NACCO Industries Inc. (NYSE:NC)
Q3 2008 Earnings Call
November 4, 2008 11:00 am ET
Christina Kmetko - Manager of Finance
Al Rankin - Chairman, President, and Chief Executive Officer
Amy Bloom - Stanfield Capital Markets
Frank Magdlen - The Robins Group
Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 NACCO Industries Earnings Conference Call. At this time all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for reply purposes.
I would now like to turn the presentation over to Ms. Christina Kmetko, Manager of Finance. Please proceed.
Christina Kmetko – Manager of Finance
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 June 30, 2008. If anyone has not received a copy of this earnings release or would like a copy of the 10-Q, please call me at 440-449-9669 and I'll be happy to send you this information. You may also obtain copies of these items on our website at www.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 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 2008 third quarter earnings release, which is available on our website.
I'll now turn the call over to Al Rankin. Al?
Al Rankin – Chairman, President and Chief Executive Officer
Thanks Christie good morning to all of you. NACCO had a net loss for the third quarter of 17.4 million or $2.10 of share and revenues of $918 million. Those results compared with net income previous year of 21.1 million or $2.55 a share and revenues of 875 million. NACCO materials handling group and both its wholesale and retail segments in the third quarter were negatively affected by the recognition of non-cash charge in a total amount of $14.5 million after tax against the accumulated deferred tax assets or its Australian operations in for certain US state taxing jurisdictions. Obviously, the third quarter was a very difficult quarter for NAACO, economic condition deteriorated considerably in the course of the third quarter and that had an effect of again significance on our consolidated results.
Key perspectives by subsidiary include the following, NAACO materials handling wholesale had a net loss of $12.7 million in the third quarter compared with $5 million of net income in the previous year. That swing of $17.7 million was of course partially reflects the $7.7 million deferred asset charge that I discussed above, it also reflects significant unfavorable foreign currency movements and substantial material cost increases net of pricing increases and it also reflects market deterioration during the third quarter.
NACCO material handling group retial had a net loss of $7.4 million it had a gain of 1.8 million in the year before. The swing of $9.2 million is essentially all accounted for by the deferred tax asset charge and a 2.6 million gain in the previous year that relates to the sale of retial operation. In total if you exclude those two items the operating results were not to somewhat.
The two consumers businesses Hamilton Beach and Kitchen Collection also had adverse market issues and particularly Hamilton Beach rising product. Hamilton Beach's net income decreased $5.1 million from 6.3 million to 1.2 million, and the decrease in 2008 primarily resulted form increased product cost net of price increases, some reduced sales of higher margin products and some adverse currency charges. Kitchens collection had a significant loss in the quarter of $3.3 million compared to 900,000 the previous year, essentially all of that was the result of lower sales and margins at Le Gourmet Chef largely as a result of markdowns on discontinued products in connection with the implementation of a very significant updating of the product offering in that Gourmet Chef format.
North American cost income declined from 7.8 million to 7 million, and that decline war largely the result of decrease in line mark deliveries which we remember mainly in Florida, and higher cost of sales due to lower production levels over the course of 2008 at the Mississippi Lignite Mining Company. And given those difficult market conditions we felt that it was appropriate to increase the capitalization of three of subsidiaries by contributing $25 million to NACCO materials handling group 13 million to Hamilton Beach and 5.8 million to Kitchen Collection that was over the full period in some cases of the first three quarters.
Turning to the outlook for the fourth quarter of 2008, I simply note that it's an extraordinarily difficult environment that we believe we face going forward. Consumer goods markets are quite weak and capital goods markets are turning cyclical, quite quickly and closed the Americas and in Western Europe. And so, those are economic and market conditions deteriorate our results are being significantly effect and will be in fourth quarter just as they were in the third. But I really have to note that how deep and how long is now in turn is going to be is extremely uncertain. In Hamilton Beach and Kitchen Collection consumers are reducing purchases and as I indicated we have significant declines in our bookings in the major markets in which we participate around the world.
In addition to that material cost increases currency – foreign currency movement are continuing to affect us negatively. Price increases have been implemented to offset increased material and transportation cost at both NACCO materials handling group and Hamilton Beach and those are expected to improve margin recovery overtime. However, they won’t fully offset those significantly higher costs in the fourth quarter. Obviously there is a substantial delay, we have fixed prices for units in NACCO materials handling group backlog and we have price commitments which in some case is continued through 2008 at Hamilton Beach.
In addition in North American Coal expects some lower delivery requirements due to customer power outages and the coal side of the business and weak limerock markets due to lower housing and construction markets in Florida. So, we don’t see the economic environment improving at all in the fourth quarter, in fact it deterioration accelerating, that’s what we are planning for. We are putting actions in place to deal with he significant downturns in each of our businesses in a very aggressive way and we are operating on the assumption that the deterioration will continue in 2009 at operating conditions at a minimum and the early part of the year are going to be extremely difficult.
As a result of all of that, and the uncertainty in overall financial markets as well, the company is really going to focus on maximizing our cash generation and in that context we are unlikely to pursue in the share buybacks in the near term.
If you look at some of the businesses in a little more detail at NACCO materials handling group, revenues increased in the third quarter primarily as a result of favorable foreign currency movements and a shift to higher price trucks in Europe and the moderate effect of unit and cost pricing increases earlier in the year. The increase in units however was partially offset by reduced unit volumes in both Americas and Europe as a result of decreased shipments of about 500 units between the two quarter, the quarter this year and the quarter a year ago. Our backlog decreased to about 26,000 units compared to 30,500 a year ago and 28,400 at June 30. As we can see the impact there from a decline in bookings as bookings markets have softened.
If you exclude the effect of a non-cash charge at 7.7 million which I refer to you in my opening remarks. The decrease in net income was primarily the result of extremely unfavorable foreign currency of $15 million pretax, it was almost for us a perfect storm of foreign currency movements with various different components, coming together class of product, adverse hedging results, revaluation of balance sheet items and the result was that we had a negative currency impact in the third quarter of 13.7 million comparison to a positive impact from currency of 2.2 million in the previous quarter. So we also face very significant material cost increases they were about $25 million from both steel and transportation cost and other elements as well, and about half of that was offset by price increases which are starting to have an impact, and we did have some higher learning cost during the quarter as well.
On the other hand, GS&A were reduced, and expenses were reduced and we had lower product liability expense as a result of better clients experience. The third quarter also included a charge of $1.7 million of additional restructuring charges for the Urban Scotland restructuring program which will be complete by the end of the first quarter of next year by effectively closing that plan.
As you turn to the outlook, as I have already suggested we expect significant declines truck bookings market in the fourth quarter and also as we look into 2009 the elevated material cost that refer to you earlier are expected to continue to have an unfavorable effect in the fourth quarter, but the price increases that we put in place are having an additional, will have additional effect in the third quarter and in the fourth quarter and the first quarter, and we obviously are looking at the opportunities for further price increases to re-power the operating margin that we had at earlier times.
We have been trying to deal with unfavorable foreign currency movements over extended period of time and that’s involved the closure of our urban manufacturing plant and it’s a part of the manufacturing restructuring program in 2009, that will expose us, leave us expose loss to foreign currency exchange rate of fluctuation, reduce our working capital and put us in enhanced position to respond more quickly to, and flexibly to customer requirements. We think that saving that are generated by that program will exceed $20 million, it obviously does fluctuate depending on the currency values that you use, but its still, a very substantial savings from that program overall.
Our new product programs continue and most importantly we have new electric rider lift-truck program that is progressing satisfactory. We expect to bring a full line of newly designed products to the market over the course of 2009 and early, and then continuing on in the 2010 and we expect those programs to contribute positively to our future results.
Turning to the retail business, operating results are about the same as I indicated, if you exclude the gain from the sale of retial viewer ship in 2007 and the deferred tax asset charge in 2008. We continue as far as the outlook is concern to focus on bringing those units in the UK and Australia to breakeven, but if economic conditions in those areas deteriorate further that could obviously affect both the revenues and the profit margins in the retail side of the business just as it does in the wholesale side.
At Hamilton Beach the third quarter revenues were comparable between the years but net income declined significantly. As I indicated earlier, we had limited price increases of 1.7 million, but product material and freight cost of 9.7 million and that was the major impact on our reduced profitability.
As we look to the fourth quarter of course, the level of consumer spending in the fourth quarter is extraordinarily important to that business, and its expected to be significantly reduced. Our retial expectations are low or the fourth quarter holiday selling season this year and we still have a lot of adverse economic factors affecting our US consumers including high food and the best home values and financial market concern, and in total it just reflects a very challenging retail environment. Against this backdrop we do expect that our commodity cost are going to remain elevated for the products that have already been purchased for sale in the fourth quarter and we don’t expect to recover those cost with the price increases that we have in place so far.
As we look to 2009 now we do expect additional impact from price increases and we are working very hard in Hamilton Beach just as we are in NAACO materials handling group to bring the effect of decreasing commodity cost including steel, aluminium and copper to bear through our supply base as quickly as they are benefited by reduced cost. We are working extremely hard in Hamilton Beach with our suppliers to make sure that those benefit come as quickly as possible. We’ve had strong placements and at least so far good promotional programs from our customers for the fourth quarter, and we think that we’ve got additional new products in the pipeline for 2009 and as well the beneficial to the company’s results. On the other hand and even the new products are being overwhelmed by the reduced consumer confidence and uncertainty in US consumer market. So forecasting their results either at the margin level or the revenue level is extremely difficult.
At Kitchen collection I have already indicated that the net loss increased was driven by the change in the Gourmet Chef Stores format. We feel very enthusiastic about the new product offerings. We will be in that format and we think there is a lot of excitement in those stores and we are hopeful that this product lineup will achieve the potential that we continue to think with Le Gourmet Chief I have. Obviously, however, consumer prospects and namely in the factory outlet mall area, we will affect the ultimate results in the fourth quarter and we have seen periods when traffic has really slowdown in the factory outlet environment. To some degree it reflects fewer shoppers with limited intent to buy and more shoppers who are interested in buying. But generally speaking it’s not a positive environment at all in the factory outlet mall environment.
As we look at the outlook, the critical issues of course are consumer confidence and traffic to the outlet malls, we hope that lower gasoline prices will be helpful, and certainly the business should perform more inline with our expectations and now that the bulk of the abnormal discontinued product discount program is essentially complete at Le Gourmet Chef. And in 2009 it should be quite clean from that point of view.
At North American Coal we had somewhat reduced income in the third quarter due to fewer limerock deliveries as a result of lower customer requirements. Obviously, we have had an enormous decline in the Southern Florida Housing and Construction markets which have led to the lower limerock deliveries. We also have higher cost of sales, sales at Mississippi Lignite Mining Company do lower production levels over the course of the year as I mentioned earlier. Now we’ve had some improved operations and have Red River Mining and some higher royalty cost to offset some of that.
We do expect that the fourth quarter will be well below 2007, we have customer plan average and higher cost of sales will continue in the fourth quarter at Mississippi Lignite Mining Company then they all gradually get better in 2009 and we should have improved results in the second half or the last three quarters of the year next year. And we expect that deliveries at our limerock operations will be lower in the fourth quarter for the reasons I outlined just a minute ago. And we don’t see those markets turning around in Southern Florida any time soon. We are continuing despite this environment to develop new domestic coal projects. We are encouraged with the project opportunities that are available and we continue to be hopeful that we will have an impact from new projects on our results as we look forward in the next few years.
That really completes my comments and I will open it up to questions after just noting that in total, while perhaps the foreign currency problems that have been buffering us and material cost problems, priced material cost shortfall and margins that we have been dealing with in 2008 will be moving behind this that the real headwind is we look forward in the fourth quarter and in 2009 is extremely weak consumer markets and the capital goods market for forklift trucks and our approach is going to be extremely conservative and managing the businesses. We have been through downturns especially in the forklift truck business, they have to be dealt with very aggressively so that you stay out in front of them and manage costs and that’s exactly what we will be doing. But we are not sure how difficult the environment will be, how much the markets will drop. We find that our forecasting models are not working particularly well in these markets. We are being extremely cautious.
That completes my remarks and I will now open it up for questions.
[Operator Instructions]. And your first question comes from the line of Vanessa Miranda of Stanfield Capital Partners.
Hi. This is Amy Bloom of Stanfield. For the Hamilton Beach Subsidiary wise, it looks like the covenant next quarter will also be tight considering that the outlook for the fourth quarter is weak? Are you expecting to contribute more capital to keep that company in mind with these covenant requirements? Thank you.
We monitor the performance of the companies very carefully and believe we have the ability to address covenant issues one way or another in each of our businesses at this time. So it obviously depends on -- the degree of difficulty depends on the assumptions you make about the markets themselves but we feel we have outstanding businesses in each of our four subsidiaries and we will take the actions that are necessary to move us through this period.
Thank you. And also on that subsidiary, are you expecting any type of inventory write-downs in Hamilton Beach?
We have a couple of areas where there is potential expertise due to some degree but it's not abnormal for the business and the general levels of inventory and the quality of the products the Hamilton Beach is just fine. Its not -- and there are no issues of significance in terms of phasing out products and phasing a new products that might leave us with significant problem areas as we look forward. There is almost always a case, we have a couple of areas where we are focused on special programs to deal with inventories, but they are not in the scheme of things of major issues.
Okay. Great, thanks for you support.
[Operator Instructions]. The next question comes from the line of Frank Magdlen of The Robins group.
Al, at Hamilton Beach, if raw material prices stayed flat, what would it taken away price increases to get to the desired margin?
Well, I am not sure I can really answer the question. What I would you tell you is about the process we’ve gone through. We have reviewed at Hamilton Beach essentially every single stock keeping unit, skew in the business. We have loved the current prices. We have asked our suppliers to reflect in their ongoing prices for next year. The kinds of reductions and commodity cost that we have seen and our engineers are basically reverse engineered, our products, we understand the material of those products in great detail and we know what commodity content is in them and therefore what we think should be appropriate reductions. So some portion of the recovery will come from decreased prices. But we believe that our decreased cost -- but we believe that the prices we put in place as a result of the reviews that we’ve done of every single skew put us in a pretty good position to have more normal margins in 2009.
But, in some cases the price increases require have really met that – it's necessary because of the implications for the price pointed which the product would ultimately sell in our customers operations to substitute products typically, to substitute lower cost, lower featured products that can help that retailer maintain a good product with the right margin for the retailer and for us at that lower price points. So, there are number of pieces that all come together with getting us back to a more normal kind of situation. So, that's really the process where we’ve been working through, we think we are out in front of it to the degree that we can be and we have always targeted the beginning of next year as the time when we can put in place many of those enhancements. And in a number of cases we have customer commitments that mean at raising prices it's very difficult in the last part of the year, the last six months of the year and the normal time for price increase is often right at the beginning of the next year. So that’s what we have focused on.
Okay. And in the lift-truck marketing can you highlight may be what industries are particularly down or…?
I think we can get some of that information for you but I will tell you that the situation is so forward and changing was such repetitive right now that we are watching the levels of the bookings market very closely each month. Those are the periods which we get the best information and I think you can assume that the manufacturing industries are particularly weak in comparison to more service-based and transportation-based industries that is industries that are involved in transportation of goods particularly from overseas. On the other hand, they are not immune either and we have seen some declines in our parts business, which is often historically is a leading indicator of weakness in the units of business because people are not feeling the need to repair trucks as quickly. It’s also a leading indicator of an upturn because you see an upturn in parts as people are bringing their forklift truck fleets back up to full serviceability. So obviously the areas that you can well imagine like automotive which are weak, but I think it’s going to take us a while to get that kind of information which we don’t get as frequently frankly to be able to answer your question more fully than I have just done.
Alright. And then I guess, I will try the second question do with Hamilton Beach, what kind of price increases if commodity cost and freight cost stayed lower where they are to get to back to board desired margin?
Well, it just varies all over the lot and because we change the mix so much, I really don’t want to retention does a percentage. We have long term targets of 10% operating profit in the Hamilton Beach business in this environment. You could assume that that’s an ambitious target. It’s a target which is dependant not only on margin but also on the absolute amount of the volume because its ability to contribute effectively to us is there is a substantial in terms of incremental impact. I think our real focus right now is on tightening our belt on GS&A costs, on ensuring we get whatever material cost reductions we can and managing the business in a very very prudent way.
And just what’s the target and remind me on the – for material handling?
In the long term we have very ambitious aspirations with the combination of the following. The new product line, which we are putting in place and which will be increasingly either parts that have had been available but the remainder over the course of 2009 and 2010, we have a significantly enhanced supply chain structure that we think will be very beneficial. We have closed the plant. We are in the process of closing the plant and in Scotland and making other changes that will make our manufacturing operations more efficiently, have very good parts business. And we think that on sort of an average part of a cycle which we are certainly not in, we would aspire to a 9% operating profit in the business. But in this environment, those are not numbers that we are focused on. We are focused on managing at low levels and doing all of the kinds of things that you have to do when you have a heavy industrial business with substantial embedded capital and so on and so forth.
Alright. Thank you, Al.
And you have no further questions. I will now turn the call back over to Christina Kmetko for closing remarks.
Okay, I will just comment again that we are watching the markets very carefully. We think this is going to be – I think as we surprised anyone on this call that the economy both here and in other countries is facing very difficult conditions and those are certainly affecting us perhaps even at the front line in terms of affecting us. We are taking all actions that we think are appropriate and proven to manage our costs and our businesses in that adverse environment, while at the same time continuing particularly in product development to maintain our position as excellent product provider because we think that’s where the long term strength of our businesses comes from. Till that completes my remarks. Christie, you have any closing remarks
Just thank you for joining us today and we appreciate your interest. If you do have any followup questions please feel free to give me a call, again the number is 440-449-9669. Have a good day.
Thank you for your participation in today's conference. To access the replay for this call you may dial 888-286-8010 or 617-801-6888 internationally. With the replay pass code 34694487. The replay will be available in approximately one hours' time. This concludes the presentation and you may now disconnect.
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