NACCO Industries Inc (NC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2013 NACCO Industries earnings conference call. My name is Alex and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now, I would like to hand the call over to Christina Kmetko. Go ahead, please.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday a press release was distributed outlining NACCO's results for the first quarter ended March 31, 2013. If you have not received a copy of the release and would like a copy of the Q, you may 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. Also in attendance representing NACCO are Mark Barrus, NACCO's Vice President and Controller, and J.C. Butler, Senior Vice President, Finance, Treasurer and Chief Administrative Officer. 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 are set forth in our earnings release and in our 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 first quarter earnings release, which is available on the website.

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

Good morning. NACCO Industries reported income from continuing operations of $4.4 million, $0.53 a share on revenues of $196 million for the first quarter and that compared with income from continuing operations of $4.7 million, $0.57 a share on revenues of $173 million in the year-ago quarter.

Consolidated EBITDA from continuing operations for the trailing 12 months ended March 31 was just under $83 million.

The Company's cash position was about $97 million at the end of the quarter and that compared with $140 million at the end of December.

Debt was $173 million compared with $178 million at the end of the year and $114 million a year ago.

In overview, North American Coal and Hamilton Beach had improved net income, and the highly seasonal Kitchen Collection business had an increased net loss in the first quarter.

Turning to the individual businesses, North American Coal's net income for the first quarter was $9.6 million. Revenues were $51 million. That compared with $9.2 million and revenues of $24 million in the first quarter a year ago.

The first quarter financial results include $16.7 million of revenues and a loss of $1.1 million from the Reed Minerals operations, which were acquired at the end of August last year.

Our revenues increased in the first quarter primarily due to the Reed Minerals acquisition, but there was also an increase in tons delivered at the Mississippi Lignite Mining Company as a result of fewer outage days at the customer's power plant compared with a year ago.

An increase in deliveries at the Limerock Dragline Mining operations and higher royalty income also contributed to the improvement in the first quarter revenues.

Net income in the first quarter increased slightly compared with the first quarter a year ago. The favorable effect of higher royalty income, increased deliveries at Mississippi Lignite Mining Company and the Limerock Dragline Mining operations, as well as lower income tax expense, was offset by an operating loss at Reed Minerals due to sales which were below expectations, partially as a result of inclement weather that led to operational mining delays, and higher operating expenses at the Mississippi Lignite Mining Company, as increased production levels resulted in fewer costs being capitalized into inventory in 2013 compared with 2012.

An increase in employee-related and outside services costs also unfavorably affected first quarter net income.

Looking forward, steam coal tons delivered in 2013 are expected to increase over 2012 at both the consolidated and the unconsolidated mining operations, providing customers achieve currently planned power plant operating levels. Increased deliveries at the Mississippi Lignite Mining Company are expected to continue longer term as a result of improved operation of the customer's power plant, which is now under new ownership. In addition, Demery Resources Company's Five Forks Mine commenced delivering coal to its customer in 2012 and is expected to increase production in 2013 with full production levels expected to be reached toward the end of 2015.

Near-term metallurgical coal sales for Reed Minerals are expected to be below the Company's initial expectations. Full-year demand for steel is expected to increase at a slower pace than 2012.

Also, Limerock deliveries are expected to decrease in 2013 compared with 2012, as customer requirements are expected to decline moderately beginning in the second half of 2013. And royalty income is expected to be modestly lower over the total of 2013 in comparison to 2012.

Unconsolidated mines currently in development are expected to continue to generate modest income in 2013. Those four mines are not expected to be at full production for several years. Liberty Fuels is expected eventually to produce approximately 4.5 million tons of lignite coal annually from the Mississippi Power Company's new Kemper County energy facility currently being built in Mississippi, and that project is on track for initial coal deliveries in mid-2014.

In February of 2013, the mining permit needed to commence mining operations at the Caddo Creek Resources Company's project in Texas was issued and Caddo Creek expects to begin making initial coal deliveries in 2014.

In January of 2013, the mining permit needed to commence mining at the Camino Real Fuels project in Texas was issued and that operation expects initial deliveries in the latter half of 2014, and expects to mine approximately 3 million tons of coal annually when it is at full production.

Coyote Creek Mining is developing a lignite mine in Mercer County, North Dakota, from which it expects to deliver approximately 2.5 million tons of coal annually beginning in May of 2016.

North American Coal also has new project opportunities for which it expects to continue to incur additional expenses in 2013. In particular, the Company continues to move forward to obtain a permit for its Otter Creek reserve in North Dakota in preparation for the anticipated construction of a new mine.

Overall, North American Coal expects net income in 2013 to decrease from 2012, primarily due to the absence of pre-tax gains from asset sales of approximately $7 million during 2012. Excluding the effect of those asset sales, operating results are expected to be comparable with 2012.

Cash flow before financing activities is expected to be higher than 2012, but not at the levels of 2011, due to an anticipated increase in capital expenditures at Mississippi Lignite Mining Company and at the Reed Minerals operations. Capital expenditures associated with the Reed Minerals operations were designed as part of the Reed Minerals acquisition plan and should reduce costs and increase capacity.

Over the longer term, North American Coal expects to continue its efforts to develop new mining projects, and the Company is actively pursuing domestic opportunities for new or expanded coal projects which include prospects for power generation, coal to liquids, coal to chemicals, coal gasification, coal drying and other clean coal technologies.

Also, the Company views its acquisition of Reed Minerals as the first step in a metallurgical coal strategic initiative which includes coal exports.

North American Coal also continues to pursue additional non-mining opportunities, particularly in aggregates and international value-added mining services projects, particularly in India.

Hamilton Beach reported net income of $1.5 million for the first quarter of 2013. Revenues were $106 million, and that compares with net income of $1 million in the quarter a year ago and $105 million on revenues. The modest revenue increase in the first quarter compared with a year ago is primarily due to increased unit sales volumes of lower priced products, mainly in the US consumer retail market. The improvement in revenues was partially offset by lower unit sales volumes in the Canadian and international consumer markets.

Net income in the first quarter of 2013 increased slightly compared with the first -- with the 2012 1st quarter. The improvement was primarily the result of increased sales volumes of higher margin products, favorable foreign currency movements due to the strengthening of the Mexican peso and Canadian dollar and lower interest expense, partially offset by a moderate increase in product costs and higher selling, general and administrative expenses.

The increase in these operating expenses was mainly due to additional costs incurred to execute Hamilton Beach's five strategic initiatives and that was partially offset by lower professional fees.

Looking forward, Hamilton Beach's target consumer, the middle-market mass consumer, continues to struggle with financial and economic concerns. As a result, sales volumes in the middle-market portion of the US small kitchen appliance market in which Hamilton Beach participates are projected to grow only moderately in 2013 compared with 2012. International and commercial product markets are expected to grow reasonably in 2013 compared with 2012.

Hamilton Beach continues to focus on strengthening its North American consumer market position through product innovation, promotions, increased placements and branding programs, together with appropriate levels of advertising for the Company's highly successful and innovative product lines. Hamilton Beach expects The Scoop, the 2-Way Brewer and the Durathon Iron product line, all introduced in late 2011, as well as the FlexBrew launched in late 2012, to gain market position as broader distribution is attained over time.

The Company is continuing to introduce innovative products in several small appliance categories. In the first quarter of 2013, Hamilton Beach launched the Hamilton Beach Breakfast Sandwich Maker, which provides an innovative and convenient way for consumers to cook breakfast sandwiches quickly at home. These products, as well as other new product introductions in the pipeline for 2013, are expected to increase both revenues and operating profit.

As a result of these new products, the Company's solid position in commercial and international markets and the execution of the Company's strategic initiatives, Hamilton Beach expects to increase volumes and revenues in 2013 compared with last year at more than the 2013 market forecast rate of increase.

Overall, Hamilton Beach expects full-year net income to be comparable to 2012. As anticipated, increases in profits from increased revenues are forecasted to be largely offset by expected increases in operating expense to support Hamilton Beach's strategic initiatives.

Product and transportation costs are expected to remain comparable to 2012.

Hamilton Beach expects 2013 cash flow before financing activities to be moderately lower than a year ago due to increased working capital.

Now, longer-term, Hamilton Beach will continue to take advantage of the potential to improve return on sales through economies of scale derived from market growth and a focus on its five strategic growth initiatives. The first one is enhancing its placements in the North American consumer business through consumer-driven innovative products and strong sales and marketing support. The second is enhancing Internet sales by providing best-in-class retailer support and increased consumer content and engagement.

The third is achieving further penetration of the global commercial market through a commitment to an enhanced global product line for chains and distributors serving the global food service and hospitality markets. The fourth is expanding internationally in the emerging Asian and Latin American markets by increasing product offerings in these markets, increasing focus on offering products designed specifically for those markets and expanding distribution channels and sales and marketing capabilities. And fifth, entering only the best market with a strong brand and a broad product line.

During the first quarter of 2013, Hamilton Beach continued to make strides in the execution of all of its strategic initiatives and expects to continue to do so over the remainder of the year.

Kitchen Collection reported a net loss of $3.3 million on revenues of $40 million, and that compared with a net loss of $2.8 million on revenues of $45 million in the first quarter a year ago. Now, revenues declined primarily as a result of the decrease in comparable store sales of both Kitchen Collection and Le Gourmet Chef and the loss of sales from closing unprofitable Kitchen Collection and Le Gourmet Chef stores since March 31 a year ago, and that's partially offset by sales from some newly opened Kitchen Collection stores.

The decline in comparable store sales was primarily due to an increase in store transactions and fewer customer visits, partially offset by improvements in the averages sale transaction value. The decline in revenue was partially offset by sales at newly opened Kitchen Collection stores.

At the end of March, Kitchen Collection operated 255 stores. That compared with 270 stores a year ago, and Le Gourmet Chef operated 44 stores and that compared with 57 stores a year ago. At year-end 2012, Kitchen Collection and Le Gourmet Chef operated 261 stores and 51 stores respectively. The increase in Kitchen Collection's first quarter 2013 net loss was primarily the result of the reduced sales and a shift in mix to lower margin products at Kitchen Collection comparable stores.

Looking forward, Kitchen Collection believes that consumer traffic to outlet malls continued to decline in the first quarter of the year and prospects for the balance of 2013 remain uncertain. The middle-market consumer remains under pressure due to financial and economic concerns, and those concerns are expected to continue to dampen consumer sentiment and limit consumer spending levels by Kitchen Collection's target customer in 2013. In addition, the Company expects to maintain a lower number of stores through much of 2013 than it had in 2012 and as a result, revenues are expected to decline.

Overall, Kitchen Collection expects modest net income for the 2013 full year and positive cash flow before financing activities compared with a net loss and essentially breakeven cash flow before financing in 2012.

The net effect of the closing of a number of stores early in 2013 and the anticipated opening of new stores during the second half of 2013 are expected to contribute to improved results over the remainder of the year. Also, enhanced sales per store and product margins are expected as a result of improvements in store formats and layouts and further refinements of promotional offers and merchandise mix at both the Kitchen Collection and Le Gourmet Chef stores.

During 2012, Kitchen Collection reformatted many of its stores which resulted in higher upfront costs during 2012 and the liquidation of a substantial amount of inventory, both of which are not expected to recur in 2013. These new formats are expected to gain traction and improve margins and income in 2013.

Longer term, Kitchen Collection plans to focus on comparable store sales growth around a sound store portfolio, and Kitchen Collection expects to accomplish its goals by enhancing sales volume and profitability through a continued refinement of its formats and ongoing review of specific product offerings, merchandise mix, store displays and appearance, while improving inventory efficiency and store inventory controls. The Company will also continue to evaluate and as lease contracts permit, close under-performing and loss-generating stores.

In the near term, Kitchen Collection expects to concentrate its growth on increasing the number of Kitchen Collection stores, with store expansion expected to be focused on identifying the best positions in the best outlet malls for Kitchen Collection stores. And Kitchen Collection also expects to explore other growth opportunities, particularly in textiles and e-commerce.

That completes the first quarter update. I'd be happy to answer any questions that anyone may have at this time.

(Operator Instructions) Our first question comes from Tara Reisbig from Moab Partners.

Hi, guys. This is Tara Reisbig from Moab. We have been investors for a while and in our efforts to talk to the Company in the past, we have sort of been unsuccessful in getting a number of our specific questions answered. So I was hoping either on this call or perhaps after in private, you might be willing to go through some of our questions. Is that okay?

We'll try to answer your questions if you want to give us any questions, yes.

Okay, great. Let's start with North American Coal, first off with Reed Minerals. I just want to kind of review the -- your rationale for acquiring that, especially at a time when met coal wasn't exactly faring so well in the market and how you came up with a valuation for the price that you paid.

Well, we think the Reed Coal acquisition was an excellent acquisition and we think that the timing, while it's never absolutely perfect, was really pretty good because the boom conditions had already passed, so some of the prices that were being paid were not the prices that we paid. It is structured with contingencies, so that there's a base price and then a contingent payout depending on certain aspects of the performance of the business. So we had a lot of protection in the way that the contract was designed.

Secondly, it's very much a long-term opportunity from our vantage point. We really don't look at it from an (inaudible) short-term point of view. We prefer that things be better in the short term than not better, but on the other hand, we're moving aggressively to make operating improvements in the Reed Mining operations, additional mechanization capital expenditures that we think can significantly improve its operations and put them much more on the basis of the other coal operations that we have in North American Coal in the United States.

And secondly, we are working hard, as I indicated in my comments, to develop an international metallurgical coal strategy and sales. Those efforts are underway. The volumes at the moment are weaker than we had anticipated at one particular customer, but the prices are pretty much where we anticipated that they would be. We've been fairly close in projecting the prices and terms of our expectations. So I think my answer to your question is that we are really in the midst of getting prepared for a significant benefit from the Reed operations down the track over the next few years and that's really the way we look at this opportunity from our vantage point.

Okay. I guess following onto that, long term, what sort of potential do you really see from this business? Why get into met coal at all, as I understand that you're -- the other consolidated mines are all lignite, correct?

We see an opportunity to make money in this business and we think that these particular mines are well positioned for access to international markets in terms of the specific location that we are in in Alabama and access to transportation that would get us into the international markets. And so we're quite optimistic about the opportunities.

And I would just say that North American Coal has a history over the years of developing new initiatives in different parts of the country, different types of customers, and this is simply a continuation of continuous change that we have had in our coal business. And I think overall, we've been pleased with the results that we have gotten from the coal business and we certainly hope the same will be true with the Reed operation. We have no reason to think that it won't.

Okay, great. Could you give us any sense of how much of the revenue at Reed is steam coal versus met coal?

I think we will have to get back to you on those. I'm not sure we will reveal those numbers in our Q, but we -- and let me just say this, that it isn't quite as simple as this much metallurgical coal and this much steam coal. The metallurgical coal seams and the steam coal seams are intermingled in individual operations to some degree, and so as you mine through the seams, you will mine some that will go to customers for steam coal and some that go for metallurgical coal.

And so it's a balance and obviously, it is our objective over time to develop reserves that are more intensively metallurgical coal reserves and to increase our volumes of metallurgical coal. I think that's the best answer I can give you at this point.

Okay. That's great, thank you. Then let's move on to the unconsolidated mines and the new projects that you have coming on line. I guess just in general, how should we view the potential there? I mean, is it sort of average earnings per projected tons delivered? Is all the additional unconsolidated tonnage pure EBITDA for you considering that it comes in the unconsolidated earnings line? We're just trying to understand what the potential is. I think there's a lot of potential in the next few years, but we would like to make sure we are evaluating it correctly.

Well, we do think there's a lot of potential there and we effectively -- every single one of these mines is a long-term contract mine. They're not exposed to market prices in the sense that, let's say, the Reed operation could be exposed to market prices.

Right.

And in that context, we get a return for the services that we provide in mining the coal, for providing the coal in most instances, which is mined, and then we get a return for the capital that we put in and in some of these mines, we put in a fair amount of capital, and in others, we don't. And so it depends on how the contract is structured individually as to just exactly what the returns are.

But the way we tend to look at them all is that we want a good return on the capital that we invest in the mine and we want a service return on the mining services that we provide for these, and in combination that can improve the returns on capital in those situations where we're providing -- both using our capital and providing mining services.

So it's not a free market type return; it's much more along the lines of a return per ton or equivalent of coal delivered to the customers. That's about the best way I can describe it to you is that these are structured so that if the volumes are there, if the customer takes the coal, we make a reasonable profit along the way.

That's generally the way these are structured and in that sense, there's some difference from the way that Mississippi Lignite Mining works where, if we can find other sources of volume, we can get some incremental impact, but still, the core volumes are controlled by the prices that we set contractually that are over very long periods of time and they are adjusted for factors like inflation and so on and so forth.

Al, I would add to that from an accounting standpoint, those operations that are in development do drop to EBITDA just as the other unconsolidated mines do.

During the development period.

Okay, right. So --

And in production.

Okay, great. So just to look at it numerically, if you were to take your 2012 results, you had 25 million tons delivered from the unconsolidated mines and your earnings from the unconsolidated mines were $45 million roughly. Is it fair to take that $45 million of earnings and divide it by the 25 million tons delivered and come up with a sort of earnings per ton, and then apply that to the future tons that you expect to deliver from these new projects? Is that a fair way to look at it?

These mines are so individually dependent that it's very difficult for me to answer the question that way. You certainly do get an amount per ton by doing that division, but it's not necessarily true of each of the mines. For example, we would get a larger amount per ton for mines that we are putting a significant amount of capital in than for mines that we're putting less capital in.

Right. Then in terms of the new projects that -- there are five new projects, is that correct? Which ones are you putting significant capital into and which ones is the capital being funded by the plant?

Well, in some of these, there's a sharing of capital. It depends to some degree, but certainly, J.C., we would be putting substantial capital into several of those new mines -- Mississippi lignite Mining.

That is an existing mine.

I mean -- excuse me --

(Inaudible) mines (inaudible).

-- Other Mississippi operation.

Yes, we're investing substantial capital obviously in Reed, which we just acquired, and that is a consolidated operation. The other one where we are investing capital is the Coyote Creek Mining operation.

Okay.

And How about the structure of Liberty Fuels?

Well, that's all financed by the customer.

Liberty Fuels is financed by the customer.

As are the others.

And the others are -- with the exception then of which one?

Of Coyote Creek.

Coyote Creek, where we -- it would be our capital.

Okay, great. That's very helpful.

Now --

Speaking of Liberty, are there any updates on the regulatory approval for the Ratcliffe plant? I know that's sort of been pending.

Just only what's available in the public record.

Okay. Okay. And (inaudible) --

There's nothing new to report, but everything is on track, as I indicated my comments, to begin production, and I forget what I said -- mid-2014, I think.

Right, yes. In terms of the ramp-up of the production, is it kind of a linear ramp of tons or is it more like a hockey stick where it starts off slowly and then kind of exponentially increases as you get efficiencies of production? How does that work exactly? How should we think about that?

Why don't you go ahead, J.C.?

Each customer has its own demand curve as these are started up because ultimately, these mines are serving a single customer and it's really dependent on the plans and the actual execution of the startup of the customers' operations. So there is no typical curve for any of these.

I think the only thing I would add to that is that those that are designed to produce power, that is mines that are backing a power plant, have a defined period of time in which they move to full production of the power. And that isn't a really extended period of time after first delivery, so it could be over a one to two-year period. On the other hand, there are some coal mines where we are not selling to power plants, where the coal is going for other uses and in those cases, it's more dependent on the customers' demand. And therefore, it ramps up in accordance with the customers' demand and it's a different situation from a situation where you have an embedded power plant that you want to operate at full capacity, if that's helpful to you.

Okay. That is helpful, very helpful. Okay. I think -- and then just lastly on North American Coal, once you sort of get these new projects online -- obviously, I'm thinking much more longer term, but is there any just thought about strategic initiatives in terms of breaking up the appliance business and the North American Coal business or -- we just have a hard time seeing how they really fit together.

Well, they fit together in the sense that they have good returns on capital and from our point of view, they are well run businesses and so, that's the primary consideration. And the answer to your question is no, there are no plans to do anything different from what we're doing at this time.

Okay. And actually, one more on the coal side -- what kind of risks are there to the long-term contracts? If a plant decides to switch to natural gas, would they pay you a termination fee? What are the -- how easy is it for them to get out of that contract because some of your contracts have lives of 25, 30 years and (inaudible).

Well, I will ask J.C. to give you some specifics here, but the general answer is that it's pretty difficult for our customers to move away from us as a supplier, given how the contracts are structured and the basic economics of our particular power plants. J.C.?

Yes, I mean, I would also add that coal-fired power plants can't switch to natural gas any easier than you could switch your car from gasoline to diesel. It's two fundamentally different ways of generating electricity, so a power plant switching really isn't part of the equation. From a contractual standpoint, I mean, I guess what I would tell you is that as you go through the variable interest entity analysis, it says that our contracts will be -- these operations will be de-consolidated from our financials.

Certainly, the costs to us in a termination event are considered. If there was any significant risk on our part, or any significant cost on our part, it would certainly affect that analysis and swing it more towards having those operations consolidate in our financials. The specifics as to how each contract works with respect to termination are subject to those contracts.

But generally speaking, I think our assessment is that the risk profile is low, that these are very efficient power plants. They have a cost structure that, generally speaking, allows them to be dispatched early in terms of desirability from the point of view of the grid, and that the bigger risk, if there is one, would be some sort of draconian rules that relate to carbon dioxide as opposed to lower fuel prices. And I mean, frankly, the sort of deconstruction of the US infrastructure that would be involved in that for our particular coal mines and power plants would be enormous, and so we don't feel that those risks are particularly significant as we see it.

Now, what I would add -- and really, perhaps this is the more important point, is that the market is very likely, for the time being, with the technology that's in existence, to be constrained for new power plants being built on top of reserves that we currently have that are coal-fired. So what we want to look for are opportunities for coal to liquids kinds of technologies. We think those are evolving. We are going to be pursuing those. We think that the Kemper County Liberty Fuels project is very environmentally sound. It has carbon capture capabilities.

On the other hand, there are a lot of hurdles for new coal-fired power plants as you look to the future at the moment, and given the technologies. So what we want to be doing is looking -- with the completion of our new coal mines, and I would suspect we are in a mighty small minority of companies that are building new coal mines, at least at the magnitude that we are in the country. And those, we think will all turn out well, and the question is where does the growth come from in the future?

And as I say, really we, in our strategy, it comes from two areas or three areas perhaps. One is a continued maturation and development of the operations we have today and the new operations that are planned. The second is various types of coal to liquids operations and the third is the metallurgical platform that we have already described to you that is involved in the Reed situation. So that's really the way I would look at the risks and opportunities structure. It has less to do with risks to the old operations and more to do with the changing character of what we invest in for growth in the coal business.

Okay, great. That's very helpful on the coal side. And I just have a couple of quick questions on the Ham Beach and the Kitchen Collection segment. If you look at Hamilton Beach, you went through the five strategic initiatives. I'm just wondering if you can give us sort of an example or an update on the progress that you have made in any one of those strategic initiatives. You said that you are progressing well and I was just wondering if you could give us some concrete examples.

Well, for example, we have -- we're expanding internationally. We have a significant initiative in Brazil; we have a significant initiative in China. We have one that is starting up in India and we're continuing to try to strengthen the performance in our Latin American operations. So there are some very specific examples in that case.

We do feel that our innovative products are driving new placements and also, our relationship with our customers is driving enhanced placement opportunities. We really work hard to be viewed by our large customers as a very strong partner in their business, both in terms of the innovative products and in terms of the sales and marketing activities.

I mentioned the Breakfast Sandwich Maker. I think that's an example. We have gotten good pickup on that and the other products that I mentioned are also really picking up and enhancing our position. We have a very strong position on the Internet. It is growing quite rapidly and we've been working with not only the traditional customers like Wal-Mart, Target and so on, but also with Amazon and we're well positioned with the customers in the Internet area, but we're also trying to do work to enhance customer understanding of our products.

Our products tend to be well rated by consumers and folks that are in the business of rating and one of the interesting facets of the Internet business is that customers tend to look more thoughtfully at the information about the products, their quality, how they have been received by consumers, than those that buy in some of the more traditional brick-and-mortar operations. So that is another example.

Our commercial business, we've got a number of initiatives underway with the chains. We really have been moving in the last few years out of the more traditional bar-oriented blender type of business. We have expanded the product line considerably, but the chain business tends to require less standardized and more tailored products. And so we've been working with a number of the major chains not only in the United States, but internationally, so that is, I think, another example. And then only the best market I would simply say that we are working on very specific initiatives in that area and trying to move that forward.

So the entire organization is really galvanized around those five strategic initiatives and we view them as kind of a three to five-year program. Those are not going to reach the longer term objectives we have for them in an extremely short period of time. They are things we are working hard on developing, putting capabilities in place and it really complements a very strong core business that we already have. So that's the best way I think I can answer that question.

Okay. In that three to five-year timeframe, do you think Hamilton Beach can get back to being kind of a $50 million EBITDA company? Is that level of profitability achievable?

I'm really not going to comment on the growth in terms of EBITDA and others. Our aspirations -- I would just say that our aspirations for the longer term are very significant.

Okay. And then lastly on Hamilton Beach, is Wal-Mart still your largest customer?

Wal-Mart is, I believe, our largest customer, yes.

Okay. After Wal-Mart, could you give as any sense of what percent of revenue the second-largest customer would be?

I don't -- you would have to look at the Q and whatever is in the Q is what we're prepared to say. To be honest, I don't have those numbers at my fingertips.

Understood.

Tara, This is Christy Kmetko.

Hi.

There is information in the 10K that talks about, I believe, our -- the percentage of our five largest customers. I have to find it, but I can call you back with that information.

Okay, that would be great. Thank you. And then lastly on Kitchen Collection, how far along in the renovation strategy are you? And is there any point at which you would consider giving up sort of on the strategy if it doesn't seem to be improving?

Well, I think the way to look at Kitchen Collection is if there's a solid core business and I think that we still have some further way to go in terms of eliminating stores that are not as profitable as we would like them to be, but that is really, in large measure, reaching a conclusion. I think that's behind us, so as we look forward, I think a number of things can happen. One is eventually, I think, the consumer, the middle-market consumer, will become healthier than the middle-market consumer is today. We can't estimate how fast that's going to happen. A lot is going to be dependent on the improvement of the economy and fuller employment than we have today, but it has been a long cycle that has affected that business.

It has affected the Hamilton Beach business as well, but I think we have been able to counter it in the Hamilton Beach business by deploying our assets and efforts around in a variety of different businesses, countries and so on, but so I think the consumer is going to get more healthy.

We're looking at some additional formats as we indicated -- as I indicated. Textiles are one and enhanced performance in the Internet business is another, and I think that we will be looking very carefully at our positioning in outlet malls as opposed to more traditional malls, and I think the formats are pretty much in place. They need to mature a little bit and we need to have consumers get a little more healthy and be patient in that regard.

And then we will continue to expand, particularly in outlet malls, where we think the characteristics are soundest in terms of the sound core that I mentioned earlier, and there are some signs that developers are starting to get more interested in additional outlet malls and improved environment. So I guess I would say we are cautiously optimistic at this point.

Okay. So do you -- would it be fair to say that you feel that you have hit the inflection point in terms of the transition or the renovation strategy and you should see recovery from this point on, or could we still expect declines in this business -- further declines in this business?

Well, I think you have to distinguish between the comparisons to the previous year, which is one set of comparisons, and the base that we are at at the moment, and if you're talking about the base we are at at the moment, that is at the end of the first quarter, I think you're going to see that that stays more or less in place with some puts and takes, but you've still got -- you're still going to see some reported declines based on the activity that occurred in the second and third quarters of last year as you are comparing the year-to-year numbers.

Understood, okay. That wraps up my questions. I really appreciate you taking the time to answer them.

Happy to do it.

And that's it for me. So thank you very much.

Thank you.

We have No further questions in the queue at this time. Now, I would like to hand it back to management for closing remarks.

Okay. Thank you all very much. Christy?

Thank you for joining us. If you do have any further questions, you may reach me at 440-229-5130. Thanks for joining us.

Thank you for joining today's conference. This concludes the presentation. Please be aware a replay of this call may be available by dialing 617-8201-6888 and using the passcode 84397307. You may now disconnect. Good day.