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NACCO Industries Inc. (NYSE:NC)

Q1 2010 Earnings Call

May 6, 2010 11:00 am ET

Executives

Christina Kmetko - IR

Al Rankin - Chairman, President and CEO

Ken Schilling - Vice President and Controller

Analysts

Schon Williams - BB&T Capital Markets

James Holly - Haltheon

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 NACCO Industries Earnings Call. My name is Regina and I will be your operator for today. At this time all participants are in listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Christina Kmetko. Ms. Kmetko, you may begin.

Christina Kmetko

Thank you. Good morning everyone and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO’s results for the first quarter ended March 31, 2010. If anyone has not received a copy of this earnings release or would like a copy of the Q, please call me at 440-449-9669 and I will be happy to send you this information. You may also obtain copies of these items on the NACCO website at nacco.com.

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 full year then open up the call to your questions.

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

I'll now turn the call over to Mr. Rankin.

Al Rankin

Good morning. NACCO announced last evening a consolidated net income of $11.7 million or $1.40 a share for the first quarter of 2010 and that was on revenues of $558 million and compares with a net loss for the first quarter of 2009 of $9.1 million or $1.10 per share on revenues that were quite similar, $555 million.

If you look at the highlights by subsidiary, NACCO Materials Handling Group profits improved to $26.5 million, net income in 2010 was $8 million compared with a net loss of $18.5 million in previous year.

Hamilton Beach's net income was $2 million better at $3.4 million in the first quarter compared with of $1.4 million a year ago.

Kitchen Collection had an improvement of $1 million with a smaller net loss at a low seasonal first quarter of $1.8 million compared with a net loss of $2.8 million the year before.

North American Coal's net income declined $2.7 million. Net income was a very strong $8.1 million compared with $10.8 million.

NACCO and Other, which includes parent company operations have a net loss of $3.0 million compared with a $1.5 million a year ago, which is an increase of $1.5 million.

And NACCO recorded a $3.1 million interim tax provision in eliminations in the first quarter of 2010 and that compares with an actual interim tax benefit in 2009.

So now I will turn to more detailed discussion of the results of each subsidiary.

NACCO Materials Handling Group, as I indicated, had improved income of $8 million compared to $18.5 million loss in the previous year. Sales went down to $375 million from $389 million. Operating profit improve to $10.3 million from a loss of $12.6 million in the previous year.

In the first quarter of 2010, worldwide new unit shipments increased to approximately 11,100 from shipments of approximately 10,800 in the first quarter of 2009 and that was the first time in six quarters that worldwide new unit shipments had increased over the comparable quarter in the prior year.

For the third consecutive quarter, parts sales increased over the preceding quarter and were up over the prior year quarter for the first time in five quarters.

NACCO Materials Handling Group worldwide backlog, very importantly, was approximately 16,900 units at March 31; that compares with 12,800 a year ago and 13,200 at the end of 2009.

The first quarter net income increased significantly compared with the first quarter of 2009, primarily as a result of a substantial increase in operating profit and a change in the effective income tax rates. Operating profit increased $22.9 million and that was primarily due to improved gross profit, lower operating expenses, which included a $4.4 million of favorable product liability adjustment, the absence of a bad debt charge, which we recognized in the previous year, and a $1.9 million pre-tax partial reversal of a restructuring accrual.

Also it was due to releases of cumulative foreign currency translation and deferred profit, partially offset by a loss on the sale of certain Australian operations. In total, those accounted for $4.2 million swing and had an impact on the profitability of $3 million in operating profit in the first quarter of 2010.

Our gross profit improved mainly as a result of improved margins on units despite lower revenues, improved parts margins on higher sales volumes, lowering manufacturing variances due to increased plant activity and the effect of favorable foreign currency movements.

Finally, the company recognized an income tax benefit in 2010, as a result of the completion of the sale of certain Australian operations compared with an income tax expense in 2009.

Turing to the NMHG outlook, we are cautiously optimistic that global market levels for units and parts volumes will improve at a moderate pace, but NMHG is not anticipating the market upturn of significance compared with the levels of the most recent six months, until the second half of 2010, with the exception of China and Brazil.

The critical North American market appears to be improving with moderate growth expected over the next three quarters

Recovery is also anticipated to be stronger in Eastern Europe, the Middle East and Asia than in Western Europe, which is expected to be relatively flat in comparison with 2009.

As a result, the company expects increases in bookings, unit shipment levels and parts sales in 2010 compared with 2009, with significant comparative increases each quarter over the prior year quarter.

As I reported in these discussions, in the past, NACCO Materials Handling Group took a number of actions in late 2008 and during 2009 to respond to depressed market conditions. Those included reductions in force, a plant closure in Italy, capital expenditure constraints, planned plant shutdowns, restrictions on spending and travel, suspension of incentive compensation and profit-sharing payments, wage freezes, and salary and benefit reductions, a very comprehensive program.

A portion of the salary reductions has been reinstated during 2010 and as the market continues to improve and financial results permit, the remaining salary reductions, incentive compensation and other compensation components will be gradually restored. NACCO Material Handling Group will be monitoring its operations and expenditures closely and will make additional adjustments wherever that's appropriate.

NMHG's new electric-rider truck program and warehouse truck and big truck product development programs are progressing as planned. Of particular importance, the new electric lift truck program, which is introducing trucks this year and next, is bringing a full line of newly designed products to market place.

Overall, market improvements are anticipated in the remainder of 2010, and those are expected to generate modest profitability over the remaining three quarters of the year.

Clearly, certain unusual benefits which were achieved in the first quarter, such as the substantial product liability and restructuring adjustments, are not expected to be repeated.

NACCO Materials Handling Group will also continue its program of divesting its four remaining retail dealerships to strong independent dealers. And our cash flow before financing activities is expected to be significant, but substantially lower than 2009 since the working capital reductions that we have achieved in 2009 are not going to be repeated in 2010.

At Hamilton Beach, as indicated, net income was $3.4 million on $102 million of sales compared to $1.4 million in the first quarter of 2009 on revenues of $94 million. Operating profit increased to $7.4 million from $4.4 million a year before.

Revenues increased 9%, primarily due to an increase in unit sales volumes in the U.S., Mexico and Latin American consumer retail markets and that reflects higher market demand than in the first quarter of a year ago.

The net income and operating profit increased significantly primarily due to an increase in gross profit. Lower product costs, resulting from declines in commodity costs and higher unit sales volumes were the primary factors leading to the improvement in gross profit. Partially offsetting that was an increase in selling, general and administrative expense mainly due to higher employee-related expenses, which result from the full restoration of compensation and benefits that were suspended in the first quarter of 2009.

Turning to the Hamilton Beach outlook, the small kitchen appliance market continues to recover. While consumer confidence and other key indicators have improved, the pace and sustainability of the upturn does remain uncertain because consumers continue to struggle with financial concerns and high unemployment rates.

As a result, Hamilton Beach anticipates revenues for the full year to be comparable or perhaps a little bit lower than 2009.

Despite the challenging economic environment, Hamilton Beach continues to focus on strengthening its market position through product innovation, promotions and branding programs, together with appropriate levels of advertising.

In late 2010, the company expects to launch a line of Melitta-branded beverage appliances. These products, as well as other new product introductions in the pipeline are expected to affect revenues favorably over time.

Overall, full year 2010, net income and cash flow before financing are currently expected to be strong, but somewhat lower than 2009. Employee-related costs are expected to be higher in 2010 than in 2009 because compensation and benefit programs, which were suspended in 2009, have been fully restored.

At Kitchen Collection, the loss was $1.8 million on $42.8 million of sales compared to net loss of $2.8 million on $39.7 million in the year ago. The operating loss was $2.9 million for the first quarter compared with an operating loss of $4.3 million in the first quarter of 2009.

Revenue increased approximately 8% and that increase resulted primarily from an increase in comparable store sales in both the Kitchen Collection and Le Gourmet Chef stores and sales at newly opened Kitchen Collection stores, partially offset by the effect of closing unprofitable Le Gourmet Chef stores.

Comparable store transactions and the average sales transaction value were up at both the Kitchen Collection and Le Gourmet Chef, as a result of an improved and increased product assortment and more effective merchandising.

At the end of March, Kitchen Collection operated 224 stores, and that compares with 211 a year ago. Kitchen Collection's substantial improvement in operating results was primarily driven by higher revenues, improved gross profit margins and reduced store rental expenses.

As you look forward, consumer spending levels continue to reflect financial concerns and high unemployment rates that I mentioned in connection with Hamilton Beach, but the outlet market does appear to be improving.

Kitchen Collection expects full year revenue in 2010 compared with 2009 to increase, but at a lower rate than in the first quarter. The favorable sales and margin trends that occurred in the reformatted Le Gourmet Chef stores in the second half of 2009 and early 2010 are expected to continue throughout the remainder of the year.

In addition, the company plans to continue to make further improvements to the merchandise mix in Le Gourmet Chef stores. The opening of new stores and company's continuing aggressive efforts to close or renegotiate leases for underperforming stores are also expected to provide improved results in 2010.

Overall, Kitchen Collection anticipates a significant percentage increase in full year net income for 2010 compared with 2009, primarily as a result of market and format improvements in the first quarter of 2010 compared with the first quarter of 2009 and continued moderate improvement over the remainder of the year.

Cash flow before financing activities is expected to be higher than in 2009.

At the coal company, net income was $8.1 million on revenues of $38 million compared with net income of $10.8 million on $32 million of revenue in the previous year.

Revenues increased in the first quarter, primarily due to an increase in contractual reimbursable costs at the San Miguel Mine and increased deliveries at the Florida dragline mining operations.

Net income for the first quarter declined compared with the first quarter of 2009, primarily as a result of the absence of a gain on the sale of assets recognized in the first quarter of 2009, a decrease in income at the Mississippi Lignite Mining Company primarily due to higher operating expenses and an increase in income tax expense in 2010 compared with 2009 as a result of a higher 2010 effective income tax rate.

North American Coal does expect steady performance at its coal mining operations in 2010 but that's always with the caveat that customers achieve their currently planned power plant operating levels.

Overall, tons delivered at the coal mines in 2010 are expected to be slightly higher than in 2009. Although due to a tornado in the vicinity of the Mississippi Lignite Mining Company in late April, tons delivered could be a little bit lower than previously anticipated.

Limerock deliveries are expected to be significantly higher in 2010 than in 2009. Early in the year, the U.S. Army Corps of Engineers issued new mining permits for North American Coal's limerock customers in the Florida lake belt region where an unfavorable legal ruling set aside the customers' previous mining permits.

On the other hand, although these mines are back in production, production levels are expected to continue at low rates through the remainder of 2010 because of continued depressed levels of the southern Florida housing and construction markets. Delivery levels are not expected to return to 2008 levels until those markets recover.

The company has three new mines that are expected to generate modest income during 2010. They are in the development stage and won't be in full production for several years. North American Coal also has a number of new project opportunities for which it expects to incur additional expenses in 2010.

We are moving forward to gain a permit for the Otter Creek reserve in North Dakota in preparation for the expected construction of a new mine. That permit is anticipated to be issued in mid-2010.

In addition, the company continues to work on a project with Mississippi Power Company to provide lignite coal to a new coal-fired Integrated Gasification Combined Cycle power plant expected to be built in Mississippi.

Overall, North American Coal expects full year 2010 income from continuing operations to increase over 2009 income from continuing operations excluding the lease bonus payments of $7.1 million pre-tax received during the third quarter of 2009.

Cash flow from operating activities in 2010 is expected to be substantial, but down from 2009.

So that completes my overview of the first quarter earnings release and I will be happy to answer questions, if anyone has any.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question today comes from the line of Schon Williams with BB&T Capital Markets.

Schon Williams - BB&T Capital Markets

I just wanted to go through a couple of questions. First, it looks like there are a number of one-time items within the Material Handling segment for the quarter. I just want to make sure I am absolutely clear on exactly what we should be adjusting out. I am coming up with something closer to breakeven for Q1 after stripping out the restructuring reversal and the profit, some of the other items. Does that look reasonable to you guys?

Al Rankin

We had marginally positive operating profits if you exclude the 1.9 million restructuring, the product liability of $4.4 million and effectively the 2010 portion of the $4.2 million, it's listed in the Q as other and that's about $3 million. So that brings you down to about $1 million of operating profit from $7.3 million.

Schon Williams - BB&T Capital Markets

Okay. I guess was there a LIFO adjustment as well in Q1?

Ken Schilling

No. LIFO was really an issue in the prior year first quarter. In the Q, you will see LIFO moved $1 million during the quarter. During the quarter, we only had a $1 million difference in LIFO.

Operator

(Operator Instructions). You have a question from the line of [James Holly with Haltheon].

James Holly - Haltheon

You had mentioned in some of the prepare commentary that you're monitoring commodity costs and considering options to mitigate potential unfavorable effects. What exactly on those lines are you considering, have you announced any price increases?

Al Rankin

Could you repeat the question, again?

James Holly - Haltheon

Sure. For the Materials Handling Group, you had mentioned that you are monitoring commodity costs and they may potentially have unfavorable effects that you're looking to offset. Could you talk about what steps you are --?

Al Rankin

First of all, we have contracts that extend in various durations for certain products and so, as commodity costs go up, it doesn't affect us immediately. We always have further discussions with our suppliers on how to reduce costs on their side to overcome any cost increases.

In addition, we have our own value improvement projects that we're constantly implementing and our hope is that we can keep our costs relatively stable and I think there are some signs it will increase modestly in the later part of the year. And we have enough visibility that we always try to address any net cost increases through price increases. So those are all tools that we would expect to use as we look forward.

James Holly - Haltheon

Okay. So you wouldn't necessarily expect an impact from Q2 but potentially you will need to work to offset the impact from the second half of the year?

Al Rankin

No, I think, that’s probably correct, but I think we've got a lot of improvement programs that also mature in the second part of the year. So all of that comes together and we have reasonable clarity for the year at this point.

James Holly - Haltheon

Okay. Just in terms of you mentioned you've seen some improvements in a lot of your end market in terms of volumes for (inaudible) as well. Does that continue through April?

Al Rankin

Yeah, I think so far as so good. I think we are encouraged by what we were seeing. On the other hand, we will be moderate about the pace at which we increase our factory production for two reasons; one, we want to make sure that the volume gains are sustainable and that they reflect not just some pent-up demand, but an ongoing level of demand.

And secondly, we want to be vey careful to make sure that our suppliers can keep pace with any upturn that we have in our production levels so that we minimize the risk of component shortages from our supply base. So it’s a careful process.

Operator

Your next question comes from the line of Schon Williams with BB&T Capital Markets

Schon Williams - BB&T Capital Markets

I want to circle back to Hamilton Beach. I don't understand the guidance there. Help me out. Q1 numbers very strong, both at the top line and at the margin, based on just normal seasonality, I find it hard to believe that revenues could actually be down in that unit this year. Is there something customer-specific that you're aware of that causes you to be conservative or is it just kind of your general out-take on the economy?

Al Rankin

That's very hard to project third and fourth quarter volumes in that business. My best hope would be that the numbers might turn out to be better than the ones we have but at this point, I think, this is the kind of a way we see it. A lot depends on the promotional volumes that we get in the third and fourth quarter and those can vary significantly from year to year, depending on just exactly how our customers want to position themselves.

So trends are encouraging, but you have to also keep in mind that you are comparing the first quarter this year with the first quarter last year, so that was a particularly weak quarter and I just wouldn’t assume that pattern continues through the rest of the year in terms of the market place

Schon Williams - BB&T Capital Markets

Right. I mean I don’t doubt possibility of the growth rate moderates, but again I just find a declining revenue scenario just to be a pretty low probability at this point, but --

Al Rankin

I think that I would just urge you to be cautious about following at a declining revenue scenario as opposed to similar sales level.

Schon Williams - BB&T Capital Markets

Can we talk about the average selling price was down year-over-year in Ham Beach. Can you talk about what's causing that?

Al Rankin

I really can't. I have to look at average selling price myself and a calculation is not one that I find particularly helpful. It really depends on the stage of the individual category markets. We have separate product categories, lenders, coffee makers, toasters, and ovens and so on and so forth. And I think we have on the order of ten of those of units and different markets respond differently at different times and the price points in all will be different.

And so my focus is on the total revenues, much more than it is on units.

Schon Williams - BB&T Capital Markets

But is there any pressure? Are you getting added pressure from your customers to reduce prices? Has that accelerated within the last few months or quarter or two?

Al Rankin

It would be hard for that effort to accelerate it. That business is very competitive always and had up and ever changes in that regard. But that would not be the reason for whatever change there is that you cited.

Schon Williams - BB&T Capital Markets

Moving on to coal, it looks like the Mississippi Service Commission issued a slightly unfavorable ruling on the permit for the Kemper County project. It sounds like the costs are now going to be capped that calls into question --

Al Rankin

I wouldn't make any assumptions about what state of play is. It's the world of politics and negotiation and I am sure that there will be further discussions and negotiations and public service commissions and utility commissions are very anxious these days to demonstrate their commitment to protecting the consumer.

And on the other hand, no power company is going to go forward without a viable project and deal structure. I think perhaps the encouraging thing is that they gave approval in effect under certain conditions. Now there will be a discussion about the conditions. I think that's the right way to read it for the time being. Who knows what's going to happen, but that would be my perspective at this point.

Schon Williams - BB&T Capital Markets

Can we talk about Otter Creek? What is kind of your timeline? I understand the permitting is going to happen. There's public discussion now over the next month or two. If permitting goes through this summer, do you have customers already lined up for that site? Could we see that site start yielding tonnage at the latter part of this year or some time next year, what is your timeline for that?

Al Rankin

I think the timeline is out quite a bit further than that. There could be some marginal operations on there relatively quickly depending on how we decide to develop it and go forward, but our objective has continued to be to get the permit in place and then we will be working on trying to develop more affirm complex of customers or individual customers for that project. I think that's the sequence we have used here and we will keep you posted as we learn more.

But at this point, the project is on track. We are doing exactly what we expected to do by this time, but I don't think it would be appropriate to expect major coal tonnage out of that operation quickly. Any coal project, it's got a pretty long lead time if you are going to talk about major volumes.

Schon Williams - BB&T Capital Markets

Then last question on coal, how should we be thinking about San Miguel? My understanding is that's one of your less profitable mine sites. What would be the EPS impact if you actually did not renew that contract? Could it actually be positive? How should we be thinking about it?

Al Rankin

It wouldn't be positive. But I don't believe we will reveal and discuss the individual earnings from individual mines and I think what I would just say is going forward, we would hope that something will work out that would allow us to have a reasonable contract, similar to the other contracts that we have. And that's the way we will approach it and will see what happens.

Schon Williams - BB&T Capital Markets

The new RFP that you put out, is that at more favorable terms or less favorable terms than your existing contract?

Al Rankin

You mean that they put out. We didn't put it out.

Schon Williams - BB&T Capital Markets

Well, your response to the RFP?

Al Rankin

The RFPs are the starting point for outlining what you are prepared to do and what you are not. So the negotiating process starts when the RFP is issued. And how everybody responds to that will depend.

So I think that all lies in the future. I guess, all I would say is that any contract that we would negotiate would meet our test of being a reasonable contract.

Schon Williams - BB&T Capital Markets

Then I guess, lastly, just kind of other item, litigation costs at $2 million or $3 million in the quarter, is that a good run rate? Do you expect that number to ramp up significantly in the latter part of the year, kind of stay constant?

Al Rankin

I really couldn't speculate as to what the numbers would be from quarter to quarter. All I would say is that litigation is a very expensive business. We feel that we have good taste for the other side, it feels the same way and that's what litigation is about. So I really can't comment more than that.

Operator

Ladies and gentlemen, this concludes the question and answer portion of the call. I would now like to turn the call back over to management for closing remarks.

Al Rankin

Okay. Christie, do you have anything you want to add?

Christina Kmetko

I just want to thank everyone for joining us and we appreciate your interest. If you do have additional questions, please call me again. The number is 440-449-9669. Have a great day.

Operator

Ladies and gentlemen, the replay of this call will be available for the next eight days. The phone number to call is 1-866-233-1854 and the replay code is 56824839. Once again we would like to thank you for joining us today. This concludes our presentation and you may now disconnect. Have a wonderful day.

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