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NACCO Industries (NYSE:NC)

Q4 2007 Earnings Call

February 26, 2008 11:00 am ET

Executives

Christina Kmetko - Manager of Finance

Alfred M. Rankin, Jr. - Chairman, President and Chief Executive Officer

Kenneth C. Schilling - Vice President and Controller

Analysts

Amy Bloom - Stanfield

Brian Rosenhouse – Sidoti

Frank Magdlen - The Robins Group

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 NACCO Industries earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Miss Christina Kmetko, Manager of Finance.

Christina Kmetko

Good morning, everybody, and thank you for joining us today. This morning, a press release was issued, outlining NACCO’s results for the fourth quarter and year ended December 31, 2007. Anyone who’s not received a copy of this earnings release or would like a copy of the 10-K, 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 our website at www.nacco.com.

Our conference call today will be hosted by Al Rankin, Chairman, President and Chief Executive Officer of NACCO Industries; also in attendance representing NACCO is Ken Schilling, Vice President and Controller. I will provide an overview of the quarter and full year and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today.

Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-K. In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2007 fourth quarter earnings release which is available on our website.

I will now turn the call over to Al Rankin.

Alfred M. Rankin, Jr.

Good morning. I’ll begin with an overview of the earnings release which was sent out this morning, and that earnings release complements the 10-K, which as Christy indicated, was also released this morning.

As you’ve probably seen, NACCO’s fourth quarter net income was $51.7 million or $6.24 per share, compared with $70 million or $8.48 per share for the fourth quarter of 2006. 2006, importantly, did include in its fourth quarter an after-tax extraordinary gain of $12.8 million, which did not re-occur in 2007.

As a result, income before extraordinary gain, as I indicated in 2007 was $51.7 million or $6.24, and that compared with comparable 2006 numbers before extraordinary gain of $57.2 million or $6.93 per share. The decrease in consolidated income before the extraordinary gain is primarily the result of the absence of a gain of $21.5 million, or $13.1 million net of taxes, $8.4 million from the sale of two draglines, which occurred in the fourth quarter 2006 operating results.

Other key highlights of NACCO’s fourth quarter included net income at NACCO Materials Handling Group, which was $23.8 million, compared to $22.4 million in the previous year.

I should note that in August of 2007, NACCO Materials Handling Group announced a manufacturing restructuring program that added additional restructuring charges during the fourth quarter of $0.5 million pretax, and additional costs in the fourth quarter of $1.7 million pretax. Included in the 2006 net income was a $7.9 million reduction in income tax expense related to the recognition of the tax benefit of previously-recorded capital losses.

The NACCO Materials Handling Group retail business had a net loss of $1.1 million in 2007, compared with a loss of $4.3 million in the previous year. Programs put in place in mid-2007 affected operations positively in the fourth quarter, resulting in significant progress toward achieving at least breakeven results while building market position.

Hamilton Beach’s net income was $12.6 million in 2007, compared with net income of $14.7 in the previous year. Net income was negatively affected by increased interest expense in 2007, primarily due to increased borrowings related to a $110 million special dividend paid in May of 2007.

Kitchen Collection’s net income of $5.9 million in 2007 decreased compared with net income of $6.3 million in 2006 as a result of store inventory fulfillment difficulties at Le Gourmet Chef’s third-party warehouse operations.

North American Coal’s net income decreased to $6.6 million from $20.2 million in 2006, primarily as a result of the absence of a gain on the sale of two electric draglines of $13.1 million after-tax, which was recognized in 2006.

There were some offsetting items at NACCO and other. The income before extraordinary gain increased to $4.2 million from a loss before extraordinary gain of $2.3 million in 2006.

The income improved as a result of increased interest income, lower employee-related expenses, lower income tax expense due to the absence of a 2006 charge for the reversal of a previously-generated capital gain of benefits, and the absence of costs of $2.3 million, $1.5 million after-taxes recognized in the 2006 fourth quarter which was associated with the terminated Applica transaction.

Net income for the year 2007 was $89.3 million or $10.80 per share, compared to $106 million or $12.89 for the year before, and the net income excluded the extraordinary gain that I discussed previously. And if you exclude the extraordinary gain, 2007’s $89.3 million in net income compared with $93.4 for the previous year.

Revenues were $3.6 billion, compared to $3.3 billion for 2006. Consolidated cash flow before financing was again positive, but at a significantly lower level in 2007 at $21.7 million, compared to $138 million the year before. There were some one-time benefits associated with cash flow in the previous year, and I’ll touch on the reasons for the cash flow level as we go through the individual subsidiary results.

The economic environment, as we look out into 2008, appears very uncertain at this time for both the consumer markets in which Hamilton Beach and Kitchen Collection participate, and the capital goods markets in the United States in which NACCO Materials Handling Group participates. At NACCO Materials Handling Group, key improvement programs continue to be implemented.

However, these programs will incur significant costs in 2008. North American Coal and Hamilton Beach are likely to have very difficult operating environments for reasons I’ll touch on, which in turn are likely to lead to significantly-reduced results in those businesses, compared with 2007.

Turning to the fourth quarter at NACCO Materials Handling Group Wholesale, net income was $23.8 million on $760 million of revenue, compared to $22.4 on revenues of $613 million in the previous year’s fourth quarter. 2007 fourth quarter net income includes additional restructuring charges that I referred to in my earlier comments.

Worldwide shipments increased to 25,946 units in the fourth quarter, up from 23,138 units in the previous year’s fourth quarter. The wholesale backlog on a worldwide basis was approximately 30,500 units at the end of 2007, compared with 27,200 units at the end of 2006, and about the same number, 30,500, at the end of September in ‘07.

Net income for the fourth quarter increased $1.4 million between the fourth quarter of ‘07 and ‘06. However, the fourth quarter 2006 net income included a reduction in income tax expense of $7.9 million related to the recognition of a tax benefit for previously recorded tax losses.

Excluding the effect of the tax benefit, income increased significantly between years, primarily as a result of an $8.4 million increase in operating profit. That came about as a result of improved unit margins, parts margins, was partially offset by an increase in SG&A expenses, and additional manufacturing restructuring that I referred to.

Units and parts margins largely increased due to increased volume. And selling, general, and administrative expenses increased primarily due to higher marketing program and employee-related expenses, and lower favorable adjustments to product liability reserves between the two years.

Turning to the outlook for NACCO Materials Handling Group Wholesale, we’re expecting continued growth in lift truck markets in 2008 in Europe and Asia-Pacific, and a year-over-year decrease in the Americas market. Overall, the company expects modest increases in unit bookings and shipment levels for 2008, compared with 2007, as a result of these market prospects.

I should note, however, that if U.S. economic conditions deteriorate more than expected, sales of units and higher-margin parts could decline in 2008, which would adversely affect revenues and profit margins.

As I’ve commented before in these discussions, the weakening of the U.S. dollar has adversely affected NMHG’s results, because the company manufactures certain lift trucks and sources certain components from countries with appreciated currencies and sells them in the U.S. market.

Unfavorable foreign currency movements have effectively lowered current annualized pretax profitability, excluding the effects of hedges by approximately $72 million more than if the currency rates in 2007 had been the same as 2002, when NACCO Materials Handling Group Wholesale established its operating profit margin target.

In addition, the company is expecting a further unfavorable impact on 2008 results, if year-end 2007 unfavorable currency exchange rates persist. In other words, the current exchange rates on a running rate basis are even more unfavorable than the rates that we had effectively over the course of 2007. That, of course, has led to a number of specific programs to offset the effects of currency, which I’ve commented on again in these discussions in the past.

During 2007, NMHG outsourced its welding and painting operations at its facility in The Netherlands and announced an additional manufacturing restructuring program which will phase out production of current products at its facility in Irvine, Scotland; change the product mix at its Craigavon, Northern Ireland facility; and increase production at its Berea, Kentucky and Sulligent, Alabama plants in the United States; and its Ramos Arizpe facility in Mexico.

These programs are expected to reduce purchases of high-cost Euro and British pound sterling-denominated materials and components, reduce freight costs, lessen NMHG’s exposure to future currency exchange rate fluctuations, and reduce the manufacturing footprint of wholesale’s European manufacturing locations, and provide additional opportunities to source components from lower-cost countries and reduce required working capital levels.

The Irvine, Scotland and other related manufacturing programs are expected to generate savings beginning in 2008 and improve net results starting in 2009, and at maturity, generate benefits which are expected to exceed $20 million in annual cost savings.

However, the company anticipates future additional charges related to this manufacturing restructuring program of approximately $9.1 million in 2008 and $400,000 in 2009, and those charges are in addition to the $7.6 million which was incurred pretax in 2007.

In addition, NMHG has continued to invest in its long-term programs. Of particular importance is its new electric-rider truck program, which will bring a full line of new products to market over the course of 2008 and 2009, and warehouse and big truck product development and manufacturing programs which are expected to continue to improve results.

The bottom line is that we continue to believe that the programs are in place, and that others are in development which will allow NMHG to achieve its 9% operating profit margin goal in the 2010 or ‘11 timeframe. That’s certainly what we’re striving for.

At NMHG’s retail business, the reported net loss for the fourth quarter was $1.1 million, compared with a net loss of $4.3 million in the previous year. The reduction in the net loss was primarily as a result of improvements in Asia-Pacific retail operations.

As you look into 2008, we think that those key improvement programs in retail, especially the ones that were implemented in Asia-Pacific in mid-2007, will have an increasingly favorable effect during 2008, in line with the company’s strategic objective of achieving at least breakeven results while building market position.

For the full year, NMHG had consolidated cash flow before financing of essentially breakeven. In 2006, NMHG had consolidated cash flow before financing activities of $54.2 million, and the decrease was driven by higher accounts receivable from higher fourth quarter revenues in Europe and some increase in day sales outstanding due to the timing of payments. Higher investments in inventory were mostly offset by higher payables.

Turning to Hamilton Beach, the company reported net income of $12.6 million in the fourth quarter on revenues of $200 million, compared with net income of $14.7 million in 2006 on revenues, which were essentially comparable.

Hamilton Beach’s decrease in net income was driven by an increase in interest expense of $2.2 million pretax as a result of an increase in borrowings that I mentioned earlier, and also a decrease in operating profit.

Increased advertising and transportation expenses and unfavorable foreign currency exchange rate changes of $900,000 pretax were partially offset by a favorable product liability adjustment, resulting from continued better-than-anticipated claims experienced in the absence of a restructuring charge of $900,000 after-tax, which was recognized in 2006. The restructuring charge was associated with the programs that have been implemented at Hamilton Beach’s Saltillo, Mexico facility, in order to transfer all production from that facility to third-party manufacturers.

Turning to Hamilton Beach’s outlook, 2008, we think, is expected to be a difficult year. The economic factors that we all hear a great deal about affecting U.S. consumers such as high gasoline prices, depressed home sales levels, mortgage debt concerns, appear to be among factors which are likely to create a challenging retail environment in 2008.

Further, Hamilton Beach expects continued significant pricing pressure from its suppliers in 2008, due to increased commodity costs for resins, copper, steel, and aluminum, and those are likely to affect short-term operating profits unfavorably.

While the company is going to work to mitigate those cost increases through a variety of programs that have been initiated in prior years as well as through price increases as appropriate, the timing of margin recovery based on the timing of our negotiations with our customers is likely to adversely affect results in 2008.

And while economic factors are expected to continue to affect consumer-spending patterns unfavorably over the near term, it’s important to keep in mind that Hamilton Beach is focusing on continuing to strengthen its market position through product innovation, promotions, and branding programs. As a result, the company had a strong assortment of new products in 2007, and further product introductions are in the pipeline for the next two years, all of which are expected to favorably affect revenues.

However, because of uncertainty in U.S. consumer markets, volume prospects, both on new products and existing products, are very difficult to predict with regard to price point and margin mix. Hamilton Beach has completed its transition out of manufacturing and moved production of all products to third-party manufacturers.

This transition and other programs initiated by Hamilton Beach, as well as anticipated increases in sales resulting from an improved mix of sales of higher-margin; higher-priced products are expected to have a favorable impact on operating results over time.

Turning now to Kitchen Collection, the company reported net income of $5.9 million in the fourth quarter on revenues of $85 million, compared with net income of $6.3 million on revenues of $90 million for the fourth quarter of 2006.

The revenue decreased, primarily as a result of a decrease in comparable Kitchen Collection and Le Gourmet Chef store sales, compared with the fourth quarter of 2006, and the main driver was store inventory fulfillment difficulties at Le Gourmet Chef’s third-party warehouse operations and fewer store transactions.

Closures of unprofitable stores also contributed to the decrease in revenue. And at the end of 2007, the company had 198 Kitchen Collection stores and 74 Le Gourmet Chef stores, compared with 203 and 77 at the end of the previous year.

Net income decreased moderately in the fourth quarter compared to the previous year, primarily due to the decrease of sales at Le Gourmet Chef stores.

During the full year of 2007, Kitchen Collection had a substantial negative cash flow before financing activities of just under $15 million. The change in cash flow compared to the previous year’s, when there was cash flow before financing of $1.1 million positive, was the result primarily of a decrease on the one hand in the net income, but really primarily as the result of a decrease in accounts payable between the years which was the result of the timing of payments in 2006 and was closely related to the whole acquisition process that occurred of Le Gourmet Chef stores in 2006.

Turning to the outlook, many of the same factors that affect Hamilton Beach affect Kitchen Collection, the uncertainty in the U.S. economy. Gasoline prices are expected to continue to be high and to affect consumer traffic to outlet mall locations and influence retail spending patterns unfavorably. Nevertheless, the company is hopeful there will be modest increases in revenues and improvements in operations in 2008, primarily in the second half of the year.

That really ties in with the thought that, with the significant exception of the distribution function, the integration of Le Gourmet Chef operations was completed in 2007. And then to improve the distribution operations of Le Gourmet Chef stores, Kitchen Collection has begun making arrangements to shift the warehousing operations from a third-party warehouse service provider to an owned distribution operation near its current own distribution operations which support the Kitchen Collection business.

This transition is expected to be completed by mid-2008, and at the same time, Le Gourmet Chef’s key merchandising program should have, we hope, an increasingly positive effect overall, especially in the second half of 2008, and Le Gourmet Chef operations are expected to improve over the course of 2008 compared with 2007. Overall, continued profit improvement has been expected in 2009 and in succeeding years.

Turning to North American Coal, the company’s net income for the fourth quarter was $6.6 million compared with net income of $20.2 million. The $20.2, of course, included the $13.1 million after-tax that was related to the sale of the two electric draglines that I referred to earlier. Excluding the effect of the gain in 2006 from those dragline sales, net income for 2007 fourth quarter decreased only moderately, compared to the 2006 fourth quarter.

The decline is primarily the result of increased income tax expense, excluding the effect of the gain on the dragline sales, resulting from a shift in the mix of pretax income toward entities with higher income tax rates, and due to reduced royalty income, which is partially offset by an increase in the earnings of the unconsolidated mining operations due to contractual price changes.

Turning to North American Coal’s outlook, its results in 2008 which, we think will be well below 2007. Much of that decrease is expected to be the result of a reduction in total lignite coal deliveries in 2008 compared with 2007, primarily due to increased customer plant outages in 2008.

The company also expects higher costs due to lower production levels at its Mississippi Lignite Mining Company as a result of expected continued lower delivery levels, as well as higher repair and maintenance expenses at our Red River Mining Company operation.

In addition, lower royalty income, primarily as a result of a completion of certain mining and certain reserves in the second quarter, and an increase in development expenses, are expected in 2008 compared with 2007. Also contributing to the decrease between the years is the absence in 2008 of a $3.7 million pretax arbitration award which was received in the previous year.

Deliveries from limerock dragline mining operations are also expected to decrease in 2008. Limerock customer projections for 2008 deliveries continue to reflect the continued decline in the Florida housing and construction markets, and you’ll remember that all of those dragline-mining operations are in the Florida market.

In addition, compliance with a district court ruling in July of 2007 and the timing of receiving new permit application approvals, indicate further reduction in customer deliveries are likely for a period of time over the course of 2008.

Those are the highlights of NAACO’s overall fourth quarter results and the general outlook for 2008. I think now then we’ll turn to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Amy Bloom - Stanfield.

Amy Bloom - Stanfield

Yes, you talked about your guidance for Hamilton Beach was significantly reduced results for 2008, could you give us, maybe, a little bit more clarity on that? You’re talking about the top or the bottom line, and, maybe, give us a range of, maybe, mid single-digits, high single-digits; I just want to get a little bit more clarification on the guidance?

Alfred M. Rankin, Jr.

Well, as you know, we don’t provide earnings guidance and have not for many years as a general matter. This is a particularly difficult year in which to have a sense of how economic conditions will affect our various businesses. At Hamilton Beach, like many other companies that are selling into the consumer retail environment, December sales were weak.

We did have comparable sales in 2007 in the fourth quarter to the previous year, and I think we certainly don’t see at this time any upturn in the consumer demand environment. So we would work hard to try to maintain the placements that we have and hope for good sell-through and to gain some additional new placements.

The bigger impact, really, in terms of the difficulty of the environment, is more at the operating profit level, and of course, we have the full year of the interest expense associated with the $110 million dividend.

So I think you can expect that there are factors that are going to affect operating profit. I mentioned, particularly, the cost pressures that are coming through in the business, and I think we’re in the same position that essentially all companies are that have established supply stores in China.

That was a tremendous cost reduction opportunity over a good many years, but now the supply business is very competitive in China. And the global upturn particularly in China and India has put tremendous pressure on price increases of commodities, and it’s very difficult to come up with cost reduction programs to offset those.

So I think there is an element of change here in moving into a more inflation-driven environment in terms of the cost profile in businesses such as Hamilton Beach’s than has been the case in previous years. The suppliers’ margins simply don’t permit the absorption of those increased costs, and, obviously, we work very closely to try to pass on appropriate cost increases to our customers.

But as I intimated in my comments, the customer cycle for negotiation is, to some degree, different from the cycle of negotiation with our suppliers. And the cost increases that we are receiving from our suppliers, based on accelerating commodity cost increases, have been increasing above our anticipation of just six months ago. So there’s likely to be a lag time that affects 2008, when some of those factors are coming through.

It’s also fair to say that we had some placements in 2007 with margins that were attractive; we hope for those kinds of opportunities in 2008, but it’s very difficult to count on them. And at this point, we think that, given the cost pressures and the weak consumer market, that products with higher margins may have a tougher time selling through than perhaps was the case in 2007 and 2006. As far as specifics are concerned, I wouldn’t go any farther than to give you the general perspective that I just outlined.

Amy Bloom - Stanfield

Do you have a number on how many new products were introduced in 2007, and maybe what’s on the docket for ‘08, is that higher or lower than 2007?

Alfred M. Rankin, Jr.

I don’t have those numbers at hand. I think we’ll probably talk about those in our annual report to some degree, and certainly the innovation commitment of the business continues to be very high. We have a high proportion of our products that are renewed every year, and I see no change in that.

We don’t have a substantial tradeoff as some businesses might in terms of capital and expense associated with tooling for new products, because those expenses more often than not are borne by our suppliers and then by us over time in the cost of the products. So we don’t have a trade-off that either permits or provides a profit improvement that comes from changing the pace at which those activities are going on.

Amy Bloom - Stanfield

I noticed in the 10-K that your CapEx guidance is higher for 2008 for tooling. You had just mentioned that, is that for new products or that’s for existing products and is that already committed on spending that capital?

Alfred M. Rankin, Jr.

You’re talking about for the total company not for Hamilton Beach.

Amy Bloom - Stanfield

It was for Hamilton Beach.

Alfred M. Rankin, Jr.

The numbers are pretty low levels in Hamilton Beach in total, and there may be some modest increase in those. But it’s really a very small number, maybe, $1 million or $1.5 million.

Kenneth C. Schilling

Yeah, I think you’re talking about the schedule we have on page 61, where we’re going from $3.9 to $5.4. That, in part, is tooling as well as some other activities at Ham Beach. And again, there are some new tooling for new products that we have in our budget, and that’s what we’re forecasting.

Alfred M. Rankin, Jr.

We’ll see how the numbers come in. It is often the case that the intentions early in the year are not fully carried out during the course of the year, but that’s the number we have at the moment.

Operator

Your next question comes from the line of Brian Rosenhouse - Sidoti.

Brian Rosenhouse - Sidoti

In regards to operating margins in NMHG I have 3.8% for this quarter which third quarter of ‘07 was a record low of 1.3%. I was just wondering if you wanted to talk about, basically, the snap back in operating margins.

Kenneth C. Schilling

Well, we had enhanced volume. We had good results in Europe, and, of course, that’s very helpful to us. That’s the flip side of the problems we have in the U.S., where we’re sourcing the products from Europe. There are so many factors that have come in to bear on the operating margins that they can swing in the short-term substantially.

To me, the more important issues are the following. Number one, that we have the whole set of restructuring activities that I described in some detail are coming to pass that will reduce our Euro content, reduce our manufacturing footprint, and, therefore, our fixed-cost content which happens to be in pound-based currency. And a number of things that are really quite favorable from that point of view.

In addition, we have continued efforts in procurement to find lower-cost sources in mainly in low-cost countries. And we have, importantly, a new electric truck line coming out, that will begin to affect results over the course of 2008 and in 2009.

And it’s important to understand, I think, with regard to those new electric trucks, that we expect them not only to have significantly enhanced performance and capability levels in comparison to the existing products, but also give us a broader product line, especially in the European market, and to have significantly lower costs than we currently have today.

We also have cost reduction efforts underway in our big truck facilities in Nijmegen in the Netherlands. And I would say that beyond the programs that have already been strictly identified in the narrow sense that those have, that we have value improvement programs that have very specific targets and very specific content that are being implemented that affect our various product lines.

So all of those things start to begin to come together in 2008, but we have additional costs associated with them substantially in 2008. And I think, perhaps, a good way to think about 2008 is a transition year toward 2009 and 2010, when a number of these programs that affect the cost side of our equation continue to mature.

In addition, on the pricing side, we are not just looking at trying to recover any material cost increases and labor cost increases that we absorb, but also to strategically position our products so that we capture the full value in terms of the customer value that we’re delivering.

So I’m more inclined to look out at 2009 and forward, and focus on the programs that are coming and the detail in the fourth quarter. Having said all that, certainly the fourth quarter was encouraging in terms of the improvement that it reflected. And it’s important to put that in the context of the operating and profit improvement too, not just between the third and fourth quarter, but between the fourth quarter of the previous year.

Now the percentages can get recorded and affected dramatically by the currency moves that affect both the value of revenues and cost margins from our European operations and move them in one direction, and the equation in the U.S. moves in another direction. So the net out of all that in the short-term is complicated.

Brian Rosenhouse - Sidoti

Regarding the coal division, do you see any plant shutdowns in 2008?

Alfred M. Rankin, Jr.

You mean power plant shutdowns. Well, we see a number of scheduled outages in that business. And we see more scheduled outages than have been typical in the past, and that’s part of a cycle. Major maintenance causes greater down time.

In addition, there have been operating issues at some of the power plants or even the gas plant in North Dakota that have affected the coal that they need for their operations. And those are sort of unplanned outages, if you will, and those have been up already this year.

In addition, in one of our operations, Mississippi Lignite Mining, last year, the outages, including the unplanned outages, were significantly greater than the forecast on which the mining production took place. The result was that as we built or mined at the level that the customer had indicated was appropriate, we actually ended up building inventory over the course of the year.

And this year, we need to reflect in the operating schedule for that mine where there are very heavy fixed costs that are absorbed by additional volume will, of course, create additional expense with less volume. We’ve got to bring our production levels down in line with what we think the power plant is actually going to operate at. And our hope is that the power plant increasingly over the next couple of years will begin to operate more efficiently and have a much higher up time than it currently has.

But it’s, to a large degree, a factor that is outside of our control. And we want to try to do everything we can to help our customer with the maintenance issues that they face in their operation and try to get the higher up time.

But in the meantime, it’s just we have to re-adjust, and so we expect in that operation that there’ll be somewhat lower shipments of coal and that the on-going production level will be significantly below, so that we don’t actually increase inventories this year and actually reduce them to some degree as we look into 2008.

Operator

Your next question comes from the line of Frank Magdlen - The Robins Group.

Frank Magdlen - The Robins Group

Could you talk a little bit about your market share, where you think you are in North America, and how different is the European and Asian market compared to North America?

Alfred M. Rankin, Jr.

Well, our market share has been pretty constant in the Americas over the course of the last few years. We hope with our new product line up that we’ll be able to enhance our share position in coming years. And we certainly have programs that we hope will have those outcomes.

North America is by a significant margin the highest share area for us. After that, we have lower shares in the European theater, and those have actually improved a little bit over the last year or so in many countries. Then we have our position in the Asia-Pacific area. We have some real strength in Australia and New Zealand, but our position in the Asian countries, as opposed to the Pacific countries, is not as strong as we’d like it to be.

We’ve been increasing in Japan on a steady but slow basis from a lower level than many of our other competitors. But the biggest issue in Asia is that we have a small share in China. We have a manufacturing plant in China, and we are working diligently to expand our distribution operations and have product that is appropriate for that market.

But it has been exploding at an extraordinary rate. And to some degree, that same trend exists in Eastern Europe, and although our share is higher there than it is in China, these very rapid growth markets are not markets where we have as established a distribution position.

So that’s a challenge and an opportunity for us as we look forward, and we’re very much focused on that, but the fact is that as the market expands in areas of the world where we have lower share, our global share position does decrease, unless we are able to establish a distribution that is more comparable to what we have in the more developed parts of the world.

Frank Magdlen - The Robins Group

Are there any component shortages in the lift truck market at this time?

Alfred M. Rankin, Jr.

No, I think my recollection is that there were some issues, sort of, a year ago, but we haven’t seen fundamental component shortages in recent times. We have our continuous efforts to try to ensure that the quality of our components is what we expect and what our suppliers want to deliver to us, and that’s not always the case. And I think we can do a better job of making sure that the right components at the right quality, gets to the plants at the right moment. And we’re working very hard on that.–

We’ve put in place a new supply chain management organization, which is more centralized than we have had in the past. It gives us greater focus and visibility on a global basis with our suppliers. And we’ve supported that new organization with a new supply chain management IT system, which we think is going to give us increasing benefits in that area over the next couple of years.

So that’s a very important factor in driving the enhanced productivity and efficiency that we expect from our forklift truck plants around the world. We’ve simplified the designs considerably over the last two years, and our new product made them more manufacturable. But at the end of the day, an efficient plant really requires that the components all be there absolutely on time, and so that’s a major focus of effort, of course.

Frank Magdlen - The Robins Group

Is there any guidance on the tax rate for ‘08?

Alfred M. Rankin, Jr.

Again, we really don’t give guidance on the tax rates or on individual components of our earnings, no.

Operator

At this time, there are no further questions in the queue.

Alfred M. Rankin, Jr.

Obviously, much of what we look forward to in ‘08 is going to be highly dependent on the state of the economies, especially in the U.S. And I think at this point, it’s more difficult to predict what economic conditions are going to be in both consumer and capital goods markets than it has been for a very long period of time.

Christina Kmetko

Thank you for joining us today. We appreciate your interest, and if you do have any additional questions, please call me at 440-449-9669. Thank you.

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Source: NACCO Industries Q4 2007 Earnings Call Transcript
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