Christina Kmetko – Manager of Finance
Al Rankin – Chairman, President, and CEO
Frank Magdlen – The Robins Group
NACCO Industries, Inc. (NC) Q1 2008 Earnings Call Transcript May 1, 2008 11:00 AM ET
Good day, ladies and gentlemen, and welcome to the first quarter 2008 NACCO Industries earnings conference call. My name is Akia, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Christina Kmetko. Please proceed, ma'am.
Thank you. Good morning everyone and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO's results for the first quarter ended March 31, 2008. If anyone has not received a copy of this earnings release or would like a copy of the 10-Q, please call me at 440-449-9669 and I will be happy to send you this information. You may also obtain copies of these items on our web site 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. Al will provide an overview of the quarter and then open up the call to your questions.
Before we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q. In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2008 first quarter earnings release, which is available on our web site. I will now turn the call over to Al Rankin.
Good morning to all of you. NACCO's net income for the first quarter was $2.7 million, $0.33 a share, on revenues of $865 million. That compares with net income for the first quarter of 2007 of $6.6 million, or $0.80 a share, on revenues of $803 million. First, some highlights of the first quarter. NACCO Materials Handling Group Wholesale's net income declined $1.2 million to $7.9 million. Increased sales prices and sales of higher margin units did not offset the effects of increased material and delivery costs, higher warranty and manufacturing costs, and increased SG&A expenses. Both years' quarters included restructuring and associated costs of approximately $1.6 million to $1.7 million net of taxes. Revenues increased 15% in the first quarter compared with the first quarter of 2007. First quarter shipments increased to 22,341 units from a level of 21,514 units in the first quarter of 2007. NMHG Wholesale's worldwide backlog was approximately 29,100 at March 31, which compares with 30,000 units a year ago and 30,500 units at December 31, 2007.
NMHG Retail's net loss of $600,000 in the quarter of 2008 decreased compared with the net loss of $3.7 million in 2007. The decrease was the result of programs put in place in 2007. Clearly, significant progress was made toward achieving at least breakeven results, while building market position.
Hamilton Beach's net loss was $2.8 million in 2008 compared with a net loss of $100,000 in 2007. The increased net loss for 2008 resulted from lower sales volume, increased product costs not fully offset by price increases and increased interest expense of $2.1 million pre-tax or roughly $1.3 million after-tax, primarily due to increased borrowings related to $110 million special cash dividend which was paid in May of 2007.
Kitchen Collection's net loss was $3.2 million in 2008, essentially comparable with the net loss a year before which was $3.1 million. North American Coal's net income decreased to $3.8 million from $6.8 million the previous year, primarily as a result of reduced royalty income, a decrease in lignite coal deliveries due largely to customer planned outages and also a decrease in lime rock deliveries in a very difficult Florida construction and housing market to higher cost of sales, due to lower production and delivery levels at our Mississippi Lignite Mining Company and increased commodity costs for diesel fuel, tires and steel at all consolidated mining operations, which weren't fully recovered in that particular period through escalation provisions. In addition, the coal company had an increase in other expense as a result of a charge for the ineffectiveness of interest rate swaps in that quarter.
Turning to the outlook at a consolidated level, the economic environment continues to be very uncertain at this time, both for the consumer markets in which Hamilton Beach and Kitchen Collection participate and the capital goods markets in the U.S. in which NACCO Materials Handling Group participates.
At NMHG, key programs continue to be implemented. However, these programs will incur significant costs in 2008, especially in the first half of the year. Also product price recoveries are expected to lag increased costs, which will contribute to a very difficult second quarter for NMHG. North American Coal and Hamilton Beach are likely to continue to have very difficult operating environments in 2008, which in turn are expected to lead to significantly reduced results in those businesses compared with 2007, as we indicated in our last discussion after the full-year earnings for 2007 were announced. Those are a few highlights of our outlook.
I'll turn to the outlooks for the individual businesses now and go through a bit more detail on our perspective about the future. NACCO Materials Handling Group Wholesale does expect continued growth in lift truck markets in the remainder of 2008 in Europe and Asia Pacific but it also expects a further year of year-over-year decreases in the American 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 and the launch of a newly designed electric counterbalanced lift trucks in the late 2008 time period. However, if U.S. economic conditions continue to deteriorate, sales of units and higher margin parts could decline in 2008 which would adversely affect revenues and profit margins. Increases in material costs, specifically industrial metals and rubber and fuel and freight costs are expected to continue to affect results unfavorably throughout 2008. But, price increases implemented in 2007 and in 2008 are expected to offset most of these cost increases, especially as the full effect of the price increases occurs in the second half of the year.
The company will continue to monitor economic conditions actively and the resulting effects on costs. We are obviously working to mitigate cost increases, but they are very broad, and we will be focused on increasing our prices when that's appropriate in order to recover our cost increases. Appreciation of currencies in countries where NMHG manufactures lift trucks for sale in the U.S. market and where NACCO Materials Handling Group buys components for its U.S. lift truck operations have adversely affected earnings in the U.S. as the U.S. dollar continues to weaken against other currencies. To offset these adverse currency movements, we are implementing a number of programs, the most important of which is the phase out of production of current products at the facility in Irvine, Scotland, which will also then change the product mix at our Craigavon, Northern Ireland facility and increase production at our Berea, Kentucky and Sulligent, Alabama plants in the U.S. and at our Mexican facility. These programs, which we expect to complete in early 2009, are expected to reduce purchases of high-cost euro and British pound sterling denominated lift trucks materials and components, reduce freight costs and lessen NMHG's exposure to future currency exchange rate fluctuations and reduce the manufacturing footprint of our European wholesale manufacturing locations and provide additional opportunities to source components from lower cost companies and also to reduce working capital.
It's a very important program for the company. This program and other related manufacturing restructuring 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 a year in annual cost savings. However, we do expect future additional charges related to the manufacturing restructuring program of $6.6 million in the remainder of 2008 and some modest expenses in early 2009. Those charges are in addition to the $10.2 million of pre-tax charges incurred in 2007 and the first quarter of 2008.
NMHG's investment in long-term programs, particularly the significant new electric-rider truck program, which as I indicated is expected to bring a full line of new products to market over the course of this year and 2009, and warehouse and big truck product development efforts and manufacturing programs are expected to continue to improve future results. And our belief continues to be that the programs in place and others in development will allow NMHG to achieve its 9% operating profit margin goal in the 2011 or 2012 time period.
The outlook at NMHG Retail is for our key improvement programs, especially those implemented in Asia Pacific, to continue to have an increasingly favorable effect in 2008 and to put the company close to a position of meeting its strategic objective of achieving at least break-even results while continuing to build market position.
At Hamilton Beach, we expect 2008 to be a very difficult year, with results well below those of 2007. Current economic factors affecting U.S. consumers, such as high gasoline prices, depressed home sales, mortgage debt concerns are certainly among the factors creating a challenging retail environment. Further, the company expects continued significant pricing pressure from suppliers in 2008 due to increased commodity costs for resins, copper, steel, aluminum, as well as to an appreciating Chinese currency relative to the U.S. dollar. While Hamilton Beach will work to mitigate those costs through price increases, the timing of those price increases on margin recovery is likely to affect 2008 adversely. Despite those near-term unfavorable factors, the company continues to focus on strengthening its market position through product innovation, promotions and branding programs.
The company introduced a strong assortment of new products in 2007. Further new products are expected and are in the pipeline for 2008 and 2009. On the other hand, reduced consumer confidence and uncertainty in U.S. consumer markets makes volume prospects very difficult to forecast with regard to price point and margin mix. Over the long term, the company is working to improve revenues and profitability by focusing on not only the innovative products, but also implementing cost reduction and margin enhancement programs and strategic growth opportunities.
At Kitchen Collection, again, the uncertainty in the U.S. economy, a reduction in consumer confidence, high gasoline prices are expected to affect consumer traffic to outlet mall locations and retail spending decisions generally in an unfavorable way. Nevertheless, Kitchen Collection is hopeful there will be modest increases in revenues and improvements in operations, primarily at Le Gourmet Chef, in the remainder of 2008, but largely in the second half. With the significant exception of the distribution function, the integration of Gourmet Chef was completed in 2007. And to improve the distribution operations for the Gourmet Chef stores, Kitchen Collection is shifting those warehouse operations from a third-party service provider to a Kitchen Collection managed distribution operation, which is near its current company-owned distribution operations. That transition is expected to be completed early in the third quarter of 2008.
In addition, key merchandising programs at Le Gourmet Chef are expected to have an increasingly positive effect overall, especially in the second half of 2008. As a result, Le Gourmet Chef operations are expected to improve over the course of 2008 in comparison with 2007. Longer term, Kitchen Collection expects to continue programs for its Kitchen Collection store format, which are designed to enhance merchandise mix, store displays and appearance, and optimize store selling space. Overall, improvements in operations are expected not only in 2008, but in 2009 and succeeding years at Le Gourmet Chef.
At North American Coal, overall results for 2008 are expected to be well below 2007. Much of the anticipated decrease is expected to be the result of a reduction in total lignite coal deliveries, primarily due to more customer planned outage days in 2008 and that includes an increased number expected in the second quarter and to lower delivery requirements expected at Mississippi Lignite Mining Company and higher cost of sales at Mississippi Lignite Mining Company because of those lower production and delivery levels.
Higher repair and maintenance expenses at Red River Mining Company and increased commodity costs for diesel fuel, tires and steel are affecting all consolidated mining operations. Those are not expected to be fully recovered in 2008 through contractual price increases, escalation provisions and therefore will adversely affect results.
In addition, lower royalty income, primarily as a result of the completion of mining certain reserves by third parties in mid-2007 and an increase in development expenses are expected in 2008 compared with 2007. And importantly, also contributing to the decrease between the two years will be the absence in 2008 of a $3.7 million pre-tax arbitration award, which was received in the second quarter of 2007.
Deliveries from lime rock dragline mining operations are also expected to decrease further in the remainder of 2008. Customer projections for 2008 deliveries continue to reflect the ongoing decline in the Southern Florida housing and construction markets. In addition, compliance with a July 2007 district court ruling and the expectation that North American Coal's customers will need to apply for new mining permits in 2008 indicate further reductions in customer deliveries are likely. Over the longer term, North American Coal expects to continue its efforts to develop new domestic coal projects and we continue to be encouraged that more new project opportunities may become available in the near term, including opportunities for coal-to-liquids, coal gasification, and other clean coal technologies.
That really covers the overview for the company and its subsidiaries. Obviously, this is not going to be an easy year in any of our businesses and a lot will depend on how the U.S. economy evolves. That really completes my overview of the first quarter and the outlook for 2008. And I turn now to the questions if any of you have them.
(Operator instructions) Your first question comes from the line of Frank Magdlen. Please proceed.
Frank Magdlen – The Robins Group
Good morning, Al.
Frank Magdlen – The Robins Group
Your position of rising commodity costs isn't any different than anybody else in the manufacturing world. But, could you give us a little bit of an illustration of maybe the percentage increases that you are seeing and then maybe a better understanding of how much you have to increase price to get your margins back to where they should be? The lag you mentioned was two or three quarters if I understood it right.
Yes, it depends on the particular area of the world that you are talking about. But, if I took an average, it's running around 3% cost increases. Let me say that those cost increases are net of, what we call, our Value Improvement Program decreases. The VIP program is an integral part of our business. And it's designed to go out and find improvements, either lower cost sources or improved engineering, different materials, and so on and so forth. But, the net is around those kinds of numbers. It really, though, doesn't tell the full story because other elements than what are contained in the strictly defined manufacturing costs of our products are also going up. For example, costs for ocean freight are going up significantly and that affects both our NACCO Materials Handling Group and our Hamilton Beach business.
By the way, my comments on cost increases were really focused on NACCO Materials Handling Group. I'll come to the others in a minute.
Fuel costs are going up for transportation. That affects NACCO Materials Handling Group. So there are a broad set of costs that are increasing and sort of flowing through the P&L. We have a concerted effort in place to look at the detailed effect on our products, if you will, series by series, so that we can determine how much those cost increases have been. And we feel that our competitors are struggling with the same kinds of cost increases and there's nothing particularly unusual about our position.
In addition, I would add that while currencies have had a net negative effect on us that in the United States certainly, our relative currency position in many of our products has probably been improved because we've a great deal of dollar content. On the other hand, there are certain products that come in from Europe to the U.S. that we haven't yet moved to domestic U.S. production and component sourcing, where currency costs are also hurting us. So the depreciating dollar has had a net adverse effect on the company to some degree and certainly in certain products.
Now to the extent that our competitors have a similar cost structure, which is the case to some degree in product lines like our very large heavy trucks, there are opportunities to pass along some of those currency cost increases.
Turning to Hamilton Beach/Proctor Silex, we not only have the commodity cost increases but there are certain Chinese labor cost increases and of course, the Chinese currency appreciated relative to the dollar at a more rapid rate in the first part of this year and in last part of last year than had historically been the case. And there, we negotiate many of our agreements with our major customers like Wal-Mart, Target, Kmart, Sears and so on in a manner which makes it difficult to increase our prices as quickly as the cost increases affect us. So it's something that's affecting everyone in the industry and we are all working to work our way through it. Certainly, our customers who do a great deal of sourcing in Asia and China in particular directly are well aware of the pressures that are coming there.
So I think we do have these lags. We are working hard to focus on that. We are trying to take currency into account where we can. And as you heard, by the end of the year, roughly speaking, we expect to be in a position where our currency balance will be very significantly improved. And in addition, from an absolute cost sense perspective, the program we put in place a couple of years ago to bring a great deal of production back from Europe to the United States – the production is for the U.S. market – will be even more beneficial than it was expected to be at the time that we – because the European currency has appreciated since then relative to the dollar.
So that's about the best perspective that I can give you. I guess I should add in the case of the coal company that we've cost escalators in all of our contracts. Some of them work in a manner which causes those cost increases to be passed on quite quickly; others of them have significant lag periods. And in those cases where there are lag periods, if costs go down in the future, we'll still get the benefit in the future of the previous earlier cost increases. So, it lags in both directions as cost moves.
Frank Magdlen – The Robins Group
All right. Thank you very much.
(Operator instructions) At this time, I'm showing there are no more questions. I would like to turn the call back over to Mr. Al Rankin.
Okay. We thank all of you for joining in. And Christy will be available to answer further questions should you want to give her a call. Christy?
If you do have any further questions, please call me at, again, 440-449-9669. Thank you, and have a good day.
The replay for this call will be available in approximately two hours. To access the replay, please dial 888-286-8010 toll free and 1-617-801-6888 internationally. The replay passcode is 72205058. The replay will be available for eight days. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.
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