Nacco Industries Q3 2007 Earnings Call Transcript

Oct.31.07 | About: NACCO Industries (NC)

Nacco Industries Inc. (NYSE:NC)

Q3 2007 Earnings Call

October 30, 2007 2:00 pm ET

Executives

Christina Kmetko - Manager of Finance

Al Rankin - Chairman, President and CEO

Ken Schilling - VP and Controller

Analysts

Frank Magdlen - Robins Group

Amy Bloom - Stanfield

David Rubin - SAC

Steve Thomas - Passcode Outlook

Jason McCab - Plutose

Operator

My name is Francis and I will be your coordinator for today.At this time, all participants are in listen-only mode. We will conduct a question-and-answersession toward the end of this conference. (Operator Instructions) As areminder this conference is being recorded for replay purposes. I will now liketo turn the call over to Christina Kmetko, Manager of Finance. Please proceed.

Christina Kmetko

Thank you. Good afternoon, everyone, and thank you forjoining us today. Early this morning, a press release was distributed outliningNACCO's results for the third quarter ended September 30, 2007. Anyone has notreceived a copy of this earnings release or would like a copy of the 10-Q,please call me at 440-449-9669, and I will be happy to send you thisinformation. You may also obtain copies of these items on our website atwww.nacco.com.

Our conference call today will be hosted by Al Rankin, Chairman,President and Chief Executive Officer of NACCO Industries. Also in attendancerepresenting NACCO Industries is Ken Schilling, Vice President and Controller.Al will provide an overview of the quarter and then open up the call to yourquestions.

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

In addition, certain amounts discussed during this call areconsidered non-GAAP numbers. The non-GAAP reconciliations of these amounts areincluded in our 2007 third quarter earnings release, which is available on ourwebsite.

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

Al Rankin

Good afternoon. I'll begin with an overview of the earningsrelease, which was sent out this morning, as Christie indicated thiscomplements the 10-Q, which was also released this morning and which isavailable on the NACCO website.

As you probably seen already NACCO's third quarter netincome was $21.1 million or $2.55 a share, compared with $18.8 million or $2.28a share last year.

Our key highlights include a number of points. At NACCOMaterials Handling Group, wholesale's net income was $5 million, compared with13.3 a year ago. In August 2007, NACCO Materials Handling Group announced amanufacturing restructuring program, it resulted in a restructuring charge of$5 million or $3.5 million net of taxes and additional cost for the thirdquarter of $300,000 net of taxes.

NACCO Materials Handling Group Retail had net income of $1.8million compared to a net loss of 2.8 in the quarter a year ago. Net income in2007 included a total gain of $3 million or $2.6 million net of tax from thesale of a European retail dealership in the third quarter.

Hamilton Beach reported net incomeof $6.3 million for the third quarter, compared with a net income of $5 millionin 2006. Ham Beach's 2006 net income included acharge for environmental expense of $1.3 million net of tax last year. And netincome for 2007 was negatively affected by the increased interest expensepayable in or paid in 2007 due to increased borrowings related to the $110million special cash dividend paid in May of this year.

Kitchen Collection's net loss of $900,000 increased $200,000from quarter a year ago as a result of two months of seasonal losses of$900,000 or $0.5 million net of taxes from Kitchen Collection's acquisition ofcertain Le Gourmet Chef stores in late August of 2006.

North American Coal's net income increased to $7.8 millionfrom $5.9 million primarily as a result of a decrease in the 2007 effective taxrate. And NACCO and other's net income increased to $900,000 from a net loss of$1.9 million for the third quarter of 2006. Spin-off expenses related toHamilton Beach were $400,000 pre-tax in 2007, they were offset by increasedinterest income and the absence of cost associated with the terminated Applicatransaction of $1.3 million net of taxes.

Improved operations at all subsidiaries in the parentcompany, if you exclude the items that I have just been through resulted in anafter tax improvement to the third quarter 2007 net income of approximately$1.6 million compared with previous year's quarter.

Consolidated net income for the nine months ended September30 was $37.6 million compared with $36.2 million for the first time nine monthsof 2006. Those are really the highlights of NACCO's overall third quarterresults and the outlook for the full year 2007, I'll touch on now.

As basically the same as we saw earlier this year, thecombination of favorable market forces and the results of improvement programsare expected to lead to 2000 net income in the general range of 2006 resultsexcluding the 2006 extraordinary gain from the reduction in the company'sestimated close mind applications and charges associated with the restructuringprogram at NACCO Materials Handling Group wholesale.

Improvements are expected to occur in the last quarter ofthe year as a result of specific programs at NACCO Materials Handling Group theseasonal nature of the housewares business and increasing benefits from theintegration of Gourmet Chef and the Kitchen Collection.

And then assuming market conditions do not deterioratesignificantly. We do think on a preliminary basis that results in 2008 areexpected to improve in over 2007, as more appropriate benefits are achieved.

That's a very broad and very preliminary perspective at thispoint on 2008. Now, I would like to move to add a few supporting perspective oneach subsidiary as usual more details are in the press release itself.

First, I focus on NACCO Materials Handling Group wholesalethe revenues did increase in the third quarter compared to the previous year asa result of the favorable mix and sales, favorable currency movements in Europeand Asia-Pacific and the realignment of certain activities that are performedin Asia-Pacific wholesale and retail to make them more in line with the waythat we operate in United States.

In addition, unit volume increased in Europe and Asia-Pacific,parts sales volume and pricing improved in Americasand Europe and the effect of price increases implemented in late 2006 and early2007 in Americas and Europe contributed to the improvement in revenue.

Worldwide shipments increased a bit to 21,247 from 20,278 inthe previous year and the backlog are now stands at 30,500 in comparison with25,700 a year ago, September 30 and 30,000 units at June 30.

The decrease in net income compared with the prior yearresulted from the recognition of the manufacturing restructuring charge, whichI had mentioned. An increase in selling and general administrative expense andunfavorable foreign currency movements which increased the cost of lift trucksand components in the U.S.market and sourced from countries with appreciated currencies.

Selling, general and administrative expenses increasedprimarily due to higher marketing program and employee-related expenses. Thedecrease in income resulting from these factors was partially offset by animprovement in gross profit resulting primarily as a result of price increasesand increase in the sales of higher margin units in Europe and higher marginparts in the Americas.

Turning to the outlook for wholesale, wholesale expectscontinued growth in the lift truck markets in the fourth quarter of 2007 inboth Europe and Asia-Pacific and a moderate year-over-year decrease in the Americasmarkets. However, growth in the South American market is expected to partiallyoffset the decline in the North American market.

As a result, the company expects modest growth in thesemarkets for the remainder of 2007 and overall modest increases in unit bookingsand shipment levels for the fourth quarter of 2007 compared with 2006.

For 2008, our hope really is for better inside over the nextfew months, but a very preliminary look suggests a continuing moderateyear-over-year decline in North America andreasonable strength elsewhere.

The weakening of the U.S. dollar has adversely affectedearnings due mainly to NACCO Materials Handling Group manufacturing of certainlift trucks and sourcing of components from countries with appreciatedcurrencies for sale in the U.S.market.

As you know, if you follow the company during the firstquarter of 2007 wholesale outsourced its welding and painting operations at itsmanufacturing facility in the Netherlandsto a lower-cost country. This action is expected to provide pre-tax benefitsthat will reach $1.5 million annually. More importantly, during the thirdquarter of 2007, NACCO Materials Handling Group announced an additionalmanufacturing restructuring program, which will phase out production of currentproduct at its facility in Irvine Scotland, change the product mix at itsCraigavon, Northern Ireland facility and increase its production at its Berea,Kentucky and Sulligent, Alabama plants in U.S. and at its Ramos Arizpe facilityin Mexico.

These actions are expected to reduce purchases of high costeuro and British pound sterling-denominated materials and components, reducefreight costs, lessen the company's exposure to future foreign currencyexchange rate fluctuations, reduce the manufacturing footprint of NMHGWholesale's European manufacturing locations and provide additionalopportunities to source components from lower-cost countries. This manufacturingprogram, net of future charges, is anticipated to contribute to improvedresults in 2008 and 2009, and at maturity, generate benefits which are expectedto exceed $20 million in annual cost savings.

We do expect future additional charges related to thisprogram of approximately $2.7 million in the fourth quarter, $10.2 million in2008 and $800,000 million in 2009. And those charges are in addition to the$5.4 million of charges already incurred in the third quarter. They of courseare not of the improvement benefits which will begin to occur in mid-year 2008.

Overall, Wholesale's full year results are expected toimprove over 2006. The company has been investing in long-term programs,particularly its significant new electric-rider truck, warehouse truck and biglarge truck product development and manufacturing programs are expected tocontinue to improve future results. The company continues to believe that theprograms are in place or under consideration which will allow NACCO MaterialsHandling Group to achieve its 9% operating profit margin goal in the 2010, 2011timeframe.

Turning to NACCO Materials Handling Group Retail, as Iindicated earlier, Retail's third quarter net income was primarily attributableto a total gain of $2.6 million net of taxes from the sale of the Europeanretail dealership in the third quarter excluding the results of the sale of theEuropean dealership retail had an after-tax improvement in the third quarter ofapproximately $2 million compared with 2006 primarily as a result ofimprovements in service and rental margins in Asia-Pacific and higher new unitand used unit margins in Europe.

Retail's key change programs are expected to have anincreasingly favorable effect in the fourth quarter of this year and are beenput in place to meet the longer-term objectives, strategic objectives, whichinclude at least break-even results while building market position.

And Hamilton Beach third quarter net income increased $1.3million compared with a year ago quarter primarily as a result of animprovement in gross profit and lower selling, general and administrativeexpenses partially offset by an increase in interest expense as a result of theborrowings to pay this special cash dividend of $110 million in the second quarterof 2007.

As you look it fit to the HamiltonBeach outlook, current economicfactors affecting U.S.consumers, such as high gasoline prices, depressed home sales and mortgage debtconcerns, appear to be among factors unfavorably affecting sales at key retailersand creating a challenging environment at the retail level. In spite of thosechallenges, Hamilton Beach has secured strongplacements and promotional programs for the fourth quarter of 2007.

A new product introduced in 2007 along with those productsintroduced in recent years are expected to continue to generate additionalproduct placements at retailers, resulting in increased revenues and operatingprofit in the fourth quarter of 2007 and in 2008.

Hamilton Beach has now completedits transition out of manufacturing and moved the production of all products tothird-party manufacturers. This transition and other programs initiated by Hamilton Beach, as well as the anticipatedincreases in sales results from an improved mix of sales of higher-marginproducts, are expected to have a favorable impact on operating results overtime.

In longer-term, Hamilton Beach is focused onimproving revenues and profitability continuously through production ofinnovative new products and focus on cost reduction and margin enhancementprograms in conjunction with pursuing strategic growth initiatives.

KCI's outlook, I'll just cover the outlook, KitchenCollection is expecting an increase in revenues in the fourth quarter of 2007,as a result of opening the seasonal store locations during the holiday season,sales at new stores opened in the last year and higher average salestransactions resulting from improvements in merchandising.

Kitchen Collection also expects operating results for theGourmet Chef stores in the fourth quarter to improve as the company continuesto work to offer a better mix of store inventory and rebuild customer royaltylost as a result of the bankruptcy before the acquisition of LGC by KitchenCollection.

The integration of Gourmet Chef is on schedule is expectedto be completed by the end of this year with the exception of the distributionfunction which will be expected to be complete in late 2008.

As a result Kitchen Collection expects the majority of thesynergy benefits, excluding distribution synergies, from the integration ofGourmet Chef to be achieved by mid-2008.

At North American Coal net income for 2007's third quarterincreased compared with the previous year primarily as a result of lower incometax rates from the increased benefit of percentage depletion tax treatment,partially offset by decrease in limerock deliveries as a result of unfavorabledecision in the ongoing Florida litigation, which has reduced operations atsome of the customers' quarries.

In July 2007, a federal district judge ruled and orderedthat mining cease in selected previously permitted areas in South Florida mined by the company for its customers.

However, North American Coal's operations aren't expected tobe materially affected by the ruling in 2007. Further, North American Coal'scustomers continue to challenge this ruling and have appealed the unfavorabledecision of the federal district court.

Deliveries from the limerock dragline mining operations areexpected to decrease moderately in the fourth quarter as customer projectionsfor 2007 continue to reflect the decline in the housing market. This decreasewill be partially offset by customer requests to maximize inventory in advanceof the decision related to the pending appeal.

Overall, North American Coal expects strong performance fromits current operations over the next few years. And over the longer-term NorthAmerican Coal expects to continue its efforts to develop new domestic coalprojects in is encouraged that more new project opportunities may becomeavailable, including opportunities for coal-to-liquids, coal gasification andother clean coal technologies.

Accordingly, expenditures for the development of additionaluncommitted coal reserves are likely to be higher in 2007 compared with 2006and the company also continues to pursue additional non-coal miningopportunities.

In closing, I have a few broad thoughts about the challengesand opportunities, which lie ahead. First, Hamilton Beach,Kitchen Collection, and North American Coal are all operating quite well. Someimprovements programs are still underway for example the completion of theintegration of LGC in Kitchen Collection. But mainly the emphasis in all thesebusinesses is on growth. Through Gourmet Chef the Kitchen Collection throughinnovative products of Hamilton Beach product, Proctor-Silex are now HamiltonBeach brands and through new deals at North American Coal.

Second, NACCO Materials Handling Group plans to reach its 9%operating profit target in 2010 to 2011 period seem to be on track at thispoint. New products, especially in the electric counterbalanced line are comingalong in 2008 and 2009. We have the restructuring program, which I mentionedearlier, but the focus is still on even more cost reduction and on the performanceand feature positioning in our big truck product line and in our internalcombustion engine line serving the Americas.

We think there are further profit improvement efforts, as aresult of this and all of these are receiving major emphasis, especially withthe currency mix continuing to deteriorate for NACCO Materials Handling Groupin total. We are also hopeful that the Australia retail business is nowheaded in the right direction.

Third, NACCO's businesses continue to expect to be soundfree cash flow generators, as we look to the future. So, an overview then, Ithink we are on the same track that I've suggested, we've been on in the lastfew quarters, which is basically one of enhanced underlying profitability thatwe achieved in 2006 and expect again in 2007. And then a gradual move to afurther new plateau over the period between the end of 2007 and 2010 and 2011.

I do however, want to know, as I always do that markets incompetitive conditions are uncertain. U.S.market conditions as I think any close observer of the U.S. economy knows at this pointare unclear. The risk may well be on the side of weaker than current forecastbut it's too early to say. Fortunately, each of our businesses we will beaddressing any future issues from position of strength. Each of our company isa real leader in its industry and each has, we believe a very strong managementteam. And with that, what I would like to do now is to turn to any questionsthat you may have.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Frank Magdlen with Robins Group. Please proceed.

Frank Magdlen -Robins Group

Good afternoon.

Al Rankin

Good afternoon.

Frank Magdlen -Robins Group

When I look at your longer-term strategy, what is thecapital expenditure program, what does it looks like in the future, and what isthe maintenance CapEx going forward?

Al Rankin

Well, I'd answer that in a general way as follows, and Iwill do it business by business. At NACCO Materials Handling Group Wholesale,we don't expect major change in our level of capital expenditures. Really theissue there is focus around the profitability programs into the extent that wehave additional capital expenditures associated with enhancing our Berea, Sulligent, andRamos Arizpe operations. They are set byreduced capital expenditures for the plant in Scotland which will no longer needthem.

With the NACCO Materials Handling Group Retail, we don'texpect significant capital expenditures. At Hamilton Beach capital,expenditures will continue at a very low level having withdrawn frommanufacturing, those capital expenditures are associated mainly with newproduct tooling, in certain instances, and that is not a very major capitalexpenditure.

At Kitchen Collection, capital expenditures will stay at afairly modest level, despite expansion of the Gourmet Chef format at bothfactory outlet malls and at enclosed malls over the next few years.

The one that is very difficult to call is the Coal Company.Our existing coal mines will not require particularly large capital investment.That will be pretty stable, and at not a very high level.

The part that is hard to call is the part that is related tonew deal opportunities in those businesses. We do expect that we will havesome, we hope substantial expansion opportunities in the coal business. And inmany of those we may have to supply a significant portion of the capital.

It is worth noting, however, that those projects are all backed by the way we do business, and bylong-term contractual commitments. 20, 30, 40 years from now customersthat they serve and to that extent, capital expenditures have a self financingaspect to them. This is because they allow the individual company entities thatare involving creating new mining operations to borrow money on the back of thecapital expenditures that are being put in place to carryout the contractcommitments. But that's the one area where you really can't call it till youget a deal and other than that I can't, that's about as far as I can go.

Frank Magdlen -Robins Group

Well, could you put a minimum in size or maximum or a rangeof what a major project might entail?

Al Rankin

Well, it depends so much on how they are structured, it'svery difficult to do that. The one thing I would say is that, we don't enterinto speculative contractual arrangements in terms of pricing structure. We arewilling to take the risk that is associated with being an effective miner. Wereally don't take price risks in those. And so, as I said there is aself-financing element, they could be very substantial, we certainly hope sobecause it would be wonderful to be able to use the free cash flow of a companyfor constructive high returning investment opportunities. But we can't reallypredict what those will involve and some will be financed by customers, somewill be financed by us. It really has to be built with on an individual mind bymind basis, as those deals come alone.

Frank Magdlen -Robins Group

Well, could you characterize irrespective of who financesit, what would be the magnitude of the total capital needed, whether youprovide it or whether the customer provides?

Al Rankin

No, an individual new coal mine today, if you add all thepieces together, we're typically quite an expensive preposition, and many ofthem could exceed a $100 million in capital investment, depending on whetherthe draglines are new or used pieces of equipment and a number of things ofthat nature.

Frank Magdlen -Robins Group

Alright.

Ken Schilling

I think in terms of the information we've given in therelease, we've incurred $42 million of CapEx to date and we've got a forecastof 25 for the rest of the year. I don't know if that's helpful to you.

Frank Magdlen -Robins Group

That's helpful. What is your maintenance CapEx goingforward? You have a lot of moving pieces as you expand capacity in certainparts of the world and contract in others. But I guess I have loss side alittle bit as total to what the ongoing…

Al Rankin

Well, I think, our maintenance, level of maintenance capitalexpenditures is going to be something below those numbers. And I don't knowthat I have, off hand, a specific number, but if you think around the system isgoing to be more alike, it is less than $50 million.

Frank Magdlen -Robins Group

Okay. So…

Ken Schilling

It is just from a depreciation perspective, we are runningat about $16 million of depreciation, if you think about that in terms ofreplacement capital.

Frank Magdlen -Robins Group

$16 million.

Ken Schilling

$16 million a quarter.

Frank Magdlen -Robins Group

Okay, so…

Ken Schilling

$64 million.

Al Rankin

And I think, we're probably, at this point given the stateof our facilities, they are all in good condition. Our mines are establishedand it's a number that's well below that.

Frank Magdlen -Robins Group

Alright. And then, back to Materials Handlings a little bit.You talked about the lead costs that have increased and Al, I am not quite surewhat lead cost means, other than I keep thinking of the commodity cost going upand there is a surcharge involved, does that mean...

Al Rankin

You mean lead?

Frank Magdlen -Robins Group

Well, I'm sorry. Its lead, I am sorry, it's lead. I am areally bad reader.

Al Rankin

I think its lead cost, and lead has gone through the roof,and our position is that there are no selected product lines that require theuse of lead. And that whatever the cost is, we are going to pass it onto thecustomer. And we just put it on as a surcharge, and if the price of lead goesdown, we'll reduce it immediately by the same amount. We are going to keep thecompany hold, and we just don't have any other way of dealing with those kindsof things that are involved in somewhat specialized parts of the product line.

Frank Magdlen -Robins Group

Can you give me an idea, how much that's fluctuated in thelast year or two?

Al Rankin

I don't know exact, lead is up three or four times. I forgotwhat the number is. But it's a huge amount.

Frank Magdlen -Robins Group

Alright.

Ken Schilling

In lieu to the fact that a lot of products we sell areelectric products that use a lead-acid battery. That's where a lot of the leadis, as well as sometimes in counter weights.

Al Rankin

Counter weights is a big issue though.

Frank Magdlen -Robins Group

Alright. Thank you gentlemen.

Al Rankin

Okay.

Operator

(Operator Instructions) Your next question is from the lineof Amy Bloom with Stanfield. Please proceed.

Amy Bloom - Stanfield

Hi. On the Hamilton Beach subsidiaries, I waswondering if you could talk about the improvement in year-over-year sales.Where is that from any particular product category or any particular customer?

Al Rankin

There are product categories that have gone up, and productcategories that have gone down. In general, the most important single thing wehave done is to continue to try to have innovative new products come out. Forexample, our Toastation has been out for a while that's been a very successfulproduct. Our BrewStation family of products have been a real leader in thecoffee maker area.

Other product lines, sometimes with smaller, lower unitprices, like can openers, have been much less robust and have declined alittle, and to some degree as it's been a movement away from cans that have tobe open with the can opener, but generally speaking it's more higher priceproducts and fewer opening price point products that have moved the revenuestructure up. Now, we have had some other selected categories that have beendoing well this last year, but it's fairly broad.

Amy Bloom - Stanfield

Thanks for the color. How many new products were introducedin 2007 and how many do you plan to introduce in 2008?

Al Rankin

I think, those are not numbers that I have on the tip of mytongue. I think Christie can probably get some perspective on that and give youa sense of those numbers. But there is a great deal of innovation that goes onand the level of new product activity continues to be extremely high. I have arecollection that we have 40 to 50 major programs going on at any one-time withthe sort of [cadre] of engineering people that we have. We have a collaborativearrangement that we use which involves a combination of deep knowledge of the U.S.market by the engineering group. And here, the headquarters of the business in Richmond at Virginia,which very much is in tune with the needs and requirements of Americanconsumers. But we complement that withsome of our own engineering capabilities in China, in Shenzhen, at our ownfacility and our people that are very much in touch and were close with oursuppliers' engineering groups. So, we are trying to leverage the whole systemwhile keeping innovation coming through for our particular products. Maybe thatgives you a little bit more field force.

Amy Bloom - Stanfield

Got. Thank you. And has there been any change in theordering patterns of your larger customers? I've heard a lot that some of thebig customers keeping inventory levels tight?

Al Rankin

Our big customers have kept inventory levels pretty tightfor a very long period of time. Wal-Mart, KMart Series target those kinds ofcustomers. Certainly, a while back Wal-Mart explicitly reduced its inventoriesacross the Board for everyone. And we find there is a general pattern that oursales to our customers, or sale in the fall selling season are coming closerand closer to the actual sales, and there's less and less accumulation ofinventory in anticipation. So, the whole system is quite highly geared andpushed back toward the end of the year. So, the months of October and Novemberare, the Hamilton Beach are just enormousmonths and November and December for Kitchen Collection.

Amy Bloom - Stanfield

Thank you and just one last question. Is there any update onthe spin-off of Hamilton Beach? Is that still onhold?

Al Rankin

The update is really the one that we gave a while back whenwe made our formal press release, which is if we cancelled the spin-off ofHamilton Beach market conditions were extremely unsettled. We concluded itdidn't make sense and I think we said at the time that well we might go backand revisit that sometime in the future, we have no plans to do that at thistime.

Amy Bloom - Stanfield

Okay, thank you.

Operator

Your next question comes from the line of [David Rubin withSAC]. Please proceed.

David Rubin - SAC

Hi, I just wanted to understand the basis for your, not theexemptions, you said net income is going to be for '07 to '08 or is it fixed'07?

Al Rankin

As '07 compared to '06, what we said is, and I think, if westick by the very specific language that we used which was in the generalrange, as opposed to just flat. It's in the general range in '07 of '06, takinginto account the elimination of the extraordinary income item that we had in'06, it was literally, an extraordinary item. And secondly, we also noted thatand have throughout the year, it would exclude the charges associated with therestructuring decision that NACCO Materials Handling Group, but that's thegeneral framework that we have used for '07 in comparison to '06.

David Rubin - SAC

As of '06, would that exclude a one-time charge number? Whatis that that you are, what is that net income that '06 number that you areusing as a comparison?

Al Rankin

The '06 numbers that excluding the extraordinary charge was,I think, $93.4 million, it was an extraordinary item in '06, a $12.8 millionand we had total net income in '06 of a $106.2 million and what we excluded wasthat $12.8 million.

David Rubin - SAC

Got you.

Ken Schilling

And restructuring charge that we also mentioned, however,about 3.5 or there about.

David Rubin - SAC

That's the 3.5 for fiscal '07.

Ken Schilling

'07, right.

David Rubin - SAC

Okay. And just thinking about the general machinery, what doyou think it will take you guys to get to above the last year's numbers versuswhat would happen to get you modestly below last year's numbers?

Al Rankin

I really don't want to comment anymore on forecast. There isa general rule. We really don't make forecasts of our earnings. I do think thatI would just make the obvious comment that both Hamilton Beachand Kitchen Collection are highly dependent on having a strong Christmas andThanksgiving selling season. The stronger it is, the better they do, the weakerit is the less well that they might want to do. So, North America CoalCorporation is not terribly dependent on that and NACCO Materials HandlingGroup. It's really question of completing the year with the strong fourthquarter, which has got a lot of working days in it.

The third quarter is always a little bit muddled becauseit's a vacation quarter, and so we have. But it's not much more of the situation in our hands than it is in thetwo consumer based businesses.

David Rubin - SAC

And a final question, in this again, and I apologize I knowsomeone has just asked this question but it relates to the spin-off in Hamilton Beach. And I know you said at that pointthat it was because of market conditions, I mean, I guess, in the equitymarkets the market has basically kind of normalized. I mean, stocks are notmuch up their highs. I am just trying to understand why the issue would be themarket, I mean, there is another reason why you decided not to go through it,just because it seems to make a lot of strategic sense as part of the business.

Al Rankin

Well, I think, what we meant in what we said, it's unsettledmarket conditions. It's not justequities it's debt. We are not sure how that's all going to play out. These arevery tricky times in financial markets. Then there are lot of issues associatedwith smaller companies, valuations being spun off, the kinds of pressures thatcome up and markets where hedge funds are playing a significant role in termsof market movements.

It's just a whole variety of issues that kind of came to '04and are still unsettled in terms of the situation that may be playing out infront of us and I think you see it pretty much every day with disclosures, notjust about some sub-prime mortgage issues, but also about specializedinvestments vehicles of the banks, the implications for the bank's lending andso on and so forth.

So, I think all of that went into our thinking and we juststand on what we said and what was. I think Christie not only in press releasebut in 8-K filing and that's the way we would kind of stick with it.

David Rubin - SAC

Okay, thank you very much.

Operator

Your next question comes from the line of [Steve Thomas withPasscode Outlook]. Please proceed.

Steve Thomas -Passcode Outlook

There is a mission made of a decline in coal sources due toan extended power plant outage. I was wondering, what plant that was theylinked about it versus the plant outage and the affected the tonnage?

Al Rankin

We really don't get into the specifics usually. We haveoutages from time-to-time. I think the best way to think about the Coal Companyis to take a full year and we think the prospects for the Coal Company for thefull year are very sound. We feel comfortable with those. We do try to indicatethe narrow and special conditions that effect one quarter or another, as matterof explanation. But the outages are, on the one hand, often planed, but on theother hand, never known in terms of duration until the power plant owners getin there to do the maintenance when they have an outage and see what theconditions are.

Sometimes, they have more work to do and sometimes they haveless work to do. We have, but it is just sort of a random thing that we simplydeal within that. Keep in mind that, almost all of our coal operationseffectively are paying a profit per tons. So that on the margin some of thosefluctuations have, well they have an impact, not necessarily a dramatic impact because they just reduced the numberof tonnes that are sold in any one quarter but the base for the year is still avery, very high number. And so, most of the profit comes on through. So, thereis not a lot of fixed cost to cover in most of our operations in that sense.

Steve Thomas -Passcode Outlook

Thank you.

Operator

And your next question comes from the line of [Jason McCabwith Plutose]. Please proceed.

Jason McCab - Plutose

Yes, hi. I guess the stock is down about a third for thequarter. And I guess, I haven't heard any discussion on the phone call, Iapologize if I missed it but I haven't heard any discussion about that decline.Do you have thoughts on the decline and how would you get the stock back upright.

And I guess, kind of second point that I've heard, themiddle market buyouts are getting done. They are still getting done at the samepace that they did in the previous two quarters of the year. So, I guess, Idon't understand the thought behind the market turmoil sub-prime, specialpurpose vehicles. I'm not sure have anything to do with middle market buyoutsbut shopping you feel as to buyout funds or strategic players. Though, I guesswhat I am saying is I don't understand, I don't hear a sense of urgency aboutdramatic decline in the share price.

Al Rankin

My guess, there are couple of factors, first of all, if youare referring to Hamilton Beach, we never proposedto sell the company. And so, there never were questions of buyouts or anythingof that nature. We were spinning it after the same shareholders who own ittoday. So in that sense, there was no transaction involved, this is a questionof the ownership vehicle. Our objective at the time was simply to find a moreflexible vehicle to accomplish kinds of things that we had previously had triedto accomplish including the merger with Applica. So, that's the broadest answeras far as that kind of an aspect is concerned.

With regard to the stock price, I really can't answer yourquestion. We have had earnings that have been pretty much what we anticipatedthat they would be. We haven't really changed our view, with regard to thecompany and its prospects, since early this year. So, in that sense, nothinghas happened. The stock price, I suppose and perhaps you all are in a betterposition than us to say, as made by the folks that are either buyers or eithera combination of buyers and sellers in the marketplace.

Jason McCab - Plutose

But it was an…

Al Rankin

And I think to the extent that the market turmoil broughtpressure to bear on certain funds that own our company, so they needed toliquidate shares at regardless of the price in order to raise liquidity toprovide more collateral for the banks or to meet liquidation needs in theparticular funds.

There could easily be a situation where there weresubstantial selling price pressures on the price of the stock. The company isvery thinly traded. The market is one that can go up or down for the stockwithout over regard to the performance of the company. We have a long-term viewthat is focused on performance of our individual businesses. And so, we tend toput it in that perspective and hopefully the market will recognize theperformance of the businesses. But in the meantime, we simply are continuing tocarry-out our efforts with the individual businesses.

Jason McCab - Plutose

But if the market is saying that the company is worth moreseparated, and then that seems to be the indication because then the market isback over where it was in July but the stock is still down, which seems to methat it is de-coupled from the market. The market seems to be suggesting thatthe company is worth more separated than together. I don't hear anything tosay, okay, well, if we're not to going to separate, if we're not going to spinit out or we're not going to sell pieces of the business, how do we get back upto where we were before? How do we get back that share price performance kindof corollary behind that, is it a $1 billion market cap or over a $1 billion?And do you have any ideas about getting coverage from investment banks fromthis company or getting more exposure for the company.

Al Rankin

It is a subject that we discuss from time-to-time theeconomics of the business of coverage in today's world are not highlysupportive of a thinly traded security. And the expensive coverage in terms ofwhere the revenue is derived from is complex. Certainly, if there areoperations in which we are interested, and being covered, we would beinterested in trying to support that within the limits of the clearrequirements for making information broadly public to all investors.

But it's not something that has, I would say coveragecondition. The coverage, in general, for small cap companies has deterioratedrather than improved, it's a problem. And my hope is in the broader question ofvaluation that as markets continue to settle down, people will look at ourparticular company, get interested in it. And the price can go back up just asfast as it went down.

But it's probably going to be more a function of individualinvestors than interest in the company, particularly, institutions that dothere own research and analysis.

Operator

And there are no other questions in the queue at this time.I would like to turn the call over to Mr. Al Rankin for closing remarks.

Al Rankin

I think if you do have further questions that ChristieKmetko, I would be happy to try to answer those for you. We appreciate all ofyou being a part of the telephone conference that we've had. And we look forward to continuing to carry onprograms that we've been carrying on for the last few years that are outlinedin our annual report and our other various publications, and if we think aregoing to create real long-term value for all of our shareholders. So, thosewould be my closing thoughts. Christie is there anything you want to say?

Christina Kmetko

I just want to say, thank you for joining us today and ifyou do have a follow-up question, please call me at 440-449-9669. Thanks andhave a great day.

Operator

Thank you for your participation in today's conference. Thisconcludes the presentation. If you wish to access the replay, you may do so bydialing 617-801-6888 or 888-286-8010 and enter a pass code 58506257. You maynow disconnect and have a great day.

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