NACCO Industries Inc (NC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 NACCO Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Christina Kmetko, Manager of Finance. Please proceed.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO's results for the third quarter ended September 30, 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 were 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 third quarter earnings release, which is available on our website. I will now turn the call over to Al Rankin. Al?

Thanks, Christy. Good morning to all of you. NACCO had a net loss for the third quarter of $17.4 million or $2.10 a share on revenues of $918 million. Those results compared with net income the previous year of $21.1 million or $2.55 a share on revenues of $875 million.

NACCO Materials Handling Group in both its wholesale and retail segments in the third quarter were negatively affected by the recognition of a non-cash charge in the total amount of $14.5 million after tax against the accumulated deferred tax assets for its Australian operations and for certain US state taxing jurisdictions.

Obviously, the third quarter was a very difficult quarter for NACCO. Economic conditions deteriorated considerably in the course of the third quarter and that had an effect of, again, significance on our consolidated results. Key perspectives by subsidiary include the following -- NACCO Materials Handling Group Wholesale had a net loss of $12.7 million in the third quarter compared with $5 million of net income in the previous year.

That swing of $17.7 million was, of course, partially reflects the $7.7 million deferred tax asset charge that I discussed above. It also reflects significant unfavorable foreign currency movements and substantial material cost increases net of price increases and it also reflects market deterioration during the third quarter.

NACCO Materials Handling Group Retail had a net loss of $7.4 million. It had a gain of $1.8 million in the year before. The swing of $9.2 million is essentially all accounted for by the deferred tax asset charge and a $2.6 million gain in the previous year that relates to the sale of a retail operation. In total, if you exclude those two items, the operating results were not dissimilar.

The two consumer businesses, Hamilton Beach and Kitchen Collection, also had adverse market issues and particularly at Hamilton Beach, rising product costs. Hamilton Beach's net income decreased $5.1 million from $6.3 million to $1.2 million. And the decrease in 2008 primarily resulted from increased product costs net of price increases, some reduced sales of higher-margin products, and some adverse currency charges.

Kitchen Collection had a significant loss in the quarter of $3.3 million compared to $900,000 the previous year. Essentially, all of that was the result of lower sales and margins at Le Gourmet Chef largely as a result of markdowns on discontinued product in connection with the implementation of a very significant updating of the product offering in the Le Gourmet Chef format.

North American Coal's income declined from $7.8 million to $7 million and that decline was largely the result of decrease in lime rock deliveries, which you'll remember were mainly in Florida, and higher cost of sales due to lower production levels over the course of 2008 at the Mississippi Lignite Mining Company. And given those difficult market conditions, we felt that it was appropriate to increase the capitalization of three of our subsidiaries by contributing $25 million to NACCO Materials Handling Group, $13 million to Hamilton Beach, and $5.8 million to Kitchen Collection. That was over the full period in some cases of the first three quarters.

Turning to the outlook for the fourth quarter of 2008, I'd simply note that it's an extraordinarily difficult environment that we believe we face going forward. Consumer goods markets are quite weak and capital goods markets are turning cyclical quite quickly in both the Americas and in Western Europe. And so as the economic and market conditions deteriorate, our results are being significantly affected and will be in the fourth quarter just as they were in the third.

But I would have to note that how deep and how long this downturn is going to be is extremely uncertain. At Hamilton Beach and Kitchen Collection, consumers are reducing purchases and as I indicated, we have significant declines in our bookings in the major markets in which we participate around the world. In addition to that, material cost increases and foreign currency movements are continuing to affect us negatively.

Price increases have been implemented to offset increased material and transportation costs at both NACCO Materials Handling Group and Hamilton Beach and those are expected to improve margin recovery over time. However, they won't fully offset those significantly higher costs in the fourth quarter.

Obviously, there's a substantial delay. We have fixed prices for units in NACCO Materials Handling Group's backlog and we have price commitments, which in some cases continue through 2008 at Hamilton Beach. In addition, North American Coal expects some lower delivery requirements due to customer power plant outages in the coal side of the business and weak limerock markets due to lower housing and construction markets in Florida.

So we don't see the economic environment improving at all in the fourth quarter. In fact, we see a deterioration accelerating. That's what we're planning for. We're putting actions in place to deal with the significant downturns in each of our businesses in a very aggressive way. And we're operating on the assumption that the deterioration will continue in 2009 and that operating conditions at a minimum in the early part of the year are going to be extremely difficult. As a result of all of that and the uncertainty in overall financial markets as well, the Company is really going to focus on maximizing our cash generation and in that context we're unlikely to pursue any share buybacks in the near term.

If you look at some of the businesses in a little more detail at NACCO Materials Handling Group, revenues increased in the third quarter primarily as a result of favorable foreign currency movements and a shift to higher-priced trucks in Europe and the moderate effect of unit parts price increases earlier in the year. The increase in units, however, was partially offset by reduced unit volumes in both Americas and Europe as a result of decreased shipments of about 500 units between the two quarters -- of the quarter this year and the quarter a year ago.

Our backlog decreased to about 26,000 units compared to 30,500 a year ago and 28,400 at June 30. So you can see the impact there from a decline in bookings as bookings markets have softened. If you exclude the effect of the non-cash charge of $7.7 million, which I referred to in my opening remarks, the decrease in net income was primarily the result of extremely unfavorable foreign currency movements of $15 million pre-tax.

It was almost for us a perfect storm of foreign currency movements with various different components coming together, adverse cost of product, adverse hedging results, revaluation of balance sheet items. And the result was that we had a negative currency impact in the third quarter of $13.7 million in comparison to a positive impact from currency of $2.2 million in the previous quarter.

So we also faced very significant material cost increases. They were about $25 million from both steel and transportation costs and other elements as well and about half of that was offset by price increases, which are starting to have an impact. We did have some higher warranty costs during the quarter as well.

On the other hand, GS&A were reduced and expenses were reduced and we had lower product liability expense as a result of better claims experience. The third quarter also included a charge of $1.7 million of additional restructuring charges for the Irvine, Scotland restructuring program, which will be complete by the end of the first quarter of next year by effectively closing that plant.

As you turn to the outlook, as I've already suggested, we expect significant declines in forklift truck bookings markets in the fourth quarter and also as we look into 2009. The elevated material costs that I referred to earlier are expected to continue to have an unfavorable effect in the fourth quarter. But the price increases that we've put in place will have additional effect in the fourth quarter and the first quarter and we obviously are looking at the opportunities for further price increases to recover the operating margins that we had at earlier times.

We've been trying to deal with unfavorable foreign currency movements over an extended period of time and that's involved the closure of our Irvine manufacturing plant and it's a part of the manufacturing restructuring program in 2007. That will leave us exposed less to foreign currency exchange rate fluctuations, reduce our working capital, and put us in an enhanced position to respond more quickly and flexibly to customer requirements. We think that the savings that are generated by that program will exceed $20 million. It obviously does fluctuate depending on the currency values that you use, but still very substantial savings from that program overall.

Our new product programs continue and most importantly we have a new electric-rider lift truck program that is progressing satisfactorily. We expect to bring a whole line of newly-designed products to the market over the course of 2009 and early -- and then continuing on into 2010 and we expect those programs to contribute positively to our future results.

Turning to the retail business, operating results are about the same as I indicated if you exclude the gain from the sale of retail dealership in 2007 and the deferred tax asset charge in 2008. We continue, as far as the outlook is concerned, to focus on bringing those units in the UK and Australia to break even. But if economic conditions in those areas deteriorate further, that could obviously reflect both the revenues and the profit margins in the retail side of the business just as it does in the wholesale side.

At Hamilton Beach, the third quarter revenues were comparable between the years, but net income declined significantly, as I indicated earlier. We had limited price increases of $1.7 million, but product, material, and freight costs of $9.7 million -- that was the major impact on our reduced profitability. As we look to the fourth quarter, of course, the level of consumer spending in the fourth quarter is extraordinarily important to that business and it's expected to be significantly reduced.

Our retail expectations are low for the fourth quarter holiday selling season this year and we still have a lot of adverse economic factors affecting our US consumers including high food prices and depressed home values and financial market concerns. And in total, it just reflects a very challenging retail environment. Against this backdrop, we do expect that commodity costs are going to remain elevated for the products that have already been purchased for sale in the fourth quarter and we don't expect to recover those costs with the price increases that we have been able to put in place so far.

As we look to 2009, though, we do expect additional impact from price increases and we are working very hard at Hamilton Beach, just as we are at NACCO Materials Handling Group, to bring the effect of decreasing commodity costs including the steel and aluminum and copper to bear through our supply base as quickly as they are benefited by reduced costs. We are working extremely hard at Hamilton Beach with our suppliers to make sure that those benefits come as quickly as possible.

We have strong placements and -- at least so far -- good promotional programs from our customers for the fourth quarter. And we think that we've got additional new products in the pipeline for 2009 and those will all be beneficial to the Company's results. On the other hand, even the new products are being overwhelmed by the reduced consumer confidence and uncertainty in US consumer markets. So forecasting their results, either at the margin level or the revenue level, is extremely difficult.

At Kitchen Collection, I already indicated that the net loss increase was driven by the change in the Le Gourmet Chef store format. We feel very enthusiastic about the new product offerings that will be in that format. We think there's a lot of excitement in those stores and we're hopeful that this product line-up will achieve the potential that we continue to think that Le Gourmet Chef has.

Obviously, however, consumer prospects in mainly in the factory outlet mall area will affect the ultimate results in the fourth quarter. And we have seen periods when traffic has really slowed down in the factory outlet mall environment. To some degree, it reflects fewer shoppers with limited intent to buy and more shoppers who are interested in buying. But generally speaking, it's not a positive environment at all in the factory outlet mall environment.

As we look at the outlook, the critical issues, of course, are consumer confidence and traffic to the outlet malls. We hope that lower gasoline prices will be helpful. And certainly, the business should perform more in-line with our expectations and now that the bulk of the abnormal discontinued product discount program is essentially complete at Le Gourmet Chef, 2009 should be quite clean from that point of view.

At North American Coal, we had somewhat reduced income in the third quarter due to fewer limerock deliveries as a result of lower customer requirements. Obviously, we've had an enormous decline in the southern Florida housing and construction markets, which have led to the lower limerock deliveries. We also have higher costs of sales at Mississippi Lignite Mining Company due to lower production levels over the course of the year, as I mentioned earlier. We've had some improved operations in Red River Mining and some higher royalty costs to offset some of that.

We do expect that the fourth quarter will be well below 2007. We have customer plant outages and higher costs of sales will continue in the fourth quarter at Mississippi Lignite Mining Company and then they'll gradually get better in 2009. And we should have improved results in the second half or the last three quarters of the year next year. We expect that deliveries at our limerock operations will be lower in fourth quarter for the reasons that I outlined just a minute ago and we don't see those markets turning around in southern Florida any time soon.

We are continuing, despite this environment, to develop new domestic coal projects. We are encouraged with the project opportunities that are available and we continue to be hopeful that we'll have an impact from new projects on our results as we look forward in the next few years.

That really completes my comments and I'll open it up to questions after just noting that in total while perhaps the foreign currency problems that have been buffeting us and the material cost problems -- price material cost shortfall in margins that we've been dealing with in 2008 -- will be moving behind us, that the real head-wind as we look forward in the fourth quarter and in 2009 is the extremely weak consumer markets and the capital goods market for forklift trucks. And our approach is going to be to be extremely conservative in managing the businesses.

We have been through downturns before, especially in the forklift truck business. They have to be dealt with very aggressively so that you stay out in front of them and manage costs and that's exactly what we will be doing. But we are not sure just how difficult the environment will be, how much the markets will drop. We find that our forecasting models are not working particularly well in these markets and we're being extremely cautious. That completes my remarks and I'll now open it up for questions.

(Operator Instructions). And your first question comes from the line of Vanessa Miranda of Stanfield Capital Partners.

Hi, this is Amy Bloom at Stanfield. For the Hamilton Beach subsidiary, it looks like the covenant next quarter will also be tight considering that your outlook for the fourth quarter is weak. Are you expecting to contribute more capital to keep the Company in-line with its covenant requirement?

We monitor the performance of the Company very carefully and believe we have the ability to address covenant issues one way or another in each of our businesses at this time. So it obviously depends -- the degree of difficulty depends on the assumptions you make about the markets themselves, but we feel we have outstanding businesses in each of our four subsidiaries and we will take the actions that are necessary to move us through this period.

Thank you. And also, in that subsidiary, are you expecting any type of inventory write-downs?

In which was this?

In Hamilton Beach.

We have a couple of areas where there's potential exposure to some degree, but it's not abnormal for the business. And the general levels of inventory and quality of the products at Hamilton Beach is just fine. And there are no issues of significance in terms of phasing out products and phasing in new products that might leave us with significant problem areas as we look forward. As is almost always the case, we have a couple of areas where we're focused on special programs to deal with inventories, but they're not in the scheme of things major issues.

Okay. Great. Thanks for your support.

(Operator Instructions). Your next question comes from the line of Frank Magdlen of The Robins Group.

Good morning.

Good morning.

Al, at Hamilton Beach, if raw material prices stayed flat, what would it take in the way of price increases to get to the desired margin?

Well, I'm not sure I can really answer the question. What I will tell you is about the process we've gone through. We have reviewed at Hamilton Beach essentially every single stock keeping unit SKU in the business. We have looked at the current prices. We have asked our suppliers to reflect in their ongoing prices for next year the kinds of productions and commodity costs that we've seen and our engineers have basically reverse-engineered our products.

We understand the bills of material of those products in great deal and we know what commodity content is in them, and therefore, what we think should be appropriate reductions. So some portion of the recovery will come from decreased costs. But we believe that the prices we put in place as a result of the reviews that we've done of every single SKU put us in a pretty good position to have more normal margins in 2009.

But in some cases, the price increases required have really meant that it's necessary because of the implications for the price point at which the product would ultimately sell in our customer's operations to substitute products. Typically, to substitute lower costs, lower featured products that can help that retailer maintain a good product with the right margin for the retailer and for us at that lower price point.

So there are a number of pieces that all come together with getting us back to a more normal kind of situation. So that's really the process we've been working through. We think we're out in front of it to the degree that we can be and we have always targeted the beginning of next year as the time when we can put into place many of those enhancements.

In a number of cases, we have customer commitments that mean that raising prices is very difficult in the last part of the year -- the last six months of the year -- and the normal time for price increases is often right at the beginning of the next year, so that's what we've focused on.

Okay. And in the lift-truck market, can you highlight, maybe, what industries are particularly down, soft?

No. I think we can get some of that information for you, but I'll tell you that the situation is so fluid and changing with such rapidity right now that we're watching the levels of the bookings market very closely each month. Those are the periods for which we get the best information and I think you can assume that the manufacturing industries are particularly weak in comparison to more service-based and transportation-based industries -- that is, industries that are involved in the transportation of goods, particularly from overseas.

On the other hand, they're not immune either and we have seen some declines in our parts business, which is often historically a leading indicator of weakness in the units business because people are not feeling the need to repair trucks as quickly. It's also a leading indicator of an upturn, as you see an upturn in parts as people are bringing their forklift truck fleets back up to full serviceability.

Obviously, there are areas that you can well imagine like automotive, which are weak. But I think it's going to take us a while to get that kind of information, which we don't get as frequently, frankly, to be able to answer your question more fully than I've just done.

All right. And I guess I'll try the same question with Hamilton Beach. And that is, what kind of price increases, if commodity costs and freight costs stayed level where they are, to get to a respectable or desired margin?

Well, it just varies all over the lot. And because we change the mix so much, I really don't want to reduce it to a percentage. We have long-term targets of 10% operating profit in the Hamilton Beach business. In this environment, you could assume that's an ambitious target. It's a target which is dependent not only on margin, but also on the absolute amount of the volume because its ability to contribute effectively to us is very substantial in terms of incremental impact. I think our real focus right now is on tightening our belt on GS&A costs, on ensuring we get whatever material cost reductions we can, and managing the business in a very, very prudent way.

All right. And then, what's the target again to remind me for material handling?

In the long term, we have very ambitious aspirations with the combination of the following. The new product line which we are putting in place and which will be increasingly, either parts of it have been available, but the remainder over the course of 2009 and 2010 we have a significantly enhanced supply chain structure that we think will be very beneficial. We are in the process of closing the plant in Scotland and making other changes that will make our manufacturing operations more efficient.

We have very good parts business and we think that on sort of an average part of the cycle, which we're certainly not in, we would aspire to a 9% operating profit in the business. But in this environment, those are not numbers that we're focused on. We're focused on managing at low levels and doing all of the kinds of things that you have to do when you have a heavy industrial business with substantial embedded capital and so on and so forth.

All right. Thank you, Al.

And you have no further questions and I'll turn the call back over to Christina Kmetko for closing remarks.

Okay. I'll just comment again that we're watching the markets very carefully. We think this is going to be -- I think it's no surprise to anyone on this call that the economy, both here and in other countries, is facing very difficult conditions. And those are certainly affecting us, perhaps even at the front line in terms of affecting us.

We are taking all actions that we think are appropriate and prudent to manage our costs and our businesses in that adverse environment while at the same time continuing, particularly in product development, to maintain our position as an excellent product provider because we think that's where the long-term strength of our businesses comes from. So that completes my remarks. Christy, do you have any closing remarks?

No. Just thank you for joining us today and we appreciate your interest. If you do have any follow-up questions, please feel free to give me a call. Again, that number is 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 888-286-8010 or 617-801-6888 internationally with a replay passcode 34694487. The replay will be available in approximately one hour's time. This concludes the presentation and you may now disconnect.