NACCO Industries Inc (NC) 2011 Q1 法說會逐字稿

Thank you for your patience and welcome to the first-quarter 2011 NACCO Industries earnings teleconference. At this time all participants are in listen-only mode. We will conduct a question-and-answer session after management's remarks. (Operator Instructions)

I will now turn the presentation over to your host, Ms. Christina Kmetko. You may proceed.

Thank you. Good morning, everyone, and thank you for joining us today.

Yesterday evening a press release was distributed outlining NACCO's results for the first quarter ended March 31, 2011. If you have not received a copy of the earnings or would like a copy of the Q, please contact me at 440-449-9669 and I will be happy to forward you the information. You may also obtain copies of these items on our website at 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 will provide an overview of the quarter and then open up the call to your questions.

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

In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our most recent earnings release which is available on the website.

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

NACCO had net income of $62.8 million or $7.48 per share and revenues of $745 million for the first quarter of 2011. That compared with net income of $11.7 million or $1.40 a share and revenues of $557 million for the first quarter of 2010.

The first-quarter results include a $39 million after-tax payment for the settlement of the Applica litigation. If you exclude the settlement, adjusted net income was $23.8 million or $2.83 per share for the fourth quarter -- for the first quarter of 2011.

NMHG had net income of $22.3 million on revenues of $586 million for the first quarter of 2011, and that compared with net income of $8 million on revenues of $375 million a year ago. Revenues increased 56% in the first quarter compared with the first quarter a year ago, primarily as a result of a significant increase in unit volume in all geographic markets as well as an increase in parts volume and the effect of unit price increases implemented late in 2010 in the Americas and Europe. This increase in revenues was partially offset by the sale of some retail and rental operations in Australia and Europe in 2010.

In the first quarter, worldwide new unit shipments increased to approximately 19,400 units from 11,100 a year ago, but were down slightly from shipments of approximately 19,700 units in the fourth quarter of last year. NMHG's worldwide backlog was approximately 24,800 units at March 31. That compared with 16,900 units a year ago and 23,000 units at the end of 2010, December 31.

NMHG's 2011 first-quarter net income increased significantly compared with the first quarter a year ago, primarily due to an increase in gross profit resulting from higher sales volumes, particularly of units and to some degree parts, lower manufacturing variances as a result of higher production levels in 2011, and the favorable effect of price increases, partially offset by material cost increases.

An increase in employee-related expenses due to the full restoration in 2011 of compensation and benefits, unfavorable foreign currency effects, and the movement toward a more normal effective tax rate in 2011 partially offset the improvement in net income.

Looking forward, NMHG expects global market levels for units and parts volumes to continue to improve in all markets this year compared with a year ago, particularly in the Americas, with more significant growth in the second half of the year. As a result, the Company expects increased bookings in 2011 compared to 2010 but with declining comparative increases each quarter over the prior quarter because the 2010 quarters became increasingly stronger as the year progressed.

Unit shipment levels and parts volumes are also expected to continue to improve in 2011.

NACCO Material Handling Group will continue to monitor ongoing market improvements and adjust manufacturing levels as appropriate. Currently, NMHG does not anticipate significant supply chain constraints or disruptions despite the earthquake-related events in Japan.

The significant majority of NMHG's supplier plants are not in the affected areas. Nevertheless, we are going to keep a close eye on that situation because the supply chains are very long and it takes a while to really determine whether there are any issues or not.

Despite the stronger lift truck markets, operating expenses are expected to be higher in 2011 compared with 2010 but at a decreasing rate each quarter, as a result of a larger workforce in 2010 and the full restoration in 2011 of compensation and benefits. NMHG anticipates material costs, particularly steel, to continue to increase in 2011. However, product price increases were announced in 2010 and in the first quarter of 2011, which in combination with additional price increases, likely during 2011, are expected over time to offset the effect of increased commodity costs.

NMHG's new electric-rider, 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 is introducing a new internal combustion engine lift truck models aimed at the medium-duty segment of the Americas market in July of this year and in Europe in mid-2011. The remaining products in this series are expected to be rolled out by 2013.

The Company also expects to introduce a new light-duty internal combustion engine series of lift trucks beginning in 2011. And finally, NMHG expects to introduce a new 12-ton big truck midyear this year. All of these products are expected to help improve revenues and enhance operating margins.

Overall, net income is expected to increase in 2011 compared with 2010 as a result of substantial improvement in volume. However, deferred gains on foreign currency contracts which favorably affected 2010 results are not expected to recur in 2011 and the effective tax rate is expected to be higher in 2011 than in 2010.

Also, despite additional volume, quarterly earnings for the remaining quarters of 2011 are expected to be substantially lower than the first quarter and have smaller improvements over prior-year earnings, as a result of increased material costs which are not expected to be fully offset by additional price increases, increased manufacturing overhead, and higher selling and general administrative expenses as a result of gradually increasing employee-related costs throughout 2010.

In addition, the first quarter of 2010 included benefits from lower warranty rates and favorable foreign currency exchange rates, which are not expected to recur throughout the remainder of 2011.

Cash flow before financing activities for the full year is expected to be higher than in 2010. Longer term, NACCO Materials Handling Group is focused on improving margins on new lift truck units, especially in its internal combustion engine business, as a result of new products which have been or are expected to be introduced. In addition, NMHG has an objective of gaining market share through these new products which meet a broad range of market applications cost effectively and through enhancements of its dealer operations.

At Hamilton Beach net income was $1 million for the first quarter of 2011 on revenues of $100 million, compared with net income of $3.4 million for the first quarter of 2010 on revenues of $102 million. The decline in net income in the first quarter of 2011 compared with 2010 was primarily the result of a decrease in operating profit, due mainly to margin compression on most of Hamilton Beach's product lines partially offset by favorable foreign currency movements.

The small kitchen appliance market in which Hamilton Beach participates continues to show strength. However, Hamilton Beach's target customer, the mass market consumer, continues to be cautious as a result of financial concerns and high unemployment rates. As a result, this segment of the US consumer market is likely to be soft.

International and commercial product markets experienced a stronger recovery in 2010 and the first quarter of 2011, and the momentum in these markets is expected to continue through the remainder of the year.

In 2011 Hamilton Beach expects the new Melita-branded beverage appliances introduced in late 2010 to continue to gain traction. In addition, the Company expects to continue to introduce innovative products in several small appliance categories.

In the second half of 2011 Hamilton Beach expects to launch The Scoop, a single-serve coffee maker, and the Durathon iron product line. These products, as well as other new product introductions in the pipeline for 2011, are expected to affect revenues favorably. As a result, Hamilton Beach currently anticipates full-year revenues in 2011 to increase compared with 2010.

Overall, full-year 2011 net income is expected to be slightly lower than 2010 due to increased transportation and product costs, particularly in the first half, of 2011. Hamilton Beach continues to monitor commodity costs closely and will adjust product prices and placements as appropriate if product costs continue to increase as expected.

Also, to increase distribution efficiencies Hamilton Beach is moving its distribution center to a new larger facility during the second quarter of 2011. The Company expects to incur additional expenses related to this relocation in the second quarter. Hamilton Beach anticipates that 2011 cash flow before financing activities will be higher than in 2010.

Kitchen Collection reported a net loss of $3.3 million on revenues of $41 million for the first quarter of 2011, compared with a net loss of $1.8 million on revenues of $43 million for the first quarter a year ago.

Kitchen Collection's first-quarter 2011 revenues declined compared with the first quarter of 2010, primarily due to the closure of unprofitable Le Gourmet Chef and Kitchen Collection stores since March 31, 2010, and a decrease in comparable store sales as a result of fewer customer visits driven by inclement weather conditions, higher fuel costs, and a shift in the timing of the Easter holiday. This decline was generally offset by sales at newly-opened Kitchen Collection and Le Gourmet Chef stores.

At March 31, 2011, Kitchen Collection operated 15 more stores than a year ago. Le Gourmet Chef operated 8 fewer stores than a year ago. At the end of 2010, the combination of Kitchen Collection and Le Gourmet Chef operated 300 stores.

Kitchen Collection reported a higher net loss in the first quarter compared with the year ago, primarily as a result of lower margin at Kitchen Collection comparable stores which was caused by a shift in sales mix to clearance and lower margin products and increased store costs due to an increase in the number of stores. In addition, Kitchen Collection incurred costs of $700,000 pretax during the first quarter that were related to the combination of Kitchen Collection's two warehouse facilities into one facility during the first quarter.

High fuel prices and high unemployment rates, along with other financial concerns, are expected to continue to constrain consumer spending for Kitchen Collection's target consumer creating a challenging retail environment. However, as a result of opening new Kitchen Collection stores, Kitchen Collection expects a modest increase in revenue in 2011 compared with 2010.

The Company plans to continue to refine its promotional offers and merchandise mix in both formats to further enhance 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 in 2011.

In addition, to improve distribution operations and increase efficiencies, Kitchen Collection began implementation of its program to combine its two distribution centers into one larger facility during the first quarter of 2011. Le Gourmet Chef stores began shipping from the new facility in March and Kitchen Collection is expected to begin shipping in May.

The Company expects some minimal additional costs in the second quarter due to this consolidation. The Company also anticipates increased product and transportation costs in 2011, but expects to offset these costs through pricing and other actions as needed. Overall, Kitchen Collection anticipates modest increases in full-year net income and cash flow before financing activities for 2011 compared with 2010.

North American Coal's net income for the first quarter of 2011 was $7.1 million on revenues of $17.9 million, compared with net income of $8.1 million on revenues of $37.6 million for the first quarter a year ago. On December 31, 2010, North American Coal's contract at the San Miguel mine expired. First-quarter 2010 results included $12.6 million of revenue and $300,000 of operating profit related to the San Miguel Mine.

The significant revenue decrease of 52% in the first quarter was primarily due to the expiration of the San Miguel contract and a significant number of unplanned outage days at a customer's power plant. A decrease in royalty income also contributed to the decline.

Net income for the first quarter decreased compared with a year ago primarily due to a decline in the results and consolidated mining operations, mainly as a result of fewer deliveries and an increase in SG&A expenses. The decline in net income was partially offset by an improvement in earnings of the unconsolidated operations due to income associated with the new Liberty Mine in Mississippi and a new service agreement to operate a refined coal processing facility, which began early this year.

Overall, North American Coal expects solid performance at its coal mining operations in 2011. However, tons delivered at the coal mines are expected to be lower as a result of the expiration of the San Miguel contract, a power plant customer's significant unplanned outage in the first quarter, and lower overall customer requirements. Royalty income is also expected to be lower.

Limerock deliveries are expected to be lower in 2011 than a year ago. In 2010 North American Coal's limerock customers in the Florida lake belt region required higher limerock deliveries as they rebuilt stockpiles that had been significantly diminished as a result of an unfavorable legal ruling that set aside mining permits in 2009. With the completion of the buildup, 2011 customer requirements are expected to be lower as market conditions in the southern Florida housing and construction markets remain weak.

The new unconsolidated mines, which are in the development stage and will not be in full production for several years, are expected to continue to generate modest income in 2011. In addition, in early 2011 North American Coal finalized a new agreement to provide services to operate a refined coal processing facility through 2018. That agreement is expected to generate modest income during 2011.

North American Coal also has new project opportunities for which it expects to continue to incur expenses in 2011. In particular, the Company continues to move forward to obtain 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 -- is anticipated to be issued in the second half of 2011.

Overall, North American Coal expects full-year 2011 net income to decrease compared with 2010, mainly as a result of the absence of the reimbursement of previously expensed costs of $7.4 million, or $4.4 million after-tax, which was received in 2010, as well as substantially reduced royalties in 2011. Higher selling and general and administrative expenses and the absence of San Miguel are also expected to contribute to the decline in full-year net income.

Cash flow before financing activities in 2011 is expected to be higher than 2010, but that assumes mine development activities occur as they are currently planned.

NACCO and other, which includes the parent company operations and Bellaire, reported net income of $34.7 million for the first quarter compared with a loss of $3 million a year ago. The improvement was primarily the result of the (payment of) $60 million, $39 million after taxes, as a result of the settlement of litigation associated with the Company's failed Applica transaction. As a result of the settlement, no further litigation costs related to this matter will be incurred.

That completes my overview of the first-quarter results and I would be happy to answer any questions that you may have.

(Operator Instructions) Schon Williams, BB&T Capital Markets.

Good morning. Order activity within the Material Handling unit continues to be very robust. I wonder if you could just add a little color about where you are seeing the majority of the strength there; either maybe break it down by end market or by geography. Where are you seeing the most strength on the order books for the [four plus]?

In percentage terms, results are improving around the world. The US market is the -- and the North American market is the most important one for us and that market is increasing, but the European market is also very important. It's increasing.

Brazil where we have a plant is -- has a very strong market situation as well. So really it's relatively broad based in terms of the market upturn.

The highest growth, or at least over the last year or so, has been in China. Our position is modest in China and so it doesn't have a big effect on us. Our share position in Asia Pacific is lower than in -- overall lower than in Europe and in the Americas, so the biggest impact really is in the Americas.

Okay. And then what about maybe what you are seeing on the electric side versus internal combustion engines? Are you seeing strength, is there a mix factory there?

There is a mix factor in this sense, the internal combustion engine market was severely depressed in the downturn, more so than the electric market, and that is typical of a downturn. That means, of course, that when the upturn comes the internal combustion engine market comes back more aggressively than the electric markets overall. So it is a mix change, but it's nothing unexpected.

Okay. And you would expect maybe that mix change to last -- could we see that last for another 12 to 18 months through this cycle here?

It will continue to move towards internal combustion engine trucks, but I think the percentage swing has probably already taken place in the last couple of quarters.

Is there a large margin difference between the two different trucks, the internal combustion engine and the electrics?

As we look forward we don't see large margin differences, no.

Okay. And then, can you just talk about -- I guess going forward what are the plans in terms of further ramp ups on production? Obviously the backlog looks very good.

I am just trying to get a sense of-- you shipped 19,000 units this quarter -- are we going to see that level kind of return back to maybe the pre-downturn levels 21,000, 22,000? Can you ramp up that quickly or do you kind of feel -- or is this a good rate going forward, maybe over the next two or three quarters?

Well, it will depend on the continuing strength of the markets. Our objective has been to bring the backlog down a little bit. It's somewhat higher than we might find ideal.

I think the constraints in ramping up will have more to do with the supply base than with market volume. The supply base has been challenged to respond and we are watching that very, very carefully. So I think that our shipment levels and our sort of daily rates will continue to move up, but at a pretty controlled pace.

Okay. And then I guess there is a little bit of some worrisome comments just surrounding margins and maybe the price/cost relationship going forward.

Is there any way for you to give me any guidance on what you view as an acceptable rate, an acceptable operating margin for material handling going forward? You did north of 5% this quarter, which as I go back is maybe a record quarter for you guys. Should I -- the tone was that is going to pull in some. I mean should I be looking for more 3%, 4% going forward or -- can you just give me a little bit of guidance there?

I would note a couple of things. First, that, as is always the case in this kind of a business, the new units business contracts in downturn considerably more than the parts business. Parts business has much more significant margins than the units business and it's the units business that is really growing rapidly at this point. So there is a natural compression of margin percentages during an upturn, even as the absolute dollars increase significantly.

Now remember there are many things in gross margins. You have not only got the margins on new units and parts, but you also have, importantly, the manufacturing variances there. So you have the lower margins on new units -- significantly lower margins on new units than parts, but you are also helped by the increased volume reducing the manufacturing variances during the upturn.

So there are many factors that are at work there which will tend to moderate margins as the cycle progresses and more new units are sold. I would add, however, that some of our price increases at the end of last year became effective in the market place somewhat ahead of the full impact of the cost increases that we see coming, and that had a favorable effect on the first quarter. But that is about what I would want to say with regard to that.

Okay. Then maybe is there any way for you to quantify maybe kind the one-time gains that you might have gotten, that you mentioned lower warranty expense and some favorable ForEx gains. Is there any way for you to quantify that affect in the quarter so that I can kind of back that out going forward?

I think you would have to take a look at the Q and see what is called out there. I think we wouldn't provide more detail than what is called out in the Q. I would just refer you to those numbers to answer that question.

Certainly, the one-time elements will be compounded to some degree by the other factors that I mentioned in terms of the relationship between profits in the first quarter and profits in the second, third, and fourth quarters.

On the other hand, I think I would just emphasize that we are looking for a good year at NACCO Material Handling Group this year. And depending on how events continue to evolve, it could be better than we even think it is right at the moment. We are just going to have to wait and see how things start to develop in more detail.

Okay, thank you. Let me move on maybe to the Housewares group.

It sounds like you are seeing some pretty significant margin compression within Hamilton Beach right now. Can you maybe talk about what -- specifically within Hamilton Beach what are the sources of that margin compression?

Is it just the -- is it simply the lower volumes? Is it a mix issue? Is it your suppliers or, I am sorry, your customers putting additional pressure on you? Can you talk about what is really driving the lower gross margins there?

Well, I think the first thing I would do is go back a little bit in history. Coming out of 2009 we had very significant inflation at the beginning -- cost inflation at the beginning of 2009. Then the downturn really hit and material costs started to go down. We had implemented price increases at the end of 2009.

Frankly, the 2010 first-quarter was a very attractive first quarter for us. And I think that we are probably in a much more normal situation now than we were then. We had kind of, if you will, a one-time boost a year ago, which was obviously quite beneficial.

So other than that it's just the normal process of dealing in a very competitive environment. When costs go up or prices go down in the competitive environment what we try to do is to adjust cost elements of the products or, in fact, offer slightly amended products to the marketplace in order to maintain our margins. Also, I think we are in a good position to increase our sales volume in 2011 compared to 2010.

And so we are looking for -- despite the first quarter being weaker than 2010, we are expecting the full year to be just slightly below 2010, albeit on higher volume and somewhat lower margins. So that is the way I would tend to put all the factors together at this point.

Okay. Where do you think you are on price versus raw materials right now? Do you think you are ahead of the curve a little bit, you are behind the curve a little bit, you are about even?

I think at the moment we are about even, but we are negotiating with our suppliers now. As is usual, they ask for more than we are willing to provide. There is a process of negotiation and then the process of working with our customers, and that process is not yet concluded.

In addition, there are other forces at work that haven't really made themselves fully apparent. There has been some signs that some of the commodity increases haven't gone up as much or will not be going up as much as people were anticipating in certain areas.

And so we are continuing to work that situation. As we always do, we are trying to maintain our margins by adjusting the costs or adjusting the products that we are offering. And that is really the dynamic that we will be working with.

Okay. And then maybe could you talk a little bit -- it sounds like there is some reshuffling within the logistics network within Hamilton Beach and Kitchen Collection. I mean is there any way for you to quantify maybe some of the benefits that you expect to get out of those reorganizations?

At Kitchen Collection we have some start-up expenses but effectively we have consolidated two warehouse operations into one. We have made them more efficient.

I don't see huge gains in cost. There will be some efficiency gains but I think it also gives us the ability to continue to expand the number of stores and to have the space to do that. We were quite constrained in our earlier space, but importantly the lease was up at one of the facilities, really effectively both of them.

So this is simply a better option for us. It will have some modest impact at Kitchen Collection.

At Hamilton Beach, again our lease was up. We believe that this facility is going to be at least as cost effective, probably a little bit more, than our previous facility. Again, there is some additional cost of moving and consolidation and we will have some modest benefit in cost from doing this. But again, it provides us with more space and the ability to expand further.

I think perhaps, in general, a good way to think about it is we have bigger facilities at more or less the same cost, maybe a little bit better, a little more efficient. But basically we have managed to enhance our distribution capability and keep our costs under control.

Okay. Appreciate the insight.

On Kitchen Collection I guess I was a little concerned about the -- sales in the quarter down fairly significantly year-over-year. I think it was about a 4.5% decline. Obviously, you have got some store closures there, but it looks to me just kind of from the normal seasonality it's going to be difficult for you to get to year-over-year improvements in that unit on the revenue line.

Could we -- talk a little bit about new store openings? Could we -- right now I think between Le Gourmet Chef and Kitchen Collection you are around 299 or 300 stores. Could we -- could I see another 5 or 10 stores open up in the next couple of quarters or are we talking really just more 1 or 2 stores?

No, actually I think our current -- first of all, as we said in the release, we expect that revenue in 2011 will increase modestly over 2010. What that reflects is the decline in the number of stores in the first quarter and the reshuffling and market weakness in the first quarter. Then it's actually a fairly aggressive store opening program for the remaining three quarters.

We think there are a lot of good opportunities out there to expand and I think, in addition to giving us full-year revenues in 2011 that are slightly above 2010, that it lays the base in 2012 for increases that are more significant. So that is really the dynamic that is at work here.

I would add to that that we feel very comfortable expanding the Kitchen Collection stores. We have very modest increases in the number of Le Gourmet Chef stores planned, perhaps one at this point, but we have a program in place to continue to refine exactly the merchandising strategy and format that we will be using in Gourmet Chef. And as I have said over the last couple of quarters, I think as soon as we feel comfortable we will begin an expansion of the Le Gourmet Chef formats.

My hope would be that we will have a pretty good perspective on that sometime in the third quarter of the year and then have a little more clarity on just how we are going to go forward there. But we haven't baked that into our thinking at this point.

Okay. And then could you just remind me, how does the margin look at the Kitchen Collection stores versus Le Gourmet Chef? Is there still a pretty big delta there between the two?

There was a delta in the first quarter but as a general, ongoing basis the margin structures are not -- the gross margin structures are not significantly different.

Okay, all right. And then just a couple questions on coal here if I may.

I was kind of surprised that you mentioned the Liberty Mine. My understanding was that that mine really wouldn't be producing until 2013 or so. Can you just maybe give me some insight into why are you getting a revenue stream from that mine given that there is not a lot of -- there is either no or little production coming out of that mine right now?

Sure. The Liberty Mine is effectively a long-term contractual arrangement. During the early period, preproduction period we received payments for the services that we are providing to bring that mine into existence and those are the payments that are being referenced here.

So you are certainly right that the larger payments will come when the mine is up and operating, but we are being compensated for the services that we are providing along the way on a contractually agreed basis.

Is that sort of a -- are you almost getting like a consulting fee during that period where you are getting so many dollars per people that you have working on it? Like how does the income arrangement --?

It's a negotiated amount in the context of the entire agreement, but certainly -- and remember, the basic philosophy behind these agreements is that they are long-term, cost pass-through kinds of contracts. And so the idea is that we are compensated for services throughout this whole period of the contract.

Now the Red Hills Mine, also in Mississippi, is the major exception in terms of exactly how that operation works, because we are compensated for the coal that is delivered on a long-term contractual basis that includes escalation.

On the other hand, we are not necessarily compensated for all of the fixed costs that are associated with any particular period. Therefore, if we have more volume in the Red Hills Mine, we make more money. If we have less volume, we make less money. But generally speaking, of the Liberty contract is more similar to some of our other cost pass-through contracts.

And am I correct in assuming that that is again more kind of a -- it's going to be more of a 2013 before we start to see any substantial production?

That is correct.

Then maybe just a little detail on the new processing contract that you have. Can you talk about maybe is that in North America, is that for lignite?

It's for lignite and it's in North Dakota. There are services that we provide to one of our existing customers that are incremental to the work that we are already doing for them. It was advantageous to the customer that we provide those additional services and we are being compensated for providing them.

Would this be like advisory services or something along those lines?

No, we actually have employees and we are managing certain aspects of their crushing and drying operation or the drying facilities for coal in that operation.

Okay, perfect. Then is there anything going on overseas? I know you guys had maybe talked about some consulting arrangements overseas. Is there anything material there I should be aware of?

Well, we are continuing to have discussions and continuing to develop relationships overseas. Those, as we have said in our release, are particularly involved, India and Indonesia.

I think our hope is that the scope of those agreements will be greater in the future than they are today, but that really is still to be determined. We have one contract which is more in the consulting nature in India, and that will generate increased revenues as that operation comes into production.

Okay. Then tonnage at -- I think you mentioned Red Hills. Tonnage at Red Hills was down pretty significantly in the quarter. I think you alluded to maybe some customer outages there. Should that be a temporary, one quarter thing and then we should see production at that mine kind of get back to normal levels throughout the rest of the year?

That certainly is our hope. These production outages are very costly for the utility; they are costly for us. Our hope is that our customers will not have these problems in the remaining quarters of this year to the degree that they had them in the first quarter. But it is not -- these are not predictable events as you well know.

Right, right. And then lastly, on Otter Creek it sounds like maybe the permit has kind of been pushed out maybe a couple quarters here. Initially I thought maybe it was going to be in 2010, now it sounds like back half of 2011. Is that just kind of the nature of the process or are you running into any environmental concerns there or anything I should be aware of?

No, it's just the nature of the process. Permitting activities these days are very complex and time consuming, so that is really the way I would put it. Frankly, the thing for you to keep in mind is that we are working toward the permit on the one hand, but we obviously can begin discussions with potential customers without having the permit in hand.

So the real question is proceeding to the point where we have customers for that operation and then when we have more specificity about that we will be commenting on that. But certainly we are moving forward and I would just call it a normal part of the process.

Okay. All right, thank you very much for the clarity, Al. Very good quarter and we will talk to you later.

Great. Thank you.

Bruce Geller, DGHM.

Good morning, thanks for taking my questions. I have four if that is okay. The first one, can you give a little more guidance on the target margins in Material Handling? I think in the past you have laid out a desire to get to the high single-digit level by the peak of the cycle. Could you just give a little more clarity on the process of getting from here to there and kind of timeframe?

Well, certainly you are correct that at the peak of the cycle we like to be in the high double-digit area. We think we are making considerable progress toward the underlying conditions to get us there. It's not an area where we would really make predictions, but I would point to a number of things that have changed.

First of all, we have readjusted our manufacturing footprint over the last few years in both Italy and in the UK, and we have strengthened our -- and centralized our supply chain activities. We have enhanced our pricing capabilities and then absolutely critically important we have been in the process of really, an across-the-board program to enhance our product lines.

As you can tell from this press release, the new counterbalanced electronic truck line is coming to completion. We have some very important new product offerings coming to the marketplace in our internal combustion engine product line, and that is going to happen over the next couple of years. I think with those all in place we have some of the preconditions really for moving in to the range of our target economics.

So we certainly think this upturn has got a couple more years of life in it, and we think that the opportunity is there to enhance our position significantly over the next couple of years. I think that is really about the way I would summarize it.

I would like to confirm that it's a high single-digit target that we believe at the top of the cycle.

I know, I almost fell off my chair when you said high double digit, but I understood that that is what he meant to say.

Did I say --? I meant single digits.

I know, maybe it was a Freudian slip that you --.

We all have aspirations.

Hope springs eternal.

Right. So just to clarify again, if the peak of the cycle is a couple of years away I would imagine, based on where we are today, that you would be expecting at least 100 basis points a year going beyond this year, which with the operating leverage in your company is pretty significant. But would that be a fair expectation to expect at least that kind of improvement?

I really wouldn't want to monetize it. We really haven't gotten into that kind of forecasting of the future. I think what we want to do is to outline the factors that we think can influence our moving toward those numbers. Life is full of many different things, plus and minus, but it's certainly our hope that things will come together in the next couple of years and move us toward the numbers that we aspire to.

Great. Well, good luck on that.

My next question relates to the Kitchen Collection business. This really does not seem to be a very good return on capital business. It seems that there has been a lot of struggles with it and the current visibility doesn't seem all that great.

Is this a business that you are committed to for the long term, considering it doesn't necessarily seem to be a core competency of NACCO?

Well, we feel there is a lot of opportunity at Kitchen Collection and I have tried to outline that. We are going to be opening quite a few Kitchen Collection stores. I think the Kitchen Collection format is really quite profitable and has had good returns.

I think since we purchased Le Gourmet Chef out of bankruptcy proceedings sometime ago that it has been more of a struggle to bring that format to the kind of profitability that we would like to have it have. We have had some -- we have been locked in to certain leases that have led to some operations that have lost money. We are working our way through all of those.

And we are refining the format. I am hopeful, actually, that we will identify a format which is very attractive and has real growth opportunity. So I think the -- we feel that Kitchen Collection format is sound, Le Gourmet Chef is in something of a turnaround mode, and one has expansion opportunities and the other, we hope, will have expansion opportunities.

Now I would add one in the short term. There is no question that the consumer that has traditionally gone to factory outlet malls has been stressed to some degree more by the economic conditions that we have. Most obvious area being unemployment rates are high.

Secondly, there is a need to rebuild savings. I think put all of that together and, if you look at other retailers who have been traditionally focused on that segment of the market, such as Wal-Mart, you have seen considerable weakness in terms of their performance as opposed to the real up-market end of the spectrum.

Now my own view is that in due course what that means is that there is going to be a market enhancement opportunity coming up eventually. I can't tell you when that is going to happen, but I think that it will happen in due course.

I would also note that the comparisons may have some quirks in them in terms of 2011 versus 2010 because in the first quarter of 2010 we think it's possible that people who come through the recession may have had some pent-up demand. And that they came back into the market, satisfied that pent up demand, and then the result is that 2011 seems a little weaker in comparison.

So we are hopeful that things will improve, but mainly in the near term we are looking to our new store openings to generate the volume and the profitability. Of course, if you look at the numbers essentially all of the profit of the business is made in the last couple months of the year. So the first months don't have a lot of meaning in that sense.

It's worth noting that the more stores you have, the bigger the loss you are going to have in the first quarter.

All right. Well, good luck on that one. I want to move to operating cash flow. One of the things that was consistent in the press release pretty much across every division was that you are expecting better cash flow this year, it sounds like out of all of your businesses, which is encouraging. You have also got a nice pile of cash on the balance sheet at this point, especially with the litigation settlement supplementing that.

I would imagine it's earning next to nothing. Again, it is quite a big pile of cash so are there thoughts of paying down some debt or increasing the dividend? What are the thoughts on capital allocation, because clearly it's not efficient to have so much cash just sitting there at this time?

Well, a good bit of the cash is in the subsidiary companies. I think there will be some refinancing and probably some net reduction of debt over time effectively in some of our subsidiary companies. That will be one use of the cash and bring the debt down.

Really, other than that, the Applica settlement is recent enough that we, at this point, have not focused a lot of that attention on that. And secondly, we would like to see that the results turn out the way that we are hoping they are going to turn out in terms of cash flow as we look at 2011. So we have indicated in the press release what we hope is going to happen, but it hasn't happened yet. So that is really where I would leave it.

All right. And then my last question also relates to the litigation. Last year you had quite a bit of expenses for this. Could you quantify what the benefit will be for the rest of the year, like the next nine months, now that the expenses are gone? What the year-over-year comparison will be in terms of what you are going to save from not having these in the P&L this year?

Well, I think the best way to answer that is to note that the settlement itself was $60 million pretax, $39 million after-tax. That is shown in the NACCO and other segment.

Secondly, we did have some modest expenses in the first quarter associated with the litigation. I believe those are called out in either a prior release or in the 10-Q. So I think you can determine the running rate, excluding litigation and the Applica settlement, from the information that is in the 10-Q and I would suggest that that is the best place to get that information.

If you are trying to do comparisons, every quarter last year we had a single line on our income statement that related to the litigation expense. You should be able to pull that out in your analysis and clean out the past. And I think Al has given you the direction on how to think through the first quarter of 2011. Obviously going forward in the remaining quarters of 2011 there is no expense.

Okay. So obviously you are going to pick up a lot of benefit in the rest of the year and I just want to confirm that that benefit had nothing to do with the division-by-division review that you gave in terms of expectations.

No, it had nothing to do with that. I think I said in the very end of my remarks under NACCO and other that, as a result of the settlement, no further litigation costs related to this matter will be incurred. That was meant to apply -- that comment was meant to apply to the second, third, and fourth quarters. It's over; the last expenditures occurred in the first quarter.

All right. Well, congrats on the win on that and thanks for all of your thoughtful answers.

Great, thank you.

At this time I have no further questions in queue, sir.

Okay, thank you very much. Christy?

Thank you for joining us today. We appreciate your interest. If you do have any additional questions, please feel free to give me a call. Have a great day.

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