NACCO Industries Inc (NC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2010 NACCO Industries Earnings Conference Call. My name is Steve, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of today's conference. If at any time you require operator assistance, please press *, followed by 0, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes. We'd now like to turn the conference over to your host for today, Miss Christina Kmetko.

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 30th 2010. If anyone has not received a copy of this earnings release or would like a copy of the 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 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, 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 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 2010 Third Quarter Earnings Release, which is available on the website.

I will now turn the call over to Al.

Good morning to all of you.

As our press release indicated, NACCO had consolidated net income of $13.5 million, or $1.62 per share for the third quarter of 2010, on revenues of $665 million. That compared with a net loss for the third quarter of 2009 of $3.9 million, or $0.47 a share on revenues of $528 million.

The net loss for the third quarter of last year includes earnings from discontinued operations of $400,000 after-tax, as a result of the sale in 2009 of certain assets of North American Coal's Red River Mining Company.

In overview for the quarter, net income increased very significantly at NACCO Material Handling. Net income was down a bit at Hamilton Beach and Kitchen Collection, our consumer-oriented businesses; and at North American Coal Corporation, net income was flat.

At the NACCO level, there was a significantly larger loss. That loss was largely related to litigation expenses of about $4 million after-tax, and an increase in employee-related expenses, which results from the partial restoration of compensation of benefits we'd reduced in 2009.

The Company reported consolidated net income for the 9 months of $41.1 million, or $4.93 a share. That compared with a net loss in the previous year of $11.4 million, or $1.38 a share.

Turning to the results of the individual subsidiary companies, NACCO Materials Handling Group reported net income of $3.8 million on revenues of $442 million in the third quarter. That compared to a net loss of $22.4 million on revenues of $328 million in the previous year.

Operating profit was $8.2 million in comparison to an operating loss of $20.4 million in 2009. The third quarter of 2009 operating loss and the net loss include restructuring charges totaling $6.9 million, both before- and after-tax, for restructuring of our Italian operations, and for additional reduction in force programs that occurred during that period.

Revenues increased 35% in the third quarter, compared with the previous year, as a result of an increase in units and parts volume in the Americas, and in Europe. New unit shipments increased to approximately 15,400 units in the third quarter, from 13,800 units in the second quarter, and from 9,400 units in the previous year's third quarter.

The backlog was approximately 24,500 units at September 30. And that compared with 21,700 at June 30, and about 13,200 a year ago in 2009.

NACCO Materials Handling Group's third-quarter net income increased very significantly compared with the third quarter of 2009 primarily due to higher sales volumes and margins on both units and parts, and lower manufacturing variances as a result of higher production levels in 2010.

Favorable foreign-currency movements primarily from the strengthening of the Brazilian real against the US dollar, and the absence of restructuring charges, which we had in the previous year, also contributed to the increase.

The improvement in net income 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, increased material and freight costs and higher income-tax expense.

As you look forward, NACCO Materials Handling Group expects that the global market levels for units and parts volume will continue to improve in the fourth quarter of 2010, compared with the fourth quarter of 2009. All markets are expected to continue to grow, but at moderate rates, during the fourth quarter.

As a result, the Company expects increased bookings compared with the fourth quarter of 2009. Unit shipment levels and parts sales are also expected to increase in the fourth quarter of 2010, compared with a year earlier.

NACCO Materials Handling Group took a number of actions, as you know, in late 2008 and during 2009 to respond to depressed market conditions. A portion of the salary reductions and incentive compensations were reinstated during the first nine months of 2010, and remaining salary reductions have been fully restored in the fourth quarter of 2010.

Further, with market demand at improved levels, and our higher backlogs, NACCO Materials Handling Group is increasing its plant workforce by adding workers and shifts for certain manufacturing operations during the fourth quarter, to meet the ongoing demand and to reduce lead times.

NMHG anticipates material costs -- particular steel -- are going to continue to increase in the fourth quarter of 2010, and that will carry forward into next year. And as a result, price increases on selected models have been announced during the second and fourth quarters of 2010; which in combination with additional increases, if needed, 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 all progressing as planned. The new electric lift-truck program, as we've mentioned before, is bringing a full line of newly-designed products to market.

And the Company also introduced a new 5,000-pound base model, internal-combustion engine lift-truck aimed at the medium-duty segment of the market in the Americas in July of 2010. And the remaining trucks in this series are expected to be completely rolled out in the Americas and Europe, and to some degree in Asia-Pacific by 2012.

In the context of these new product introductions, the Company will continue to focus on enhancing distribution effectiveness and capitalizing on its current product cost position with the objective of gaining additional market share.

Overall, market improvements anticipated in the fourth quarter are expected to generate increased profitability in 2010 compared with 2009. And cash flow before financing activities for the full year 2010 is expected to be significant, but very significantly lower than 2009; because the working capital reductions in 2009 related to lower business activity will not be repeated in 2010.

Hamilton-Beach reported net income of $5.6 million for the third quarter of 2010, on revenues of $133 million. That compared with net income of $6.9 million for the third quarter on revenues of $119 million in 2009. Operating profit was $10.9 million compared with $13.5 million in the previous year.

Revenues increased 12% compared with 2009; primarily due to increased unit sales volumes of products at lower average selling prices, mainly in the US-consumer and retail market.

Net income and operating profit declined in the third quarter compared with 2009, primarily due to higher employee-related expenses resulting from the full restoration of certain compensation and benefits that were reduced during the first nine months of 2009. And the programs at Hamilton-Beach that were cut back in compensation levels have all now been restored in that business.

The small kitchen-appliance market in which Hamilton-Beach participates continues to recover. As you look to the future, the Company has continued to secure strong placements, and has strong promotional programs for the holiday selling season, and is moderately optimistic that markets for its consumer goods will strengthen further in the remainder of 2010, in comparison to 2009.

As a result, Hamilton-Beach expects revenues for the fourth quarter of 2010 to be higher than the preceding year. However, although the market is showing improvement compared to 2009, the pace and sustainability of the upturn still remains uncertain because consumers continue to struggle with financial concerns and high unemployment rates. And if the Company's markets begin to deteriorate again, the revenues could of course be affected adversely.

Overall, fourth-quarter net income and full-year cash flows before financing activities for 2010 are expected to be strong, but lower than comparable periods in 2009. Anticipatd lower gross margins due to increased product and transportation costs are expected to be partially offset by lower selling and G&A expenses in the fourth quarter.

Kitchen Collection reported a net loss of $100,000 on revenues of $47.5 million in the third quarter. That compares with net income of $300,000 on revenues of $48.3 million for the third quarter of 2009. The revenues decreased slightly compared with the third quarter of the previous year.

Sales at newly-opened Kitchen Collection and Le Gourmet Chef stores and an increase in comparable store sales in both store formats almost completely offset the decline in revenues caused by closing primarily unprofitable Kitchen Collection and Le Gourmet Chef stores since December 30th 2009.

At September 30 of 2010, Kitchen Collection operated 219 stores, compared with 211 in the previous year. And Le Gourmet Chef operated 66 stores compared with 77 in the previous year.

Similarly to Hamilton-Beach, at KCI consumer sentiment spending levels continue to reflect financial concerns and high unemployment rates, resulting in an uncertain and challenging retail environment. However, the outlet mall market has remained less volatile than in early 2009. And the Company expects to continue to take advantage of opportunities to increase the number of temporary and seasonal stores in the fourth quarter holiday selling season. As a result, Kitchen Collection expects fourth-quarter and full-year revenue to increase, compared with 2009.

Favorable sales trends that occurred in the reformatted Le Gourmet Chef stores in the second half of 2009 and early 2010 are expected to continue in the fourth quarter. In addition, the Company plans to continue to refine promotional offers and merchandise mix in the Le Gourmet Chef stores to improve sales and margins.

The opening of new stores and seasonal store locations during the holiday season, the renegotiation of leases and the Company's continuing program of closing underperforming stores are also expected to provide improved results for the remainder of 2010.

On the other hand, the Company does anticipate increased transportation costs in the fourth quarter, and expects to offset these through pricing and other actions as needed. Overall, Kitchen Collection expects 2010 fourth-quarter net income and full-year cash flow before financing activities to be similar to the comparable 2009 periods.

Longer-term, Kitchen Collection is going to continue to focus on enhancing its sales volumes through continued improvements in its Kitchen Collection and Le Gourmet Chef store formats. And by strengthening its merchandise mix and store displays, and the appearance and optimizing store selling space, the Company continues to expect to generate sales growth.

Kitchen Collection also expects to achieve store growth in both formats, in both outlets and traditional malls over the longer-term, while maintaining tight cost control.

North American Coal net income for the third quarter was $11 million on revenues of $42 million, compared with $11 million of net income and sales of $33 million in the third quarter of 2009.

Income from continuing operations in 2009 included the receipt of lease bonus payments of $7.1 million pre-tax for certain oil-and-gas mineral rights controlled by North American Coal.

Revenues increased 29% compared with the previous year, primarily due to an increase in royalties received from third-parties and increased deliveries at the Florida Limerock Dragline mining operations. An increase in contractually reimbursable costs at the San Miguel mine, and contractual price escalation at Mississippi Lignite Mining Company also contributed to increases in revenues.

Excluding the effect of prior-year lease bonus payments, [third quarter 2010] net income improved significantly compared with the third quarter of 2009. That improvement is mainly due to an increase in royalties from third parties, and lower cost-of-sales at Mississippi Lignite Mining Company.

Improved results at the Limerock Dragline Mining operations, primarily due to higher deliveries, also contributed to the increase in net income.

Looking forward, North American Coal expects steady performance at its coal-mining operations in the fourth quarter, provided customers continue to achieve currently-planned power-plant operating levels. Overall, tons delivered at coal mines for the full year 2010 are expected to be comparable to 2009. However fourth-quarter tons, though higher than 2009, are expected to be lower than the 2010 third quarter, as a result of reduced customer requirements, and the timing of a customer's planned power-plant outage.

Limerock deliveries are expected to be significantly higher in the fourth quarter of 2010 than in the preceding year. As you'll remember, the US Army Core of Engineers issued new mining permits for our customers in the Florida Lake Belt Region, where an unfavorable legal ruling had previously set aside the customer's mining permits.

Although those quarries are back in production, production levels are expected to continue at pretty moderate rates because of the continued depressed levels of the Southern Florida housing and construction markets.

The coal company continues to focus on new project opportunities, and it expects to incur additional expenses in 2010 and in the fourth quarter. 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. The permit is expected to be issued in the first half of 2011.

Overall, North American Coal expects fourth-quarter and full-year 2010 income, excluding discontinued operations, to increase over comparable 2009 income.

Cash flow before financing is expected to be significant, but down from 2009, when North American Coal sold the Red River Mining Company.

During the third quarter of 2010, North American Coal also sold the majority of the assets of its investment in Great [American] Energy for cash proceeds of $11.2 million, which enhanced cash flow.

That's an overview of the third quarter earnings release, and the background for the increase in net income from a net loss of $0.47 a share in 2009, to a profit of $1.62 a share in 2010. We can turn to questions now, if you have any.

And ladies and gentlemen, to ask a question, please press *1. If your question has been answered or to withdraw your question, that's *2. Once again, to ask a question, *1.

And your first question comes from the line of Schon Williams, with BB&T Capital Markets

Hi! Good morning.

Good morning.

Hi! Congratulations on the quarter. I'd like to maybe start off with material handling.

It looks like shipments were obviously up significantly versus second quarter. And I think last time we had talked, I guess the tone was kind of slow and steady-paced in terms of ramping up the shipments. Seasonally, Q3 is expected to be down versus Q2. But again, it looks like you were ramping up.

I guess can you give me a little bit of color on what your thoughts are in terms of Q4, and moving into next year? How quickly can you ramp up shipments in order to get them I guess more in-line with where your order rate is right now?

We're now moving our shipment levels up in the fourth quarter. And we've been adding, as I indicated. We've been hiring additional employees and adding some shifts. Again, we're doing this in a careful manner, in order to ensure that our suppliers can match their ability to ramp up with our ability.

Obviously, whether backlogs continue to increase will depend on the incoming flow of orders, and that's very difficult to predict. There are a lot of timing issues. There are uncertainties as to how quickly the economy will continue to recover. But we feel very comfortable that the levels that we're moving to are levels that we can sustain for a good period of time, and ensure that the economy has time to fully catch up with us.

Okay. And then I was wondering if you could give us a little bit of update on the new dealers that you've acquired. I mean obviously there was an announcement back in Q2 in the UK. There've been announcements in Russia.

Are you starting to see any benefits from that in your order rates? Or is that going to take a little bit? Is that going to take several quarters to play out?

It depends on which dealers you're talking about. The dealers in Russia have been in place for a while. There's a combination of orders for shipments and orders for stock that have come through. We feel that a number of those additional dealers have been performing very well.

Eastern Europe has been a good area of strength for us. Some of the other dealers you mentioned -- the UK, I think is going to take a somewhat longer period for them to come fully online. But the best way to think about it is that we certainly don't expect to lose any ground in terms of bookings and shipments. And over time, we expect these strengthened dealers to contribute substantially to our overall position in the UK. In particular, the dealer converted to our Yale brand from another brand, and we would certainly expect that many of those customers would come along with us, and stay with their dealer.

So I think that's the case in a number of areas in different parts of the world. And generally speaking, the new dealers we've been adding are increasing our volume, and doing well.

Okay. And then I guess you mentioned some change going on within the dealer network. Can you give us an update on I guess the progression of some of the dealer consolidations between the two brands? It seems like I see an announcement every couple of weeks, now.

Is the pace of the consolidation accelerating? And maybe how do you see that playing out over the next 6 to 12 months?

I think it's going to be a slow, steady process. I think the logic in economics lie behind that approach. But we have many very good single-brand dealers, and I think the overall objective is to ensure that we have strong dealers throughout our distribution network. And that is one of the tools that we're providing that not only allows us to have stronger dealers, but also to have more focused sales-and-marketing efforts in order to serve the customer base that's out there more effectively.

So I don't anticipate that there's going to be a large number of these taking place all at once. I think this is much more in the nature of a continual progression, and focused around strong, excellent dealers.

Okay.

Then lastly on material handling. It looks like you put through some pricing this summer. There's possibly some more additional pricing going through in Q4, yet.

Can you give me an order of magnitude? Are we talking about low single-digits?

Yes. You're talking about very low single-digits. These are not really large price increases, and we feel comfortable that we can move those into the marketplace. And it's worth keeping in mind that we have a lot of competitors who have a significant amount of Japanese content -- yen content -- in their trucks. We certainly have some, but we have competitors who have a considerable amount more.

And as you can imagine, with the yen trading around $0.80 to the dollar, those components that are coming from Japan are very, very expensive.

So I think many of the competitors are facing the same cost increases, and some more so, because of their currency position. So we have been moving forward with the kinds of low single-digit numbers that you suggest.

Okay. And then kind of moving on to Hamilton-Beach. It looks like there are some new product lines that are coming on within Hamilton-Beach, related to I guess there are some new coffee offerings.

Can you quantify exactly how material those will be going forward? Are those at the fringes, they're going to help, but these aren't real needle-movers? Or I guess just give me some order of magnitude as to new product introductions.

You know, I'd rather answer the question I think by saying that it's an industry that requires constant renewal of products. And while there are some new products that can carve out fundamentally new positions as our BrewStation did a number of years ago, and as we certainly hope that some of our single-serve coffee offerings will do in the future, many of these new products are replacements for older products that are either lower-cost or improved features-and-performance. Or new to the consumer in a way that we think will be attractive to them and helpful to our customers, in terms of getting sell-through for them.

So I don't have at my fingertips what the percentage is of new products that we sell that have been developed in the last three or four years. But there's a very high degree of renewal going on all the time.

I think that sales volume increases in the nearer-term will come more from promotional activities and fourth-quarter placements that we have been selected for by our customers, which we think will be advantageous for us in the fourth quarter.

But I think increasingly over the course of the next year or so, you'll see additional new products come out that will also be helpful in the sense of expanding the participation level and approach that we participate in.

Okay. And then you know Hamilton-Beach has made significant progress in terms of the operating profits. I think you're significantly ahead of where you were going into the downturn.

Are you or the board considering any strategic alternatives for that unit? I know that at one point it was a possible spin-off candidate. What's your current thinking there?

Well, I think the best way to answer the question is to say, "We are always thinking about strategic alternatives." We've certainly demonstrated that in the case of Hamilton-Beach, over time.

I would simply say that from our perspective perhaps the more-important aspect is that we do feel over time that the industry will continue to consolidate, and that should provide opportunity for Hamilton-Beach one way or another. We keep our eyes open.

We've been doing that in the past and we'll continue to do that in the future. But that's as much as I would want to comment on.

Okay. All right. I appreciate the update.

And then just a couple questions on coal. When I talk to a number of coal producers -- especially within Central Appalachia -- there seems to be kind of a significant regulatory burden hanging over the industry right now, following the Massey incident.

Have you seen any productivity issues because of increased regulation at any of your lignite mines?

The short answer to your question is, "Not to my knowledge." Now has it been an environment which is more difficult to deal with? I think probably the answer to that is, "Yes." I would point you to a couple of things, however.

Our safety record is truly extraordinary. We have safety as Number 1, Number 2 and Number 3 for us. We have a terrific record. We are way, way below the industry levels in terms of lost time, accidents and time lost. We have incentives that are tied to safety.

To the extent that regulators are concerned about mine safety, first of all, we're not in the underground business. And second, in the surface-mining business, we have an exemplary record.

That doesn't mean you can't continuously improve, and we strive to do that. But our record is extremely good.

You may remember that we had one mine that went for 15 years without a single lost-time accident. That's sort of unheard of.

So on the safety side, I think there's no question that the individuals who are doing the examinations of the mines are under a lot of pressure to identify problems and show that they're being efficient and capable in regulation. But we feel good about that.

In the environmental area, we have always also had an exemplary record. We have won many awards for the quality of the work that we do, in terms of returning the land to its previous-or-better state, to managing water, to doing all the kinds of things that one has to do in the coal-mining industry.

So we have a very important and focused program on ensuring environmental compliance, being the best possible citizen in the states where we operate. So again, I feel that there's no loss of productivity; that there's certainly an intense focus on environmental compliance. But frankly, we already had that in our own operations, anyway.

So I don't think it's a particularly pleasant environment right at the moment, in terms of the way it's operating. I think it's more contentious in some ways than perhaps is beneficial. On the other hand, we think our record is outstanding and we are determined to keep it that way. That's how we'll respond.

I don't think it's having any significant impact on our ability to do an effective and productive job for our customers.

Okay.

And then can you talk a little bit about the -- it looks like you exited the investment with Great American Energy. Is that related to the coal-drying technology? And maybe talk about why you decided to sell off some of those assets.

Well, really it is related to a portion of the coal-drying technology. We have kept a small investment in a portion of that activity, which would allow us to participate in broad-based commercial sales, which have a different coal-drying structure than the part that we have been in. We've recovered our investment.

I think the best way to think about the reason for us having recovered our investment is that our customer who owns the coal-fired plant that will use that dried coal from the load-out facilities and the rest that were represented by those investments -- for their own reasons, wanted to delay those and to restructure them in a way that made it not all that sensible for us to continue to participate.

Economics simply changed. And we have a very constructive relationship with the power plant owner. They recognized that the basic underpinnings had shifted in a way that made sense for them to reimburse us our investment in that operation. So that's what happened.

Yes. But you still had to take a loss on that investment. Is that right?

No. We were reimbursed for all of our money. But the accountants require us to capitalize a portion of that as interest. So there was really no loss, from our point of view. It was the time value of money; nothing else.

Okay.

And then last question for me. Can you just give us an update on where the litigation stands? It looks like costs continue to accelerate into the quarter.

Can you give me any sense of when? A kind of timeframe of how this is going to progress? And maybe where the dollars go from here.

Do we continue to see those dollars move up?

Well, I think we've been through a particularly intense time period in terms of the litigation. And therefore, the costs have been at the higher end.

I would expect that if we stay on the track that is the currently-planned track that this matter would go to trial in the early part of next year. And there will be obviously trial preparation, expenses and so on. In large measure, a lot of the deposition work is completed by both sides; so there'll be some change in the costs there.

But it's very hard to predict, exactly, how much will be involved. And I think you just have to look through to the end of the period when the litigation is over, at this point.

Okay. Thank you for the update.

And as a reminder, ladies and gentlemen, to ask a question, that's *1.

Okay. If there are no other questions at this point, I'd just close it out by saying we feel that we had a good third quarter, that our operations are all increasingly normalized. That we're operating really without the special programs that we put in place during the downturn. That at three of our businesses -- NACCO Materials Handling Group -- in 2011, all of those will be back in place, and most of them are back in place in the fourth quarter of 2010.

We're hopeful that the economy will continue to strengthen, and that's what we're watching most carefully, is to see exactly what the trajectory of the economy is, as we move forward. Is it to move up more quickly? Or is it a slower upturn? So we're watching that very carefully. And I thank you all for joining us this morning.

Thank you.

Ladies and gentlemen, that concludes today's conference. There will be a replay of today's call posted shortly. You may access the replay for the next 10 days by dialing 1.888.286.8010 and entering the passcode 30149859.

Once again, that concludes today's conference. Thank you for your participation. You may now disconnect. Good day.