NACCO Industries' (NC) CEO Al Rankin on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: NACCO Industries (NC)

NACCO Industries, Inc. (NYSE:NC)

Q2 2014 Earnings Conference Call

July 31, 2014 9:30 a.m. ET

Executives

Christina Kmetko – IR

Al Rankin – Chairman, President and CEO

Elizabeth Loveman – VP and Controller

J.C. Butler - SVP-Finance, Treasurer and Chief Administrative Officer

Operator

Good Day, ladies and gentlemen. And welcome to the Q2, 2014 NACCO Industries Earnings Conference Call. My name is Tracey and I’ll be your operator for today. At this time all participants are in a listen-only mode. (Operator Instructions).

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Christina Kmetko. Please proceed. Thank you.

Christina Kmetko

Good morning, everyone, and welcome to our 2014 second quarter earnings call. I am Christina Kmetko and I am responsible for investor relations at NACCO Industries. Joining me on today’s call are Al Rankin, Chairman, President and Chief Executive Officer. J. C. Butler, Senior Vice President, Finance, Treasurer and Chief Administrative Officer and Elizabeth Loveman, NACCO’s Vice President and Controller.

Yesterday we published our second quarter 2014 results and filed our second quarter 10-Q and for three and six months ended June 30, 2014. Copies of our earnings release and 10-Q are available at our website at nacco.com. Anyone who is not able to listen to today’s entire call and our typed version of this webcast will be on your website later this afternoon and available for approximately 12 months.

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, in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward looking statements which may not be updated until our next quarterly earnings conference call, if at all. Additional information guarding these risks and uncertainties were set forth in our earnings release and in our 10-Q.

Also certain amounts discussed during this call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our 2014 second quarter earnings release available on our website.

Finally we have made some changes to our presentation format. We are not going to provide as much detail from our earnings release as we have in the past. Instead I will be providing a brief overview of our quarterly results and business outlook and then I will open up the call for your question.

Now let’s discuss the quarterly results. Results for this quarter were disappointing, but not necessarily unexpected. Consolidated revenue increased to $200.4 million in the second quarter of 2014 from $196 million in 2013. However we reported a net loss of $3.6 million or $0.47 per share for the 2014 second quarter compared with net income of $5.1 million or $0.63 per share in the second quarter of 2013.

Here’s how our results which include some unusual events break down by business unit. North American Coal’s revenues increased as a result of higher tonnes and yards delivered. However our coal business reported a second quarter 2014 net loss of $100,000 compared with net income of $9 million in the second quarter of 2013. The major contributing factor to this net loss was a significant decline in the operating results at the consolidated mining operations, particularly from Reed Minerals, and from a $1 million pre-tax charge to reimburse a customer for damage to certain customer owned equipment at the Limerock dragline mining operations.

North American Coal also had reduced loyalty and other income, an increase in operating expenses in a pre-tax charge of $1.7 million for a reserve against a receivable from its customer in India. Improved earnings from the unconsolidated mines and a tax benefit in the current year compared with tax expense in the second quarter of 2013 did partially offset the unfavourable items I mentioned.

Let me explain what happened at Reed in a bit more detail. Reed had a significantly larger loss in the previous year, which we indicated last quarter would happen in part because we idled one of Reed’s mining areas. However results were even more unfavourable than we had planned for the following reasons. The operating and productivity improvements we are implementing began later than anticipated in the second quarter of 2014, primarily because of a delay in the start of a new drag line. In addition, to the drag line delay we’d also had to contend with excessive water in the mine area that limited the ability to produce tonnes.

As a result of a combination of these events we had experienced production shortfalls which caused a decrease in inventory levels and reduced ton soil. Also we had had higher depreciation expense on the equipment acquired during 2013 and 2014 to improve efficiencies and productivity and it also had higher repairs in maintenance expense. Finally we had experienced lower selling prices resulting from unfavourable market conditions which contributed to a decrease in revenues.

We expect improved operating performance at Reed in the second half of 2014 as production efficiencies are achieved. In addition North American Coal transferred key management from other operations to Reed Minerals during the second quarter and these individuals are expected to help Reed Mineral achieve its planned operating and productivity improvements.

At our consolidated mining operations, steamed coal tones delivered are expected to decline slightly in the last half of 2014 from the same period in 2013, based on the customers currently planned power plant operating levels for the remainder of the year.

Overall, North American Coal expects net income in the second half of 2014 to increase compared with the second half of 2013. The productivity improvements and increased mining efficiencies we mentioned at Reed Minerals are expected to result in break-even results compared with a significant loss in the same period last year, but are not expected to offset the substantial operating losses that Reed Minerals incurred in the first half of this year. These improvements that Reed Minerals in the second half of 2014 are also expected to be partially offset by significantly reduced deliveries at Mississippi Lignite Mining Company due to a planned outage at Customers Power plant as well as lower royalty and other income in the second half of 2013.

Cash flow before financing activities in 2014 is expected to be positive as compared with negative cash flow before financing activities in the prior year.

At Hamilton Beach, revenues increased moderately in the second quarter of 2014 compared with the prior year second quarter. Overall volumes were down primarily in the U.S consumer market, but this was more than offset by increased sales of products at higher price points mainly in the commercial market, and in the U.S, and Canadian consumer markets. However Hamilton Beach’s net income decreased to $1.4 million in the second quarter of 2014 from $2 million in the prior year quarter. If we remove the effective environmental charges of $2.7 million in 2014 and $2.3 million in 2013, operating results decreased primarily due to an increase in operating expenses, which were partially offset by a mix, a shift in mix, sales mix to higher margin products.

Unfavourable conditions are creating continued uncertainty about the strength of the regional markets and expectations regarding consumer activity in the second half of this year. As a result, sales volumes in the middle market portion of the U.S market, and appliance market in which Hamilton Beach participates are projected to grow only moderately in the second half of 2014. The Canadian retail market is expected to follow the U.S. trends while other international and commercial product markets in which Hamilton Beach participates are anticipated to grow moderately in the second half of this year compared with the same period in 2013.

Sales volumes are expected to grow more favourably than the market at Hamilton Beach due to improved placements of products of higher price points over the remainder of 2014 compared with the second half of 2013. We expect an increase in Hamilton Beach’s revenues in the second half of 2014 compared with the same period in the prior year. The anticipated increase in revenue is expected to be substantially offset by the cost of implementing Hamilton Beach’s strategic initiative, and by increased advertising and promotional costs and outside service fees. As a result overall we expect Hamilton Beach’s net income for the second half of 2014 to be comparable to a modestly lower than the second half of 2013. Cash flow before financing activities at Hamilton Beach is expected to be substantial in 2014, but down significantly from last year.

Finally at our Kitchen Collection segment while revenues continued to decline mainly as a result of the closure of 50 unprofitable stores in the first half of 2014, and the closure of other unprofitable stores since June of 2013, the pre-tax operating result improved.

Improved operating margins at both Kitchen Collection and Le Gourmet Chef stores mainly due to the closure of the unprofitable stores as well as the shift in mix to higher margin products and reduction in comparable store expenses and a decrease in corporate expense all contributed to the improvement in the results. Seasonal losses at newly opened stores partially offset these improvements.

Kitchen Collection second quarter 2014 net loss increased to $2.7 million from a net loss of $2.4 million in the second quarter of 2013. However that increases in the net loss was mainly the result of a lower effective income tax rate that generated a smaller benefit from Kitchen Collection’s loss operations.

Unfavourable retail market conditions continued to affect traffic to all mall locations and particularly outlet malls. Traffic continued to decline in the second quarter of 2014 and prospects for the remainder of this year are uncertain. Kitchen Collection expects to continue to refine its business plan on the assumption of continued market softness and will continue to close other performing stores and re-align the business around core stores which perform with acceptable profitability. A lower number of stores are expected to be maintained in the remainder of 2014. As a result revenues in the second half of 2014 are expected to decrease substantially compared with the same period in the prior year.

Despite a decrease in revenue, cost reduction actions and revisions to store layouts that focus on higher margin products are expected to substantially improve net income for the second half of 2014 compared with the net loss in the second half of 2013. However we do still expect a loss of Kitchen Collection for the 2014 full year as the second half improvements are not expected to offset the losses incurred in the first half of this year.

Positive cash flow before financing activities in 2014 is expected to be generated at Kitchen Collection compared with negative cash flow before financing activities in 2013.

Before I open the call up for question, I want to not that during the six months ended June 30, 2014, we purchased $14.2 million of class-A common stock and our $60 million stock repurchase program. Since the program began in November 2013, we have repurchased approximately 282,400 shares for an aggregate purchase price of $15.2 million. That concludes our prepared remarks. I will now open up the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions)

Christina Kmetko

While we are waiting for questions let me provide my contact information. If you do have any questions after today’s call my number is 440-229-5130.

Operator

Thank you, the first question is from the line of Craig Iman. Please go ahead.

Unidentified Analyst

Hey guys, thanks for taking my question. Wanted to talk a little bit about the Kitchen Collection business. Historically just looking back, even in its best time it was making $4 million and performance continues to deteriorate. And really every life of it had made a whole lot of money. So just kind of want to understand your strategic thoughts around, is this one going to be a business that you keep feeding money to or are you trying to get capital out of it and just shrinking until it is profitable or earns a decent return on capital. Just want to understand what you all are thinking there in terms of the Kitchen Collection business, thanks.

Al Rankin

This is Al Rankin. I’ll comment on that. I think the first perspective is that our, view is in the last couple of years the strategic position of that business has changed. It’s probably some combination of competitive characteristics in the factory mall, environment as a result of increased internet sales and a different competitive structure and a different customer prospecting structure emerging and secondly I think there’s simply less traffic to factory outlet malls and to some degree to all malls for some of the same kinds of reasons. As you know this has always been a small business for us. Historically we had some modestly profitable operations for a few years, but we saw the opportunity for it to improve significantly over time. I think our view is moderated in that regard and I only say that at this point we’re closing all stores that don’t need our financial requirements and that is leading to shrinking of the business and we’ll see just how far that process goes as you point out. Less capital will be deployed in the business. We’re not at the capital levels that we want to be in because the business has been shrinking, but we feel that things should be pretty well stabilized by the end of the year. The second half should be significantly better than last year. So we’re pretty close to the point of stability. I just point out that it doesn’t consume a lot of senior management time to have that. Generally speaking is a very sound – should be a sound situation and we’ll just have to manage it as we go forward with less capital. Does that answer your question?

Unidentified Analyst

Yeah, that definitely makes sense.

Al Rankin

Okay, thank you.

Operator

Thank you, your next question is from the line of Brian Lennards [ph]. Please go ahead.

Unidentified Analyst

Hi, good morning. I had just a hand full of questions. If we can start on North American Coal. Can we break down the cost of goods sold for the consolidated mines, more specifically how much kind of that increase year-on-year was Reed? How was the underlying business of the consolidated mines performing?

Al Rankin

I think the best way to answer that is to say very exquisitely that we’ve had considerable difficulty at Reed in the second quarter, that we brought a lot of resources to bear, to improve it. There were some actors that were beyond our control, but it’s been a big drag and we see that changing year-on-year very dramatically in the third quarter and in the fourth quarter. So I think by far the worst is behind us at this point. But Reed is, we don’t really look at it from a caution good soul kind of view so much as just the profitability and obviously the product lack of adequate productivity leads to high costs, but it’s really in our view, a variance is from where we expect to be in the future. So it is the biggest issue in the consolidated mines and we expect it as we go in to the third quarter that we’re going to have some dramatic year-on-year improvements.

J.C. Butler

If I could just add to that, to the cost and we’ve been talking about this for a while in our earnings release. We’re installing a new drag line, one of the largest mine areas at the Reed operation that will bring significant cost reductions. The reason we’ve invested in this equipment over the last few quarters and got it installed is to drive down the costs, so that you can be profitable even in a low price environment. So the actions we’ve been taking are directly related to driving down costs.

Unidentified Analyst

Is that drag line up and running as we speak or is that still to come?

J.C. Butler

No, that’s the drag line that we mentioned that was delayed in the earnings release and that is now up and running and its, we’re in training mode and we’re making nice progress.

Unidentified Analyst

Okay, because if you look at the overall revenue growth of the consolidated mine, it was very solid for the quarter. That the underlying trends, if you look on a gross profit point of view, I don’t think really show the positive [indiscernible] it. Did the one-time charges that you guys put in the release, I think they’re in total $2.7 million. Did that fall through the – run through the cost of goods sold on the consolidated side?

Al Rankin

Well again I think the way we think about this is we think about the results in our consolidated mines and the results in our un-consolidated mines, and I think specifically you asked about the performance of the consolidated mines and it was Reed that was driving the big negative in the second quarter and it’s for reasons that we think were outlined in the earnings release and we think that are going to be dramatically improved in the third and fourth quarters. So I think that’s really the way I’d look at is that the operating profit contribution perspective which is the way we represent the numbers in the MD&A analysis.

Elizabeth Loveman

One other item just to add is the Florida operations that have a $ 1million charge in the quarter that we enter the cost of goods sold, that’s impacting operating profit.

Unidentified Analyst

So the $1 million did, but the 1.7 did not. Where did the 1.7 run through?

Elizabeth Loveman

Yeah, India falls in other below operating profit.

Unidentified Analyst

Below, okay. Given all the talk on environmental regulations what have your utility clients been talking about? I know there’s a pretty big outage coming up here in the second half of this year at one of your mines. How about on the unconsolidated mines. What have you been hearing from your utility customers, the regulation front?

J.C Butler

So obviously we’re studying this and we’re spending a lot of time talking with our customers and as well as state officials and other regulators and folks that the federal level. I mean I think the jury is still out broadly about what this rule really means. There’s a lot of questions it enforceability. There’s a lot of questions about how it might play out in the changing markets within states and of course it – energy is not dispatched state, it’s dispatched by region and I think there’s a lot of questions about that. You mentioned the outage that the Red Hills customer, the Mississippi Lignite Mining Company customer in the fall. I mean I think that’s a good example of what we’re seeing. Our customers are continuing to make substantial investments in their coal fired power plants because they just see that these are good reliable low cost environmentally up-to-date power plants that they believe should continue to run and they’re continuing to invest a lot of money on. It’s not just our customers, and it’s not just the power plant that we serve. These are all sorts of coal fire power plants. People are continuing to make investments on them. So I think there’s some real doubt about whether this really plays out as dramatically as some in the press have speculated.

Unidentified Analyst

Okay.

Al Rankin

Let me just add to that, that I think we have regular out agents for maintenance purposes and all of our – the power plants that we serve with our mind mouth to operations, and so those are regular near term events and as J.C has indicated we don’t see any change in behaviour. People are continuing to be committed and I just emphasize that the EPA will that are being happy debated in terms of what their impact may or may not be and the lack of clarity of all that is an impact that wouldn’t come for several years under any circumstances. So there isn’t anything immediate about those rules. They will only affect things several years from now.

Unidentified Analyst

Okay. You guys owned Reed for about eight quarters now. What have you kind of learned over this time period because it seemed in the recent past that trouble started to kind of bubble up in a pretty big way. What have you kind of learned from that and how to implement certain things going forward?

AL Rankin

There are a couple of things that I’d say. First is we did not buy at the peak. Looking backwards we probably didn’t buy at the trough either. I think we feel we made a good long term acquisition. What we have been able to do is to add reserves and capabilities at the trough that are going to significantly benefit us in the long term in that operation. So we feel on balance that we’ve gotten in a good strategic position. I think if we burned anything, we have to move faster to implement the professional mining practises that we have in all of our other mines. In existing mines that we acquire and get those practice in place more quickly and more comprehensively. But we’ve had a good operation for the future. We got the resources to bear on it. And we feel that on balance we’re positioned well for the future.

Unidentified Analyst

And speaking of investments, CapEx has been running pretty heavy in segment. How do you see that for the second half of the year playing out?

AL Rankin

I actually think that’s good, the numbers in the 10-Q, was it maybe you’ve got the number. But we don’t have a lot of capital investment forecasted in the future.

Elizabeth Loveman

North American Coal future CapEx for the remainder of the year is $21.8 million.

Unidentified Analyst

Additional on top of what you spend in the first half, correct?

AL Rankin

Yeah, yeah, of being reduction and that’s for all sorts of things. That’s not just every –

Elizabeth Loveman

And for Mississippi, Florida.

Unidentified Analyst

Okay, switching gears to Hamilton Beach, can you remind us what this environmental charge is for?

AL Rankin

We have a Canadian Distribution Centre that we have leased for many, many, many years and going way back it had had some manufacturing activities in it and that were quite traditional at the time and like many of our other manufacturing sites it has – they have environmental problems today. These really didn’t serve us until just recently and so as they served us we put them on the books and we feel that we have a reasonable handle on them now and we’re – so the last two years have been of charges for that facility, have related to that. We’ve also had another facility where we’ve had environmental obligations for a long time and actually in that particular case we have received some additional proceeds or the promise of additional proceeds from predecessor company and that’s offset some of those charges. So it’s all related to long past activities.

Unidentified Analyst

Of the two charges are we kind of at the point where we’re done, kind of these one of these things or there could be possibly more to come.

AL Rankin

Well there’s always possibly more or less to come. But our obligation under GAAP principals is to book a charge that we think is reasonable as its defined by GAAP principals and that’s what we’ve done, based on all the knowledge that we have at this point and we had a study done and the study gave us more knowledge and that’s we increased the reserve.

Unidentified Analyst

Got it, okay. Any updates on the agreement with [indiscernible] Group? Is that progressing along as --?

AL Rankin

It is progressing along. I’ve had a review of the program. I think everyone is very pleased with how that program is coming at this point and it’s moving along right on schedule.

Unidentified Analyst

And that’s still for products to be available spring of 2015 or everything just gets in motion by spring of 2015?

AL Rankin

We begin to have products I believe in the spring of 2015, isn’t that right Elizabeth?

Elizabeth Loveman

Correct.

Unidentified Analyst

Okay. And then how about just underlying new products. I know you’ve been pointing some out in the release, but they’ve been, kind of been pointing out in the release for quite some time. But do you have any new products that will be new to the market from Hamilton Beach for this coming selling season?

AL Rankin

I don’t expect to see anything that will – that we haven’t announced that will dramatically affect the 2015 selling season, no. What we do mean by continuing to emphasize those is they fully haven’t fully played out in the market place and they’re still gaining attraction. But we do have others that we’re going to be pushing forward hereon, but not in the time period that you’re asking about.

Unidentified Analyst

Okay. All right, and then lastly our favourite Kitchen Collection. I noticed that the gross margin has increased to a pretty highest level in five quarters, at least is 42.7%. Is that sustainable? Was there any one-off in that that really pushed that gross margin up.

Al Rankin

No, I think it’s really the reverse of that –we had one offset that reduced the gross margin and when you have the contraction in the number of stores of quantity that we’ve had and have that need to sell off products secondly, we have changed the formats and the product lines to some degree. I think that’s pretty much behind this. But I would say your point that we have also got in place I think in an enhanced system for managing our gross product by product category in terms of insuring that mark downs and other promotional activities are at budgeted levels and not more than that, and so I feel that that’s a sound number that you’re looking at.

Unidentified Analyst

You have been true to your word of reducing stores. But I’m surprised that you didn’t call out any one time costs coming through. Thus one would think with a higher gross margin your operating profit would have been better. So are there some onetime charges coming through the, or any higher charges due to store closures or severance or what not – that maybe running through the [indiscernible]?

Elizabeth Loveman

Nothing material. Yeah, there has been no material charges running through the current year, the current quarter.

Unidentified Analyst

Okay.

Elizabeth Loveman

We got some charges in the fourth quarter of 2013, but nothing this year.

Unidentified Analyst

Got it, Okay. Well thank you very much. That’s all for me.

Al Rankin

Okay, thanks a lot.

Operator

Thank you. You have no further questions at this time. But again ladies and gentlemen if you do wish to ask a question (operator instructions), thank you.

Al Rankin

Okay, Christy, I think we’ve addressed the questions and you’ve given people the telephone number to call you. I repeat the number so that if there are additional questions people can be directly in touch with you. but I think we’ll conclude now.

Operator

Okay, thank you for joining us today. We do appreciate your interest and if you do have any future or additional questions please give me a call. My number is 440-229-5130.

Al Rankin

Thanks very much everybody.

Operator

Thank you, ladies and gentlemen, I would now like to advise with the dialling detail of the replay service of this presentation which will be available to your cells until the 8th of August, 2014. The dialling details are as follows; if you’d like to use the U.S toll free number, the number is 1888-286-8010. This also is the U.S international direct number, which is 001-617-801-6888 and the replay code that you will need to enter to listen to the replay is 788-64118. I repeat 788-64118. Thank you for your participation in today’s conference. This thus concludes the presentation. You may now disconnect. Have a good day, thank you.

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