NACCO Industries Inc (NC) 2010 Q2 法說會逐字稿

Thank you for your patience. Your conference call will begin shortly. Again, thank you for your patience and please stand by.

Good day ladies and gentlemen, and welcome to the Second Quarter 2010 NACCO Industries Earnings Conference Call. My name is Brandi and I will be your operator for today.

At this time, all attendees are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. If any time during the call you require audio assistance, press *0 and an operator will be happy to assist you.

As a reminder, this conference call is being recorded. I'll hand the call over your host for today, Ms Christina Kmetko. 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 2010 second quarter results. If anyone has not received a copy of this earnings release or would like a copy of the 10Q, 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 the NACCO website at NACCO.com.

The conference call today will be hosted by Al Rankin, Chairman, President and Chief Executive Officer of NACCO Industries. Also in attendance representing NACCO Industries is Ken Schilling, Vice-President and Controller. Al will provide an overview of the quarter and full year, and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. Additional information regarding these risks and uncertainties was set forth in the earnings release and in the 10Q.

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

Good morning to all of you. As I think you're all probably aware, NACCO announced its earnings last evening. Net income was $15.9 million or $1.91 per share in the second quarter on revenues of about $599 million. That compares with net income of $1.6 million or $0.19 a share on revenues of about $540 million in the year-ago second quarter.

At NACCO Materials Handling Group, net income was $7.3 million on revenues of $413 million, compared with a net loss in the second quarter of $3.1 million, on revenues of $362 million.

Operating profit improved substantially to $9.8 million from a loss of $1.7 million in the year-ago quarter. Revenue increased 14% compared with the 2009 quarter, primarily as a result of an increase in units and parts volumes in the America and in EMEA, which is the Europe, Middle East and Africa markets.

Shipments in the second quarter increased to 13,800 units from 11,100 in the first quarter, and 9,900 units in the year-ago second quarter.

The backlog was approximately 21,700 units at June 30, compared with 16,900 a quarter ago March 31st, and 13,200 at the end of last year. And 12,300 at the end of the year-ago second quarter at June 30.

The second quarter net income increased significantly compared with 2009, primarily as a result of a substantial increase in operating profit, and a change in effective income tax rates. Operating profit increased $11.5 million primarily due to improved gross profit attributable to higher sales volumes and margins in both units and parts, and lower manufacturing variances, which resulted from higher production levels in 2010.

The improvement in operating profit was partially offset by an increase in employee-related expenses, which resulted from the partial restoration of compensation and benefits which were reduced in 2009, and higher product liability expense, primarily due to a smaller favorable adjustment in 2010 compared with the amount in 2009.

Finally, in the second quarter, the Company had a reduction in the blended income tax rate compared with the second quarter of 2009. Primarily as a result of a shift in the mix of jurisdictions where pre-tax results are projected for 2010 compared with 2009.

Looking forward, NACCO Materials Handling Group expects global market levels for units and parts volumes to improve significantly in the second half of 2010 compared with the second half of 2009. The Chinese market in which NACCO Materials Handling Group is not a significant participant has recovered to pre-recession levels, and is expected to continue to grow.

The Company's largest market -- the Americas -- the Brazilian market, also, appears to be more robust than originally anticipated. And Latin America and the critical North American markets appear to be improving with moderate growth expected in these markets over the second half of 2010.

Recovery is also expected to be stronger in Eastern Europe, the Middle East and Asia than in Western Europe, which is expected to be relatively flat in comparison with 2010. As a result, the Company expects substantial increases in bookings, unit shipment levels, backlog and parts sales in 2010 compared with 2009, with significant comparative increases each quarter over the prior-year quarter.

NMHG anticipates further increases in material costs; particularly steel in the second half of 2010. As a result, price increases were announced during the second quarter of 2010, which in combination with additional increases, if necessary, are expected over time to offset the effect of increased commodity costs.

NMHG's new electric rider lift-truck program and warehouse, internal combustion engine and big-truck product-development programs are progressing as planned. The new electric rider lift-truck program is bringing a full line of newly-designed products to market. And NMHG introduced the 2- and 3-ton 4-wheel electric-lift truck in Europe in early 2010, and a 1- to 2-ton 3-wheel electric cushion-tire truck, and a 1- to 2-ton 4-wheel electric pneumatic-tire lift truck in the Americas during the second quarter of 2010.

The Company expects to launch three additional series of electric rider lift trucks in 2011; two in the Americas and one in Europe. NMHG also introduced a new 5,000-pound base model, lower-cost internal combustion engine lift truck aimed at the medium-duty segment of the market in the Americas in July of this year.

The remaining trucks in this series are expected to be rolled out in 2012, or by 2012, in both the Americas and in Europe.

Overall, market improvements anticipated in the remainder of 2010 are expected to generate increased profitability in the second half of 2010. However, the third quarter is expected to be significantly lower than the second quarter due to scheduled plant shut-downs and the sale of NMHG's remaining European and Australian retail dealerships in July.

Cash flow before financing activities for 2010 is expected to be significant, but substantially lower than 2009 because the working capital reductions in 2009 related to lower business activity obviously won't be repeated in 2010.

What we can expect overall is that shipment volume will be increasing, but considerably more slowly than the bookings levels in order to ensure continuity of supply and also to make sure that none of this increase in bookings is strictly related to replenishment of inventories.

Turning to Hamilton Beach; Net income was $3.8 million in the second quarter; revenues were $103 million. And that compares to $4.7 million in the second quarter; revenues of $107 million in 2009.

Operating profit was $7.8 million compared with $9.8 million a year ago. Revenues decreased 4% compared with 2009, primarily due to lower average selling prices and lower unit sales volumes attributable to lower volumes in the US and Canadian consumer markets. Partially offset by increased unit sales volumes in the Mexican and Latin American consumer retail markets, as well as commercial markets.

Favorable foreign currency movements caused by a strengthening Canadian dollar and Mexican peso also partially offset the decline in revenue.

Net income and operating profit declined compared with the 2009 second quarter, primarily due to the higher employee-related expenses, which resulted from full restoration of compensation and benefits that were suspended in the first half of 2009.

The increase in selling, general and administrative expenses was partially offset by improved gross profit. And gross profit improved primarily due to lower product costs and sales of higher-margin products partially offset by lower average selling prices.

The small kitchen appliance market for Hamilton Beach continues to recover, and the Company is moderately optimistic that markets for its consumer products will strengthen further in the second half of 2010. Accordingly, revenues for the second half of 2010 are expected to be higher than the second half of 2009, resulting in a moderate increase in revenues for the full year compared with the year-ago.

However, while the market has shown improvement compared with 2009, the pace and sustainability of the upturn remains uncertain, because consumers continue to struggle with financial concerns and high unemployment rates. If the Company's markets begin to deteriorate, obviously revenues could be adversely affected.

Overall, full-year 2010 net income and cash flow before financing activities are expected to be strong but lower than 2009. Employee-related costs are expected to be higher in 2010 because compensation and benefits programs which were partially suspended during 2009 have been fully restored.

In addition, Hamilton Beach continues to monitor commodity costs and relative foreign-currency relationships very closely. And the Company expects increased transportation and product costs in the second half of 2010, and will be working to mitigate those increased costs through optimizing product assortments and selected price increases when appropriate.

Kitchen Collection reported a net loss of $1.8 million on revenues of $40.9 million for the second quarter, compared with a net loss of $1.7 million on revenues of $40.6 million for the year-ago second quarter.

The second-quarter revenue was comparable to the second-quarter of the year-earlier. An increase in comparable store sales, and sales of newly opened Kitchen Collection and Le Gourmet Chef stores was almost completely offset by the effect of closing primarily unprofitable Gourmet Chef stores since June 30 of 2009.

The increase in store sales was the result of an increase in the average sales transaction value at both Kitchen Collection and Le Gourmet Chef, as a result of improved product assortment and more effective merchandising.

At June 30, Kitchen Collection operated 224 stores and Gourmet Chef, 66 -- compared with 211 and 78.

Consumer sentiment and spending levels in Kitchen Collection's market continue to reflect financial concerns and high unemployment rates, resulting in a challenging retail environment. However the outlet mall retail market is less volatile than in early 2009. And the Company expects to take advantage of opportunities to increase the number of temporary and seasonal stores in the second half of 2010. As a result, Kitchen Collection expects full-year revenue to increase compared with 2009.

The favorable sales trends that occurred in the reformatted Gourmet Chef stores in the second half of 2009 and early 2010 are expected to continue in the second half of the year.

In addition, the Company plans to refine its promotional efforts and merchandise mix in the Gourmet Chef stores to improve sales and margins. The opening of new stores, the renegotiation of leases and the Company's continuing program of closing underperforming stores are also expected to provide improved results this year.

However, the Company expects increased transportation costs in the second half and is going to be working to offset those costs through pricing and other actions that are appropriate.

Overall, Kitchen Collection anticipates a significant percentage increase in full-year net income for 2010, compared with 2009, primarily due to the results of the first half and the current expected improvement in the market through the holiday season.

Cash flows before financing activities are expected to be higher in 2010 than in 2009.

At North American Coal, net income in the second quarter was $11.3 million on revenues of $42 million, compared with $6.8 million on revenues of $31 million.

Revenue increased in the second quarter, primarily due to revenue of $7.6 million related to reimbursement from the Mississippi Power Company for previously recognized costs of pre-development activities. Also, increased deliveries at the Florida dragline mining operations, and an increase in royalty income contributed to the increase in revenues.

The improvement in net income is mainly due to income of $7.4 million or $4.4 million after-tax of $3.0 million related to the reimbursement from Mississippi Power Company. Excluding this income, second quarter net income was comparable to the second quarter of 2009, with lower income from the Mississippi Lignite Mining Company and the unconsolidated mines, offset by an increase in income from the limerock mining operations.

North American Coal expects steady performance at its coal-mining operations in 2010, provided the customers achieve currently-planned power-plant operating levels.

Overall, tons delivers at coal mines are expected to be comparable to the year earlier.

Limerock deliveries, as you would expect, will be significantly higher in 2010 than in 2009. In early 2010, the Army Corps of Engineers issued new mining permits for North American Coal's limerock customers at the Florida Lake Belt region, where an unfavorable legal ruling set aside customers' previous mining permits.

Although these quarries are back in production, production levels are expected to continue at moderate rates through the remainder of 2010 because of the continued depressed levels of the Southern Florida housing and construction markets. And delivery levels are not expected to achieve the previously high levels of 2008 in 2010.

The Company also provides planning services to four new mines that are expected to generate modest income during the second half of 2010. These mines, which are not consolidated, are in the development stage, and will not be in full production for several years.

And during the quarter, North American Coal did finalize an agreement with Mississippi Power Company to provide approximately 4.2 million tons of lignite annually from its new Liberty Mine to the new Kemper County coal-fired integrated gasification combined-cycle power plant that's currently underway in Mississippi.

The building of the power plant is still contingent, I would note, on satisfying legal challenges to recent and future regulatory approvals. Initial deliveries are expected to commence in late 2013, and North American Coal also has new project opportunities for which it expects to continue to incur additional expenses in 2010.

In particular, the Company continues to move forward to gain a permit for its Otter Creek Reserve in North Dakota, in preparation for the expected construction of a new mine. And the permit is expected to be issued late in the second half of 2010.

Overall, North American Coal expects full-year 2010 income from continuing operations to increase over 2009. Cash flow before financing activities is expected to be significant, but down from 2009 when North American Coal sold the Red River Mining Company.

North American Coal's contract at San Miguel expires at the end of 2010, and during the second quarter, the Company responded to San Miguel Electric's request for proposal to operate that mine beyond 2010. But the Company was not selected in that process.

Beginning in the third quarter, the Company will start planning for the transition of mining operations to a new mining company. North American Coal does not expect to incur significant costs as a part of the wind-down of this contract. And under the current contract, revenues generated by San Miguel were $30 million to $50 million a year, and were primarily for contractual reimbursable costs.

Net income generated by San Miguel has been less than $1 million per year under the current contract.

Over the longer term, North American Coal expects to continue its efforts to develop new mining projects. They're actively pursuing domestic opportunities for new coal-mining projects, and the Company's also encouraged that new international mining services projects for coal may become available in addition to North American Coal's current agreement to provide mining services in India.

That concludes our prepared remarks. And I would now be happy to take any questions that you may have.

Ladies and gentlemen, if you have a question, please press *1 on your touchtone telephone. If your question has been answered and you want to remove your question, please press *2. Questions will be taken in the order received. Please press *1 to begin.

And the first question comes from Schon Williams of BB&T Capital Markets. Please proceed.

Hi. Good morning. It's Schon Williams.

Good morning.

Let's start maybe with the star of the show this quarter; Material Handling. Order activity has been very robust in the first half of the year.

I just wanted to kind of circle back on the issue of shipments. I mean certainly the backlog has been building fairly dramatically the last two quarters, and it sounds like you're kind of expecting normal seasonal slowdown in terms of shipments in Q3. And I'd expect that to kind of ramp back up in Q4.

But I mean do you expect that you can clear some of this backlog in Q4? Or are you going to carry a lot of that into 2011? I'm just wondering how long can you keep customer orders in that backlog maybe before there's some risk that they get canceled?

Well, we would hope to manage the backlog in a way that there wouldn't be any cancellations. However, there are clear limitations to our ability to ramp up the shipment schedule from a supplier point of view.

In addition, we want to be very careful that we don't get out ahead of the market. But the bookings performance has been very encouraging.

As you say, it's seasonal in a sense in the summer, but it's seasonal in the sense that we have factory vacations. And those will proceed on a normal basis. Shipments will ramp up at a much lower rate than the bookings at this point.

Then as we go into 2011, I certainly think we'll look forward, and my hope would be that we'll have a supply chain level of support that can sustain throughout 2011 higher levels of shipments than 2010.

Are there specific components that are critically short at this point? Or is it kind of across-the-board?

Oh, it's just spotty. The suppliers are all ramping up, too. I think these are the normal issues. At this point, we haven't seen any problem areas that are of significant concern. It's just a question of working closely with suppliers to ensure that they are ramping up at the same speed that we are.

The last thing we want to do is end up with a lot of inventory that we can't ship.

Certainly.

Al, can you talk a little bit about pricing? It sounds like you've got some new rounds of pricing I guess coming in Q3. How much are you looking for there?

Well, we put some modest price increases out, and we'll really gear those around cost increases. And in the main, that'll be the driver. We see the same thing going on with our competitors. Some of them are experiencing the same forces, of course, that we are, and reacting in a similar way.

But they're going to be moderate and not reflective of tight conditions. They're going to be reflective of input cost increases.

Is there any concern that there was some customer pre-buy ahead of that price increase? Have you seen that historically?

Yes. We see some booking activity. But we've been a little surprised at how little that seems to have affected the bookings since the time that the price increase was announced. But you're right, there usually is that kind of behavior. We haven't seen it at this point.

But again, I just want to say that on the one hand, I'm very encouraged by the bookings increases. On the other hand, we're going to make sure they're real and that they're going to continue over a period of time.

I think I noted in my comments that there is some element of rebuilding of inventories and depleted inventory situations around the world. And we want to make sure.

And we've had some new dealers that have come onboard in certain areas. We just want to make sure that the underlying levels of demand continue to support our factory schedules. We don't want them to get out ahead.

And as you well know, the future economic conditions are not crystal clear. We're still in the camp of thinking that there's going to be slow and steady improvement in the economy. Not a snap-back.

But we're going to watch it very carefully.

Okay. And then as a follow-up, can you talk a little bit about some of your market expansion opportunities? It sounds like you guys captured a Cat dealer in the UK. There was a new agreement in Russia that was recently signed.

Can you talk about where you see the most opportunity right now, and how that plays into the market share expansion?

Well, we're always on the lookout for opportunities to strengthen our existing dealer base. And I believe that we have been able to do that in Russia. I believe we've been able to do that in our Yale UK operations, where we had a much more limited position through the Yale distribution which we owned, and which has now been bought by that dealer as a part of the overall program in the UK.

There are other areas where we see those opportunities. We see other situations where dealers have depleted excess stocks and are now ordering in line with the market. All of those things are helping.

We were very aggressive last year and at the end of 2008, in helping our dealers to deplete their stocks and in running off our own, as opposed to trying to moderate the downturn. Now that's coming around to help us on the other side of the equation.

We've got a healthy distribution system. But we'll continue to look for opportunities to strengthen it.

So the distribution -- the dealers -- are one aspect of it. We are very reliant, very confident about our dealer network. The other is individual market areas.

Certainly as I indicated in the areas where we participate and indeed participate significantly, such as Brazil, and in developing markets -- such as Brazil, Eastern Europe, Russia -- those markets have come back relatively quickly compared to the European, the Western European and North American markets.

The only major developing country where we're really quite a modest player is China. On the other hand, the margins in that business are very, very thin. So from a profit point of view, that's not a major consideration.

So I think we have both certain markets and strengthened distribution; something we've been working very hard on over the last few years, coming to bear at this point. And you put that together with the up-to-date product line I described, the cost impact of the closure of the Irvine facility and the Modena facility in Europe, and the restructuring of some of our US operations, and the amount of effort we've put into ensuring that our supply chain has low-cost sourcing for a maximum amount of its components. All of that's really coming together at this point, and it's the stronger (ph).

If you can give the distribution the right product at the right cost, with the right quality, then I think the dealers can pull that through with their customer base. And certainly that's what we're hopeful of in our bookings performance in the remainder of this year and on out over the next few years.

Okay. Thank you.

Let me move on to Hamilton Beach and Kitchen Collection.

It looks like sequential revenues Q2 versus Q1 were unusually weak there, in both of those units. But you sound fairly or moderately bullish kind of on the second half of the year.

Are you seeing or are you concerned about any weakness in the consumer markets? Or are there other kinds of factors playing out there?

It has a lot to do with promotional activity. And when we get it in comparison to previous years.

And we're very hopeful that the promotional activity in the third and fourth quarter will be quite encouraging for Hamilton Beach.

You know, there are signs that consumer behavior is uncertain. In the last month or so, there are some indications that traffic in factory-outlet malls has been down a little bit. I think our views are not based at this point on a really strong upturn in consumer buying. We're taking a pretty moderate point of view.

But an awful lot depends on how our retailers do. Particularly the mass-marketing people, and how their relative positions are in terms of comparisons to others.

So there are a lot of issues in terms of the mix of the customer base. There's some in terms of the mix of products. But you know, these happen every year, and we're feeling reasonably good, unless this consumer gets more stressed in about the second half in Hamilton Beach.

I think the biggest driver for improvement in Kitchen Collection is the enhanced formats really in both businesses; but particularly in Gourmet Chef. I think what is less clear is just how quickly we'll get the full benefit of that.

It takes a while for consumers to get on a regular pattern of coming back to our stores and making kinds of repeat purchases that we would hope to, over time. But we feel we're very well-positioned over the next couple of years, there.

Okay. And then it looks like Hamilton Beach is moving a distribution center in the quarter. Do you expect or are there going to be any significant costs associated with that move?

No. I think that's -- I'm not sure where that comes from. We're not moving any distribution centers at all.

Not in the quarter. Not in the quarter. It's the lease in Memphis where we're --

Oh. That really is a very marginal move. That has no material expense. It's just moving from one building to a nearby building. And we have better rental rates. But it's not a significant matter.

Okay.

And then let me just move on here to coal.

Can you just talk about you're expecting some modest increases from some of the new mines coming online. Over the next four quarters, kind of Q3 through Q2 of next year; Q3 of this year through Q2 of next year. Are we talking about maybe tens of thousands of tons coming online? Maybe a couple hundred thousand tons coming online?

I mean very modest numbers, really, over the next 12 months? Is that what we should expect?

It's pretty modest through '10 and '11. And you're not going to see much 'til '12 or '13.

Okay.

And then last question, here. We discussed this last time, but it looks like the litigation costs ballooned significantly in Q2 versus Q1. I understand that this is kind of a moving target, but at $4.5 million a quarter, that's very material to earnings.

Do you have a sense of whether that's going to kind of be the run rate for the next couple of quarters? I mean $4.5 million a quarter? Or was there a tremendous amount of activity this quarter that just happened to hit because of timing?

Well, we're in a very active stage of the litigation process right now. Many depositions are being taken and preparation for depositions and preparation of the legal case. Certainly that process is going to continue at a high level for a while.

Then we'll have to see where things go as we get further down the track. But there'll be some ebbs and flows. We're certainly at a higher level now.

But you know, litigation is a very expensive process, and very time-consuming, very people-intensive. Not just of lawyers' time, but also of management's time.

But the case is moving forward. And there'll be substantial expenses through the remainder of this year. And I can't really say just exactly what the level would be, but certainly the second quarter was a very active period.

Okay.

All right. That's all I have for now. Thank you for your time.

Okay.

Are there other questions?

As a reminder, for a question, please press *1.

Okay. If there are no more questions, thank you all for listening to our earnings call. Christy?

Thank you for joining us. We do appreciate your interest. And if you do have any additional questions, you can call me. Again, the phone number is 440.449.9669.

Thanks and have a great day!

Bye-bye.

Thank you for joining today's conference. That concludes the presentation. To access the replay of the call, please dial 1.888.286.8010. And the passcode is 28666167. Again, that's 28666167, and have a great day.