NACCO Industries Inc (NC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 NACCO Industries earnings conference call. My name is Katy, and I will be your coordinator for today. (Operator Instructions). I would like to hand the call over to Miss Christina Kmetko. Please proceed.

Thank you. Good morning, everyone and thank you for joining us today. Yesterday a press release was distributed outlining NACCO's results for the third quarter ended September 30, 2011. If anyone has not received a copy of the Earnings Release, please contact me at 440-449-9669, and I'll be happy to send you this information.

You may also obtain copies of these items on the 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 Industries is Ken Schilling, Vice President and Controller. Al will provide an overview of the quarter and then open up the call to your questions. Before we begin, I would like to remind participants that this conference call may contain certain forward-looking statements.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. Additional information regarding these risks and uncertainties were set forth in our Earnings Release and our 10Q.

In addition certain amounts discussed during this call are considered non-GAAP numbers, the non-GAAP reconciliation of these amounts are included in our most recent news release which are available on our website. I will now turn the call over to Al Rankin. Al?

Thanks, Christy, and good morning to all of you. As you know from the press release, NACCO Industries announced net income of $25.7 million, or $3.05 per share on revenues of $823 million for the third quarter, and that compared with $13.5 million or $1.62 and revenues of $665 million in the year-ago third quarter. At NACCO Materials Handling Group, reported net income was $17.5 million, revenues were $629 million, and that compared with net income of $3.8 million and revenues of $443 million in the year-ago quarter.

Both of those third quarters, of course, reflect normal seasonal plant shutdown and costs associated with our customary third quarter production schedules at the manufacturing plants. Revenues increased 42% at NMHG, compared with 2010's third quarter, and that was as a result of a significant increase in unit volume in all geographic markets, favorable foreign currency movements, mainly as the Euro strengthened against the US dollar, and the favorable effect of price increases implemented both at the end of last year, and early this year, primarily in the Americas and Europe.

World-wide new unit shipments increased to approximately 19,600 units, from approximately 15,400 units in the year-ago third quarter. The backlog was 25,600 units at the end of September, and that compared with 24,500 at the end of September a year ago, and 25,100 one quarter ago, June 30th.

NMHG's 2011 third quarter net income increased significantly, compared with the previous year's third quarter, primarily due to higher sales volumes and units and parts, the favorable effect of price increases, and those essentially offset material cost increases, the absence of losses, and the sale of certain retail operations and a $2.9 million pre-tax benefit from the elimination of post retirement life insurance benefits, and certain post retirement medical benefits.

An increase in employee-related expenses resulting from the full restoration in 2011 of compensation and benefits, unfavorable currency affects primarily from the weakening of the US Dollar against the Euro and Japanese Yen and the absence of a prior year benefit related to the release of deferred gains and foreign currency contracts and higher income tax expense as a result of higher pre-tax earnings in 2011, partially offset the improvement in net income. As you look forward to the fourth quarter, NMHG expects growth in global lift truck marks to moderate, with modest growth in markets in the Americas and Asia-Pacific, and volumes comparable to prior periods in Europe and China.

With these market prospects, NMHG anticipates that unit bookings and shipping levels in the fourth quarter will be moderately higher than a year ago. As you look forward to 2012, NMHG expects slight increase in unit bookings and shipment levels compared with 2011, at a pretty steady backlog throughout the remainder of this year and next year. Parts volume is also expected to improve modestly in the second period, and NMHG will continue to monitor marketing levels and adjust its levels based on in fact what turns out to happen.

NMHG does not currently anticipate any significant supply chain constraints or disruptions. We do expect material costs increases, particularly in steel in the fourth quarter and over the course of next year, and as a result, price increases already implemented and proposed for the fourth quarter are expected to offset a significant portion of these anticipated higher material costs over that same period and into 2012. Commodity costs have stabilized and slightly decreased over the past month but these markets are very volatile and commodity price increases are expected in 2012, which could result in further increases in cost of components and materials. So the Company is going to continue to monitor those conditions, and their effect on cost to determine whether additional price increases are required.

NMHG's new electric rider warehouse internal combustion engine product development programs are all continuing to move forward. This is a very broad-product development program that continues to update our product line and ensure that all niches in the market are covered and everything is pretty much on track in those programs.

Overall in the fourth quarter of this year, net income is expected to improve modestly compared with a year ago, and that will reflect higher unit and parts volumes coupled with price increases offset by increased material costs and higher employee-related expenses due to improved earnings in 2011, some significant adverse currency movements and an anticipated shift in sales mix to lower-margin distribution channels and lift-truck models. Cash flow before financing activities for the full year 2011 is expected to be higher than 2010.

At Hamilton Beach reported net income of $4.1 million for the third quarter, and was based on revenues of $127 million, that compared with net income of $5.6 million a year ago on revenues of $133 million.

Revenues decreased primarily as a result of lower unit sales volumes in the US consumer retail market, increased unit sales volumes in international retail markets partially offset that decline. The decline in net income was mainly the result of higher product costs and also a charge of $1.3 million or $800,000 after taxes for the write-off of the capital lease asset no longer being leased. Lower employee-related expenses, favorable foreign currency movements and lower income tax expense compared with a year ago partially offset the decrease in income.

As you turn to the outlook, the middle market portion of the small kitchen appliance market, which is the core area that Hamilton Beach participates in, has weakened over the course of 2011, and is expected to remain soft during the fourth quarter of this year, and probably through 2012.

The Company's target consumer, the mass market consumer in the middle market continues to struggle with financial concerns, and high unemployment rates, and as a result, sales volumes in this segment of the US consumer market are expected to continue to remain under pressure. International and commercial product markets are expected to remain strong, and that strength is expected to drive revenue growth. Hamilton Beach continues to strengthen its market position through product innovations, promotions, increased placements in branding programs, together with appropriate levels of advertising for its key product offerings.

In the third quarter of 2011, Hamilton Beach launched 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 the fourth quarter of 2011 and 2012, along with solid placements in promotional programs for the holiday-selling season are expected to positively affect revenues and operating profit.

Nevertheless the weak US consumer market suggests that revenues for the fourth quarter of 2011 are likely to be roughly comparable to the fourth quarter of a year ago with a modest increase in 2012, compared with the full year 2011. Overall, Hamilton Beach expects the fourth quarter to be comparable to the fourth quarter of a year ago, and Hamilton Beach continues to monitor commodity costs very closely and will work to adjust product prices and placements as appropriate if product costs continue to increase. Nonetheless price increases are not expected to fully offset costs if you look at 2011 on a full-year basis. Hamilton Beach anticipates financing activities will be higher than a year ago.

Kitchen Collection reported a net loss of $0.5 million on $49 million of revenue, compared with a loss of $100,000 on $48 million of revenue a year ago. The third quarter revenues increased compared with a year ago mainly as a result of sales at newly opened stores.

At September 30th, Kitchen Collection operated 250 stores, compared with 219 a year ago. The Gourmet Chef operated 62, compared with 66 a year ago, giving a total of 234 and 66 Kitchen Collection and Gourmet Stores at year end a year ago as comparative numbers.

The Kitchen Collection reported a higher net loss in the third quarter compared with a year ago, primarily as a result of an increase in selling, general, and administrative costs.

While there were some higher employee-related costs, increased store cost as a result of the operation of 27 more stores than a year ago, increased the overall cost structure of SG&A for the business, and while there were some unprofitable stores that were closed, generally, the increased expenses were driven by those increased number of stores.

The uncertain economy and high unemployment rates and fuel prices along with other consumer financial concerns are expected to continue to affect consumer sentiment and limit spending at levels for Kitchen Collection's target customer.

It is going to be a challenging retail environment in the fourth quarter and 2012. We do, of course, as I have already indicated in talking about the increased G&A structure, we will have an increased number of Kitchen Collection stores in the fourth quarter and in 2012, and given the seasonality of the business, that would indicate that fourth quarter and full-year revenues will increase compared with 2010, and revenues in 2012 will increase compared with 2011.

Kitchen Collection expects an increase in the fourth quarter net income as a result of that increase in the number of stores, but as you look at the full year, there will be a modest decline in net income and cash flow before financing activities compared with a year ago, as the fourth quarter improvements are not expected to offset the lower sales at comparable stores in the larger losses in the first nine months of the year. There were some costs associated with warehouse consolidation and unusually high repairs in maintenance associated with improvements to older stores, as well as costs associated with the change in the Company's merchandising approach in 2011.

Those costs are not expected to reoccur in 2012, and we do expect the favorable momentum from the fourth quarter will continue in 2012, and we'll have operating improvements in both formats in 2012. We continue to renegotiate store leases and the combination of the two distribution centers into one larger, more efficient facility are expected to contribute to improved results, and we do expect increased product and transportation costs, both at the end of this year, and 2012, but we expect to offset those through price increases and other actions.

North American Coal's net income was $5.8 million, compared with net income of $11 million in the year previously. The net income for the third quarter decreased compared with the year-ago primarily due to a decline in results of its consolidated mining operations, and that was mainly as a result of significant unplanned outages at a customer's power plant, fewer deliveries and higher cost of coal as a result of those reduced production levels, and there were some higher employee-related costs and reduced royalties.

All of our mines are operating in a sound way, a good operating performance, and we expect that to continue in the fourth quarter, and next year, but tons delivered in the fourth quarter are expected to be lower than a year ago, as a result of the exploration of the San Miguel contract at the end of 2010, and significant maintenance outages at the customer's power plant that I just discussed and overall lower customer requirements.

Tons delivered in 2012 are expected to be slightly higher than 2011, as the full year, but that of course is provided customers continue to achieve currently planned power plant operating levels. Royalty and other income in 2011 is expected to be lower than 2010, with 2012 expected to be comparable to or slightly higher than 2011. Limerock deliveries are expected to be significantly lower in the fourth quarter than a year ago.

And overall on a full-year basis, 2012 will be lower. As you remember, customers in the Lake Belt region in Florida rebuilt their stockpiles over the course of this last year, and in 2010, and with the completion of that, we're back to looking at basic demand levels, and there is continued weakness in the Southern Florida housing and construction markets.

Overall, North American coal expects fourth quarter net income to be comparable to a year ago, but full-year net income is expected to decrease significantly compared with a year ago, mainly as a result of the absence of the reimbursement of previously expensed costs of $4.4 million after tax, which was received in 2010, substantially reduced royalties, and the continuing unplanned maintenance outages at a customer's power plant.

Higher selling, general and administrative expenses in the absence of the San Miguel operation are also expected to contribute to a decline in the full year net income. Cash flow before financing is expected to be significant, but lower than 2010. That's the basic earnings update.

I would add to that the NACCO Board of Directors did approve a repurchase program of up to $50 million of the Company's Class A stock. The timing and amount of those repurchases will be determined at the discretion of the Company's management, and that will be based on a number of factors, including the availability of capital, other capital allocation alternatives and market conditions with the Company's stock.

The authorization for the repurchase program expires on December 31, 2012, and the repurchase program does not require the Company to acquire any specific number of shares, and I would note that it can be modified, suspended, extended or terminated by the Company at anytime without prior notice that it may be executed through open-market purchases, privately negotiated transactions or otherwise. That's the update on our third quarter earnings, and now I would open things up to any questions that you may have.

Thank you. (Operator Instructions).

While we are waiting for questions, let me provide you with my contact information should anything arise at the conclusion of today's call. Again my phone number is 440-449-9669. Katy, are there any questions?

Yes, you have a question on the line from Schon Williams from BB&T.

Please proceed.

Hi, good morning.

Good morning.

Congratulations on the quarter. I have got a couple of big-picture questions. First, you know, it seems like since the last time we spoke, the macro headwinds are maybe a little bit worse than just a couple of months ago. Can you talk about in an environment where we're kind of either slow growth or maybe just kind of moving sideways in terms of volume activity, where do you see the most opportunity for profitability enhancement in the business in that type of environment?

You know, obviously all of the businesses are different, so let me touch on them individually. At NACCO Materials Handling Group, I think the biggest opportunity is through enhanced volume that comes from sheer gain in a flattish market. We have got a lot of new products coming out, particularly an internal combustion engine product line. If we can execute those programs properly, that should give us some real opportunity to boost our position by having more cost-effective products that meet segments needs in a better way.

We have a number of products that are renewal products. In addition we have a lot of programs going on to strengthen our distribution, so I think that's probably the area of opportunity, and certainly what we are concentrating on at the business. I think at both Hamilton Beach, and I'll talk about them one by one. At Hamilton Beach, I think clearly additional volume through enhanced placements particularly of our newer products is the biggest area of opportunity.

We're hopeful that the two new coffee products that we have will have a significant impact. You heard my comments about the Durathon Iron, so I think there are some encouraging opportunities there, but I wouldn't want to be too optimistic about the situation at Hamilton Beach, I really think the middle market consumer is a stressed consumer at this point. You have got a lot of unemployment. So families that had two incomes may find themselves with one income and a diminished situation. They are rebuilding their savings, a whole variety of things that I think you are well familiar with are affecting that part of the market. And of course what is happening to us is nothing different from what you hear from others. You hear it from Wal-Mart. You hear it from Procter & Gamble.

You hear it from a whole variety of companies that are having to rethink their positioning in the face of these kinds of headwinds. So I think we do have growth opportunities and significant programs in place in the International area, and a really broad range where we're focusing on additional distribution in a number of Countries, and in the commercial products area, we have a lot of new products that are getting, I think are being well received in the marketplace. So there are opportunities there. As well as Hamilton Beach, at Kitchen Collection I think our biggest opportunity is through wise addition of stores.

We have, I think, pretty good way of judging now what the prospects of new store openings will be in different kinds of mall environments. That's where the biggest opportunity is going to come. I think as far as the management of the two formats is concerned, that we are quickly getting to the point where those formats are being operated in a very thoughtful way. There are some improvement programs that are going to come along still over the course of 2012.

I think by the end of 2012, we'll be in a pretty good situation in both formats as far as looking forward to additional stores is concerned, and the basic stability of those formats. Obviously, you are always adjusting the product mix. Every year to meet consumer opportunities that may come up as products change and so on, but the number of stores is the big driver in that business, and we are continuing to focus on that. There is a difference in our approach to Kitchen Collection where stores are basically very profitable and well-run and we think those prospects are good.

We still have a shortfall to our objectives and in our Gourmet Chef stores, and we don't have an aggressive expansion program in that format until we're confident that we have a format that can make money, given the volume prospects and rent requirements for those kinds of stores in the malls that they go in.

At the coal company, you know, things don't happen quickly, and it's a long-term gain, and there the opportunities are new deals, new coal mining opportunities, both domestically and internationally. Those are all areas that we continue to work very aggressively in, and we're optimistic that there are opportunities that lie ahead for us.

So those are my thoughts about the overall opportunities. I do agree with the general perspective that there are more macro headwinds than might have been anticipated just even a couple of months ago. Certainly there's some indication that Europe is slowing more than we might have anticipated. We indicated that we think volumes will be pretty flat, and I think there's just simply more moderation and we are in a slow-growth period, and you are hearing about it every day in the newspapers.

And maybe just as a follow-up, could you talk about maybe the margin outlook for the business. Are there any particular areas where you are seeing significant margin pressure so that we could actually see a scenario where volumes are actually fairly flat next year, but you are actually seeing year-over-year compression in the margin, either raw materials or pass through pricing, you know, higher transportation costs, those sorts of things?

You know, that's not my big concern at this point. First of all, we're not operating at the margin levels that we would like to be operating in general. Our new unit margins in the fork truck lift business are less than we would like. It's a competitive environment out there, and, you know, we haven't recovered in terms of total volume in the marketplace to levels that we had in 2007 and 2008.

It's a competitive environment. I think the biggest threat would be a major material cost increase, but with the moderating environment that we just discussed at the macroeconomic level, I think that's far less likely than it might have been, so I'm optimistic that there could even be some opportunity in that area with moderating costs. You know these costs on the margin are very volatile, and it only seems to take a very little bit of either increased volume to drive commodity costs up, or decreased volume to have them go down, and what you often see in the macroeconomic forecast is that there the price of this commodity or that commodity is going to go up 3 or 4%.

I guess my own experience is that is the one thing that never happens. They either go up quite a bit, or down quite a bit, and just moderate growth doesn't necessarily drive them up moderately. But it would be a tough environment to recapture dramatically increased material cost increases as opposed to a more normal inflationary cost increase.

So that's the thing I would worry about more, but I think that's less likely as I look forward, kind of the same story would be true at Hamilton Beach, we had pretty good earnings going back 18 months or so ago, because we had implemented price increases when material costs went way up, and then material costs dropped, and margins were really unusually good during that period of time, as we were very aggressive at getting our price increases through, but that really has to be looked at as not the norm. We were glad to have the improved margins and to have those things work to our advantage, but it wouldn't be the normal situation.

Okay. Thank you, and then I would like to turn to coal for a little bit. I wonder how you would maybe, you know, classify the regulatory environment? It seems like there has been a lot of news here recently. I know one of your neighbors down in Texas they are threatening to shut down some of their lignite coal operations because of concerns in complying with EPA regulations.

North Dakota is facing new regulatory scrutiny over Regional Haze. I know Minnesota is battling, and I think you are part of that litigation, battling importing coal-powered fire into that state. Sierra Club, they have another case against the Mississippi power plant. I'm wondering it seems like coal fired power has been in the news recently and I am wondering in your mind if this is normal operating environment or have the regulatory risks heightened here recently?

Let me answer the question carefully from two perspectives. One,our Company and its mines. I think our mines are relatively well positioned. I think we are generally a low cost producer.

I think many of our customers have very up to date pollution control systems, so I am not looking to have this environment have a major impact on our operations at the current time. Having said that, this Administration is, the environment out there is very, very difficult. The regulatory environment is highly ideological at this point.

And I think that the Administration is reluctant to have a more balanced perspective because they are trying to keep their coalition together on the left and with the Environmentalists, so the EPA's regulations are, some of them in my view, are very extreme. And it drifts over into a variety of other kinds of enforcement actions. All of it designed to make it difficult to go forward with new operations, and that would affect us.

And just as an example, we have our new coal mine coming up in Mississippi, and the owner of that power plant has all kinds of, you know, I think there are three current lawsuits, mainly driven by the Sierra Club against them. They spent some hundreds of millions of dollars on this power plant already. It's just the way things operate right now. And I think we're not going to get more clarity in this whole area until we see the results of the 2012 election, and that is the next big marking point, and things could change significantly depending on what happens in the election.

So I don't think you can automatically assume that this current environment will continue over the long term. It's very controversial. Congress feels it has no ability to affect a regulatory process coming out, particularly of the EPA right now. They are not pleased. A lot of states aren't pleased with the environment, so it's complicated and you have to take the long view, and continue to focus on efficient operation of our existing plants, but that's about the best answer I can give you.

Okay. Thank you. Now, I appreciate the perspective. Last question here I just wanted to address the buyback. It's been a while since you guys have executed a buyback. I'm wondering just what has changed maybe in the Board's thought process?

I mean, when I look back, I mean this was a stock that traded in the mid-teens in 2009, and you weren't buying it then. What has changed now versus then? And then the second part of that question is would you maybe be leaning towards a private transaction to do that buyback? My only concern would be I'm looking at the Board today, you have only done 10,000 shares so far, this authorization would be for something like 600,000 shares

What are you talking about with 10,000 shares.

NACCO you traded 10,000 shares today.

Oh, okay.

My concern would just be that the liquidity is such that it's going to be difficult to push through, you know, a 600,000 share buyback, which is kind of what roughly $50 million translates to. So I'm just trying to think in terms of execution, would you be leaning towards a private transaction versus open market. And then maybe again just trying to address maybe the Board's perspective on buybacks.

Generally on buyback I think the Board constantly looks at and receives recommendation from management with regard to the utilization of its assets. As you know there's quite a bit of cash on the balance sheet, and I think that, you know, we have put in place the kinds of borrowing facilities that we think are reasonable going forward, and so, we think that the debt equity structure is sound in our various businesses, and it's that backdrop that led to the decision to have a share buyback program at this juncture.

If you look back at, in the last couple of years, share buybacks were pretty infrequent because there was so much insecurity in the market, liquidity was challenged, in a whole variety of areas, and so while the capacity may have been there, I think there was great reluctance on the part of most companies to do anything other than keep liquid resource available in an environment in 2008 and 2009. I think the environment now is much more uncertain. It certainly isn't a normal upturn, but it is still a lot better than it was in those periods of time.

So I think those are the reasons it seemed appropriate to the Board at this point to have a share buyback program. With regards to the method of execution, I think I said that there will be open market purchases. Those are subject to a whole series of limitations and controls in terms of the volumes that can be purchased on any particular day. But they do not preclude what I think you have referred to as private transactions. And just to be clear, what I mean by that is a direct block purchase that is coming from a significant shareholder.

The institutional ownership in the Company is quite concentrated, and it could be that those are some of those owners who from time to time may conclude that this is not the investment that they want to have as they think about restructuring their portfolios, and we have the flexibility to take advantage of those in this program should those opportunities come up, and we will be working with our advisors to ensure that the owners of the shares are well aware that we can do that. And it could be that will be of interest over time since selling through the open market directly can lead to enormous volatility from time to time for any selling shareholder. It isn't as you suggest a particularly liquid market on a day-to-day basis. We have a lot of long-term holders who don't trade in the stock, relatively little of the stock trades, and what was trade seems to trade with great frequency, and we'll work our way through it, and see what the best way is to accomplish the program that we have outlined, but I can't be any more specific than that because it would be speculation on my part, but we have the flexibility to respond to whatever circumstances come up.

Okay. Thank you. That's all I had. It's very helpful.

Okay. Thanks a lot.

(Operator Instructions)

Okay. Well thank you all very much. We appreciate your participation in the call.

Ladies and gentlemen, thank you for your participation, but as a reminder, the Company would like to remind you, there will be an auto replay viable later today.