negative comparisons.

Deliveries from the limerock drag-line mining operations are also expected to decrease further in the remainder of 2008. Limerock customer projections for 2008 deliveries continue to reflect the enormous decline in Southern California, Florida housing and construction markets. And the compliance with a July 2007 district court ruling and the expectation that our customers will need to apply for new permits probably in 2009 indicate further reductions in customer deliveries are likely.

On the other hand, at North American Coal, the company is continuing its efforts to develop new domestic coal projects and continues as in previous quarters to be quite encouraged that more new project opportunities may come to fruition, including coal to liquids, coal gasification, and other clean coal technologies.

At NACCO and other, which includes parent company operations and our Bellaire subsidiary company, which holds non-operating assets, reported a net loss of $3.2 million for the second quarter compared with $1.3 million loss the previous year. Higher income tax expense and lower interest income were partially offset by the absence of Hamilton Beach spin-off related expenses.

So, that in total then is an overview of the perspective on the second quarter and prospects for the remainder of 2008. And if any of you have any questions, I'd be happy to take them now.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Frank Magdlen from The Robins Group. You may proceed.

Good morning.

Morning.

Al, when I look at the reasons for the, say the lower gross margins or operating profits, there's a number of issues out there. But what are the two biggest factors that are impacting gross margins or operating margins right now?

Well, let me take them business by business. At NACCO Materials Handling Group Wholesale, it's clearly currency and material cost expenses, currency rates -- the euro versus the dollar has continued to deteriorate very significantly. And secondly, material cost increases have been coming through at a very rapid rate.

And in many cases, suppliers have simply said, regardless of past operating practice, if you want, for example, steel, this is the price, or you won't get it. And so, the conditions are very difficult there. And since we have historically had a large measure, a fixed price backlog, it takes quite awhile for new price increases that are put in place to respond to those cost increases to take effect or to have an impact on P&L.

At Retail, there are no particular forces at work other than just continuing to try to improve the businesses. The restructuring programs are largely complete. At Hamilton Beach -- has essentially an environment of weak customer sales, but a pretty good market position for us. I think that it's just a general slowness in the retail environment, which you've undoubtedly seen in other businesses. The consumers are reluctant to buy. They're putting off things. They're shifting from discretionary purchases to purchases and things that they have to do.

And so most importantly, however, if you net it all out because we did have a slight modest sales increase, most important are the cost increases we're receiving from our Chinese suppliers. They're faced with the same very large cost increases for many of the same kinds of commodities that we have in NACCO Materials Handling Group.

And generally speaking, the suppliers in China are relatively thinly capitalized. They don't have the ability to absorb additional costs. They're pretty efficient. And so, they need to pass those costs on. And many of our customers have been accustomed to operating in large measure on an annual basis in choosing their products and pricing them.

And so, getting price increases on an interim basis is certainly very hard work for our people. They're, as you can imagine, focused on that effort, making progress. But in some cases, we have structures that we can't change until we look into 2009 and have more flexibility to deal with some of these cost increases, which we hope will moderate. But as I suggested, as we go into 2009, we certainly hope we're positioned with our customers to come into the year either with products that are adjusted to the more margin effective at the price points that the customers want to offer them at or simply increased prices.

At Kitchen Collection, it's really the improvement in the Le Gourmet Chef operations. And we're optimistic that the fourth quarter will represent a significant repositioning for them, not the third quarter, but the fourth quarter. And that the -- a significant impact will come from the new products and the reset of those products in the stores in combination with the enhanced distribution capabilities.

At North American Coal, I think we have to work through the effects of reduced operating rates at one or two of our operations during the course of 2008 and in the hope that our customers will actually be consuming more coal and will be able to operate at their consumption rates in the course of 2009.

Most of those costs get passed on -- increased costs get passed on relatively quickly. But we have some where the cost escalators have lags in them. And so, we don't pick up the cost increases as rapidly as we would like. On the other hand, if inflation begins to moderate, we will ultimately recapture those at an increasing rate. So, that's out ahead of us.

But that kind of gives you a flavor if you look at the very -- there's some common themes obviously -- increased material costs in all of our businesses are causing problems and transportation costs. But the way those work through in the businesses are somewhat different. I think that gives you the flavor for the situation.

If I could follow on, if commodity costs were frozen today, how long would it take or what type of price increases in general do you need to get to a fair gross margin or operating margin?

Well, I don't think I can get into the amount of increases so much as their timing. I think the timing is the key. Our point of view is that these cost increases that we're dealing with are no different from the cost increases that all of our competitors are dealing with. So, no one can absorb these cost increases and keep producing the products at the same prices that they're selling them at. So, the question is more one of timing than anything else.

And from a timing point of view, the biggest issue we face is that we have a backlog of sort of four to six months at NACCO Materials Handling Group. Some portion of that is frozen. And in terms of prices -- and it's very difficult to change if a customer has negotiated a price in a competitive bid for a forklift truck, and then the costs change in a way that you couldn't anticipate at the time that you entered into that bid.

We have certainly been working to enhance the quality of the understanding of the people who are doing the pricing of deals, of costs that are going to be increasing and that have not yet increased, but will increase in the four- to six-month window that I mentioned so that when people are pricing those trucks, they can take into account the best estimate of what our procurement people believe is going to happen in the way of cost increases.

However, if unanticipated cost increases continue to come up the way they have in the first eight months of this year, it's very difficult to be competitive in the marketplace with regard to costs that have not yet become apparent.

Now, there may be some evidence that commodity costs are not going to go up in the future at the rates that they have been going up in the past. On the other hand, it is very difficult to determine the behavior of these markets in a situation where supply of these commodities on a global basis is relatively inelastic and therefore, doesn't respond very quickly to increases in demand.

And the increases in demand are coming not from America and Europe, but from China and India. And so, they're really driving continued scarcity and availability and creating an environment where it's very difficult to predict price increase behavior.

But my hope would be that they're starting to moderate after these very large cost increases that have been coming out over the last few months. And indeed, there are some commodities where I think you've already seen them come down from their highs. And there's just -- there is a lot of volatility out there. But hopefully, that gives you an answer to the question.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Okay. I think if there are no other questions, I'd just thank all of you for joining us and leave you with the assurance that in each of our businesses, the management teams are very much focused on dealing with these forces, some of which are amenable to being managed and others, particularly weakness in markets, which are not. It's a difficult environment. And we're watching it very, very carefully and trying to manage our way through it as best we can. And I thank you all for joining us.

Thank you. We appreciate your interest. If you do have any additional questions, please feel free to call me at 440-449-9669. Have a good day.

Thank you for your participation in today's conference. To access the replay for this call, you may dial 1-617-801-6888 or 1-888-286-8010 with the replay passcode 79478512. The replay will be available in approximately one hour's time. This concludes the presentation. You may now disconnect and have a wonderful day.