NACCO Industries Inc (NC) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 NACCO Industries earnings conference call. My name is [Noellia] and I will 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 would now like to turn the presentation over to your host for today's call, Ms. Christina Kmetko, Manager of Finance.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed, outlining NACCO's results for the first quarter ended March 31, 2009. If anyone has not received a copy of the release or would like a copy, please feel free to give me a call and I will be happy to send you any additional 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 is Ken Schilling, Vice President and Controller. Al Rankin: 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. I will now turn the call over to Al Rankin, Al?

Thank you and good morning to all of you. NACCO's revenues for the first quarter of 2009 were about $559 million, significantly lower -- 35% -- than the revenues in the prior-year period. The decline was primarily attributable to lower volumes at NACCO Materials Handling Group, mainly as a result of the deteriorating global economy.

As a result of this significant drop in volume, particularly at NACCO Materials Handling Group, the Company incurred a consolidated loss for the first quarter of $9.1 million or $1.10 per share. That, of course, compares with income of $5.6 million in the previous year.

A few highlights. Clearly, economic conditions have deteriorated further in the first quarter 2009. And that has significantly affected consolidated results. A few key perspectives -- NMHG Wholesale's net loss was $19.1 million in 2009, compared with net income of $7.9 million the year before. The key driver for the change was a significant decline in volume for units and for parts.

The Materials Handling Group's retail business had net income of $600,000 compared to a loss of a comparable amount in the previous year. The key drivers for the improvement were the favorable effect of a reduction in intercompany eliminations and reduced spending, partially offset by unfavorable margins.

A weak North American consumer market affected volumes at both Hamilton Beach and Kitchen Collection. However, as a result of a number of favorable factors that I will touch on later, both reported improved results in the first quarter.

The North American Coal's net income increased significantly to $10.8 million, compared with $3.8 million in 2008, primarily due to an increase in coal deliveries to contractual price escalation and to reduce costs for diesel fuel at the lignite coal mines.

In light of the current difficult economic conditions, NACCO increased the capitalization of two of its subsidiaries by making cash and non-cash contributions of about $29 million to NMHG and $3 million to Kitchen Collection.

As you turn to the outlook for the rest of the year, it is pretty clear that economic and market conditions that prevailed in the weak first quarter are likely to continue through 2009. The depth and duration of this global recession continues to be quite uncertain.

The Company is operating on the assumption that the economic environment will not improve significantly in 2009 and, accordingly, we have put into place aggressive plans to help meet the challenges that we face in the rest of the year. Cost containment actions were implemented at all subsidiaries in late 2008 and additional actions have been taken in the first quarter of 2009.

It is important to note that NACCO expects its subsidiaries over the course of the year to generate substantial cash flow before financing activities. In addition, NACCO has substantial cash available which does provide the Company with flexibility in the capitalization of its subsidiaries.

I will touch on some highlights in the individual operating subsidiaries. First at NACCO Materials Handling Group, first-quarter revenues decreased compared with the first quarter of 2008 very dramatically. They were down approximately 45%. That was mainly as a result of a decrease in units and parts volume in all geographic regions and, of course, that was driven by the economic downturn around the world.

Worldwide shipments in the first quarter declined 52% to 10,700 units from shipments of 22,300 units in the first quarter of 2008. Unfavorable currency movements as the dollar strengthened against the euro, British pound and Australian dollar also contributed to the decrease in revenues.

Wholesales backlog worldwide was approximately 12,800 units at the end of the first quarter compared with 29,100 at the end of March a year ago and 14,900 at the end of 2008.

The significant decrease in results -- that is, the net loss of $19.1 million in the first quarter of 2009 compared with 2008 -- was primarily attributable to a decline in gross profit, driven by the volume and offset by reduced workforce levels, and lower selling, general and administrative expenses as a result of cost containment actions, including reductions in employee-related expenses which were implemented in late 2008 and early 2009.

The gross profit declined, largely due to the reduced unit and parts volume. These unfavorable items were partially offset by reduced warranty costs, which resulted from better claims experience and lower sales volumes, and benefits totaling a little over $12 million from price increases implemented in prior periods.

These benefits from the price increases were partially offset by material cost increases. That is, between the first quarter of 2009 and the first quarter of 2008 of about $3 million pretax.

In addition, the net income numbers reflect the fact that the Company recognized an income tax expense on its pretax loss rather than an income tax benefit. That results from an interim tax accounting adjustment due to a shift in the mix of pretax losses to jurisdictions where the Company doesn't currently recognize the tax benefit for those losses but where, also, the Company eventually expects to get the benefit of those tax losses.

As you shift to the outlook for the Wholesale Materials Handling Group business, clearly, we expect a significant decline in all lift truck markets in 2009 compared with 2008, with limited recovery until 2010, despite the fact that global markets do appear to have stabilized at the very low levels, albeit in recent months. That has been the pattern in December, January, February, March and at least for those numbers that we have seen so far for April for all areas around the world.

That, of course -- the low markets -- means that the Company expects significantly lower booking and shipment levels and a reduction in part sales for the remainder of the year.

NMHG took a number of steps at the end of last year and in the first quarter this here to respond to this market outlook. Those include capital expenditure restraints, planned -- plant downtime, reductions in force, restrictions on spending and travel, suspension of incentive compensation and profit sharing, wage freezes, and salary and benefit reductions -- all of which are expected to continue to reduce expenses in 2009 compared with 2008.

In fact, I think that the business has responded very aggressively to these unprecedented declines in volume and the pretax losses, given the extent of the decline in volume represent a very considerable achievement under the most difficult possible circumstances.

The business is actively monitoring its commodity costs and its other supply chain drivers to ensure timely implementation of reductions and procurement costs because material costs have been moderating.

In the first quarter, the Company completed its manufacturing restructuring program. And that is expected to improve results over the remainder of the year and to generate benefits of approximately $15 million a year when production returns to more normal levels.

The warehouse truck and big truck product development programs including the important new Electric Rider Lift Truck program are progressing as planned. The new Electric Rider Lift Truck program is expected to bring a full line of newly designed products to the market, including the introduction of two series in the second quarter and two series in the second half of the year.

NMHG Wholesale expects a significant loss in the second quarter. However, modest units in parts volume improvements, benefits from new product introductions, improved material costs and product cost reductions. as well as further general expense reductions, are expected in the second half of the year, resulting in improvement in earnings especially in the fourth quarter. Nevertheless, the Company expects to operate at a loss for the full 2009 year.

On the other hand, cash flow before financing activities is expected to improve very significantly in 2009, primarily as a result of working capital reductions and lower capital expenditures in the significantly contracted business.

Turning to our Consumer Goods business, Hamilton Beach, the Company reported net income of $1.4 million for the first quarter 2009 on revenues of $94 million compared with breakeven in the first quarter of 2008 on revenues of $95 million. Clearly, revenues were close to flat and the improved income performance is a substantial achievement for Hamilton Beach, given that the volumes and profitability are so seasonally related in the business.

The net income increased in the first quarter, primarily as a result of cost containment actions that were implemented at the end of last year and early this year, including personnel reductions and the suspension or reduction of several employee-related benefits. Those improvements were partially offset by lower gross profit, due to higher costs of products sold, net of price increases in the first quarter of 2009 compared with the first quarter of 2008, due to higher commodity costs. You will remember that they spiked up just a year ago. That affected both Hamilton Beach and NACCO Materials Handling Group quite significantly in that period. It is only now that we are beginning to get traction in terms of margin improvement programs.

Turning to the outlook, clearly, the global recession and consumer financial concerns are among factors that make the retail environment very challenging for not only the first quarter but for the rest of the year. We do expect currently and are planning for lower revenues in 2009 than in 2008. But the Company can respond if the revenues turn out to be better than what we are currently planning for.

Given the anticipated lower volumes, we took the aggressive cost containment actions early in 2009, including personnel reductions, spending and travel restraints, suspension of incentive compensation, benefit reductions and wage freezes. Those actions, along with initiatives that are designed to improve the pricing and product positioning and reduce product and transportation costs in light of softening commodity costs for a variety of things, are expected to help Hamilton Beach return to improved operating margins for the remainder of the year in comparison to 2008, and to resolve overall for the full year in a continuation of the trend in the first quarter with a significant improvement in full-year operating profit.

I should note, however, that if the Company's markets -- which currently appear to have stabilized -- deteriorate, revenues and earnings could be adversely affected.

At Kitchen Collection, there was a net loss of $2.8 million on revenues of $39.7 million, compared with a net loss of $3.2 million on revenues of $39.2 million. Kitchen Collection had a lower loss, primarily due to a reduction in expenses as a result of the movement of the Le Gourmet Chef warehouse from a third-party provider to a Kitchen Collection-managed distribution operation in mid-2008, as well as administrative cost control measures that were implemented, which are similar to those I outlined for Hamilton Beach.

Turning to Kitchen Collection's outlook, clearly, the same retail consumer consumption uncertainty and diminished consumer confidence that affect Hamilton Beach are expected to continue to affect consumer traffic to outlet and traditional malls, and negatively affect retail spending decisions over the remainder of this year.

Nevertheless, Kitchen Collection expects a significant increase in results in 2009, compared with 2008, due to an anticipated improved holiday selling season in late 2009, significant expected margin improvements at Le Gourmet Chef stores which result from the conclusion of the new product enhancements and store merchandising programs, and the completion of a large product clearance program at the Le Gourmet Chef stores that significantly reduced margins in 2008. The capital expenditure restraints and administrative cost control actions implemented at the end of last year and early this year are also expected to help results for the rest of the year.

Overall, Kitchen Collection expects that increasing improvements in quarterly results for the remainder of the year will lead to significant improvement in full-year results compared with 2008 before the charges for goodwill and intangible impairment of $3.9 million pretax.

Cash flow is -- before financing activities, is expected to be slightly negative in 2009 but significantly improved compared with the prior year.

At North American Coal, net income for the first quarter was $10.8 million on revenues of $36.5 million, compared with net income of $3.8 million on revenues of $32.3 million, in the first quarter 2008. The revenues increased primarily due to increased coal deliveries and contractual price escalation at the Mississippi Lignite Mining Company, and an increase in contractual pass-through costs at the San Miguel Lignite Mining Operation.

Those increases were partially offset by reduced deliveries at the Limerock dragline mining operations, primarily resulting from an unfavorable legal ruling that set aside North American Coal's customers' mining permits at most of the Limerock mining operations, and which the Company's customers are currently appealing.

The income for the quarter increased substantially as a result of favorable operating results at the combined unconsolidated and consolidated mining operations, a gain on the sale of assets and reduced other expense as a result of a gain on an ineffective interest rate swap contract.

The unconsolidated mining operations improved mainly due to increased deliveries and contractual price escalation. And the consolidated mining operations improved primarily as a result of increased tonnage, contractual price escalation and reduced costs for diesel fuel.

The Coal Company's outlook, the lignite mining operations really have not been significantly affected by the economic downturn given the nature of the Coal Company's long-term contracts structure and continued stability in demand for electricity from the power plants it serves. The Coal Company does expect improved full-year results at its lignite coal mining operations provided the customers achieve currently planned power plant operating levels.

Tons delivered at the lignite coal mines are expected to increase this year compared to last, especially the Mississippi Lignite Mining Company as a result of fewer planned outage days and improved operating efficiencies at the customer's power plant.

However, contractual price escalation at all mines is not expected to affect results as favorably in 2009 as it did in 2008 because of recent declines in commodity costs.

Limerock projections for 2009 deliveries reflect the continued significant decline in the southern Florida and housing and construction markets and the unfavorable legal ruling.

As a result, deliveries will be well below the previous year. Customers are expected to reduce inventory levels before returning to production under new permits that are expected to be issued toward the end of 2009. The coal company has mitigated its financial exposure to those Limerock operations by entering into new cost reimbursable management fee contracts with most of its customers.

Overall, North American Coal expects solid operating performance in 2009 with net income somewhat better than 2008 and cash flow before financing activities is expected to be positive but down from 2008 mainly due to planned investment in new mining opportunities. The Company has a number of potential new projects and opportunities under consideration and expects to incur additional expenses related to those opportunities in 2009.

Finally, at the end of April, North American Coal entered into an agreement to sell the assets of the Red River Mining Company in Louisiana to its customer for approximately $42 million in cash, subject to closing adjustments. The sale of the Red River Mining Company is a strategic opportunity in the context of the impending expiration of the coal supply contract in 2010 and the Company concluded that this was an appropriate time to monetize and redeploy the value of that Red River Mining Company.

The sale of the mine which is subject to customer closing conditions, including regulatory approval, is expected to generate a substantial gain in enhanced cash flow when the transaction is complete later this year.

That concludes my remarks. Obviously, it is a very difficult year for the Company as a whole. I would simply note that the coal company in overview continues to do very well and it has not been significantly affected by the downturn results, likely to be better than the previous year, that both Hamilton Beach and Kitchen Collection have responded aggressively to the downturn and are well-positioned in their marketplaces; and for the reasons that I described both expect to have significantly better performance -- operating performance than in 2008.

The real difficult situation remains the NACCO Materials Handling Group where we do appear to have stabilized but at a -- markets do appear to have stabilized but at a very low level. And that at least allows us to calibrate the programs that are necessary to take the business forward as effectively as we can. But we are not in a position at this time to predict an upturn.

It could come sooner or could come later. At the moment we're simply assuming that we will get some benefit from modest inventory -- from the end of inventory liquidations that are going on at our dealers. And then, we are not assuming a significant upturn benefit but if it comes we're quite ready for it.

That concludes my remarks and I will be happy to answer any questions.

(Operator Instructions) Vanessa Miranda. Stanfield Capital.

I just have a question on the inventory change for Hamilton Beach. In your K, you broke out the impact of cost of goods sold for 2007. And I was wondering if you could do the same for 2008?

You are inquiring about inventory levels at Hamilton Beach in the first quarter of this year compared to the first quarter of the previous year?

No. The charges you took that impacted the cost of goods sold for your change from LIFO to FIFO?

Oh, the LIFO to FIFO calculation.

Yes, what you think the impact will be for 2008.

In terms of the change in 2009 from LIFO to FIFO, everything for 2008 has been restated as if we were on FIFO. And the comparisons we're making in 2009 are also on FIFO. So realistically there is no impact in those comparative numbers at this time.

But what is the adjusted number for cost of goods sold for 2008?

Adjusted how?

Just looking in the K -- a benefited $1.9 million in your cost of sales. I was just wondering what that would be for 2008, if you could give me that number?

They are comparatively the $1.9 million last year put the Company on the same basis as if it was on FIFO. So I think if you look at cost of goods sold last year in any of those quarters in the K those numbers are now on FIFO. So the comparison is now really FIFO to FIFO.

Our point of view and our auditor's point of view on the [alt side] was that LIFO was distorted and FIFO was a more accurate measure of our cost as we were incurring them. In this particular quarter we had the last tail of the increase in cost being recognized on the purchases from our suppliers.

So those costs are more current -- more running through the period on a more current basis. So our point of view would be our numbers are more accurate today with FIFO than trying to adjust them back to what they would have been on LIFO. Did that help?

Yes, thank you.

Just to clarify, too, the numbers by quarter are restated in the 10K. If you go to the footnote in the 10-K where we do the quarterly financials, the information is there.

Okay, thank you.

And that's on page 60 of the notes of the financial statement for 2008 quarters.

Henry Ty. MetLife.

Good morning. I had a couple questions related to NMHG. With respect to your lift trucks, what kind of receptivity have you received from your customers and if you have any expectations of incremental revenues for 2009?

You are talking about the new Electric Rider in particular?

Yeah.

To the extent that it is in the market place, the response so far has been very favorable. I am hard-pressed to give you any indication of specific volume prospects for it, for two reasons.

Number one, we are phasing out the old line and phasing in the new. And second it is -- the market levels are so low that some of the key customers that are very appropriate purchasers of this may not be in the market into anywhere near a normal degree.

So our objective is to enhance our share position with the entry of these new trucks. And at the moment we have no reason to think that that won't be the case. I should note that it is a phased launch process.

As I indicated, we have had some series that have been introduced in the first half, some in the second half and some in 2010. So the whole series will not be fully in the market place, although some of the major ones will be in the marketplace this year.

I think as a practical matter, what that means is that in 2010 when we hope to see a recovery in the market and have the full capability deployed for the higher volume series. And so the biggest effect is likely to be in 2010.

Okay, thanks. And then with respect to cash, can you give us your cash positions at both parent and NMHG?

Cash position at the end of the first quarter?

Yes.

At the NACCO Material Handling Group we have something around $75 million and at the parent company something around $64 million, but we have a lot of cash capacity particularly in the Coal Company.

Okay. Last question. Have you had any discussions or anticipate having any discussions with your banks with respect to covenants?

Well, we have discussions with our banks all the time. But let me leave that aside. We obviously analyze our covenant positions in all of our businesses very, very carefully. We do that on a regular basis and at this time we don't anticipate any covenant issues, if that is the point of your question.

Okay, thank you.

(Operator Instructions) Mark Sehgal, Canaccord Adams.

Good morning. Thanks for taking my call. I was wondering if you could talk a bit about some of the market dynamics you are seeing in NMHG by geography perhaps where you are seeing the most resilient and stabilization and what locations you are seeing or you think is most likely to help lead a recovery going forward?

At this point, as I suggested earlier in my remarks, market levels in almost all areas of the world, we get statistics monthly from essentially every country in the world, have been quite stable at very low levels. Those very low levels range from reductions on the order of 50% in the United States to in excess of 90% in Russia.

And the reductions have been somewhat lower in China and there is some evidence that the Chinese market, where we have a small position, is perhaps improving their stimulus program. It seems to be having an effect in an early and significant way.

But it is hard for me to, at this point, really to say that we are seeing any upturns in any of those economies from whatever the absolute level is that it is operating at right at the moment. So, I really can't say much about indicators of an upturn by region.

I think that perhaps the best way to think about it is that those regions that return to a more robust GDP growth are likely to have earlier upturns. And my hope would be that the United States would begin to turn up toward the end of this year. We're currently planning as if it begins to turn up not until 2010.

I suppose I am less optimistic at this point with regard to Europe in terms of its ability to respond, given the lack of effective stimulus programs and very different economic policies that appear to be being pursued in the developed countries in Europe. I think I would leave it at that.

Okay. That's helpful. And then just sticking with NMHG, do you have -- can you give us a sense of the split in lift sales between electric and internal combustion for the quarter?

I'm not sure we really provide statistics of that nature. I would note that essentially all of the warehouse products which we call Class II and III are electric products and the four wheel counterbalance truck market is split between internal combustion engine trucks and electric trucks.

I think the best way to answer your question is to say that historically the internal combustion engine product lines have been the most volatile in a recessionary environment. And this global downturn is no exception. Our mix has shifted from internal combustion engine products to electric products. And that is essentially a worldwide phenomenon with the exception of markets where electric trucks don't play much of a role like in China.

Okay, that's very helpful. Thank you very much.

At this moment, I'm showing we have no further questions.

Okay, thank you all very much. Christie?

Thank you for joining us today. If you do have any additional questions, you can reach me at 440-449-9669. Thank you for joining us.

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 of 16766585. The replay will be available approximately in one hour's time. This concludes the presentation and you may now disconnect. Have a good day.