NACCO Industries Inc. (NYSE:NC) Q3 2009 Earnings Call November 5, 2009 11:00 AM ET
Christina Kmetko - Manager, Finance
Al Rankin - Chairman, President and CEO
Ken Schilling - Vice President and Controller
Frank Magdlen - The Robins Group
Good day ladies and gentlemen and welcome to the third quarter 2009, NACCO Industries Earnings Call. My name is [Evet] and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).
I would now like to turn the call over to Miss Christina Kmetko. Please proceed.
Thank you. Good morning everyone and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO’s results for the third quarter ended September 30, 2009. If anyone has not received a copy of this earnings release or would like a copy of the 10-Q please give me a call and I would send you this information. You may also obtain copies of these items on our website at nacco.com.
Our conference call today will be hosted by Al Rankin, Chairman, President, and Chief Executive Officer of NACCO Industries. Also in attendance representing NACCO 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-K.
In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included on our website and in our third quarter earnings release, which is available on our website.
I'll now turn the call over to Al Rankin. Al?
Thanks Christy. The earnings release indicated that we had a consolidated net loss at NACCO Industries for the third quarter of 2009 of $3.9 million or $0.47 a share, on revenues of $532 million and that compares with a consolidated net loss for the third quarter of the previous year of $17.3 million or $2.09, on revenues of $917 million.
Its important to note that in the third quarter last year, results were negatively affected by the recognition of a non-cash tax charge of $14.5 million, against the accumulated deferred tax assets at NACCO Materials Handling Group’s Australian operations and for certain U.S. taxing state tax jurisdictions.
NACCO's consolidated revenues for the third quarter were lower than the prior year primarily as a result of significantly lower volume at NACCO Materials Handling Group, due to a major drop in the global forklift truck market demand.
There is some highlights first on the third quarter. NACCO Materials Handlings Groups net loss was 22.4 million compared with a net loss of $20.1 million in 2008. In early October, NMHG announced a manufacturing restructuring program and additional reduction-in-force programs that resulted in a restructuring charge of $6.9 million both before and after tax.
Hamilton Beach's net income increased to $6.9 million in 2009 from $1.3 million in 2008. Kitchen Collection's income increased to $300,000 in 2009 from a net loss of $3.3 million in 2008. And North American Coal's net income increased to $11.4 million in 2009 compared with $7 million in 2008. I’ll turn now to the individual business units to discuss their results.
I had noted in beginning the discussion of the third quarter at NACCO Materials Handling Group that remaining retail operations after the sales of the Hyster Retail dealerships that the presentation has been changed and we eliminate the discussion of a separate Retail operation. We discuss only consolidated NACCO Materials Handling Group information and Retail operations at this point are immaterial in the context of the total NMHG business.
NMHG reported a net loss of $22.4 million on revenues of $328 million for the third quarter of 2009, compared with the loss of $20 million on revenues of about $700 million for the third quarter of 2008. The third-quarter net loss includes a restricting charge of $6.9 million before and after tax for NMHG's Italian operations that was announced in early October and some additional reduction-in-force programs.
Included in the third-quarter 2008 net loss was $1.2 million net of taxes of restructuring charges, and an additional costs of $600,000 net of tax, related to the Irvine, Scotland restructuring program.
In addition, the third-quarter 2008 net loss included a non-cash tax charge of $14.5 million, against the accumulated deferred tax assets for NMHG which I mentioned earlier.
Our revenues decreased to 53% in the third quarter of 2009, compared with the previous year and that was as a result of a decrease in units and parts volume in all geographic regions and as a direct result of the economic downturn in each of these markets.
Worldwide shipments in the third-quarter of 2009 declined 55% to approximately 9,400 units from approximately 20,700 units in the third quarter of 2008.
NMHG's worldwide backlog increased slightly to 13,200 units from a low of approximately 12,300 units at June 30 and worldwide backlog of course was significantly higher a year ago.
The NACCO Material Handling Group's net loss, excluding the effect of the prior year tax charges and restructuring charges previously outlined, increased significantly in the third quarter of 2009, compared with the third quarter of 2008, primarily as a result of a decline in gross profit of $34.5 million partially offset by $20.5 million of favorable currency movements and lower selling, general and administrative expenses.
The gross profit decline was mainly as a result of the reduced unit in parts volume and these unfavorable items were partially offset by decreased material costs of over $20 million and price increase implemented in prior years, which resulted in benefits of $13.6 million pre-tax.
In addition there were improved warranty costs and lower sales and of course which were partly the result of better claims experience and partly lower sales volumes. GS&A declined $5.2 million due to reduced workforce levels and other cost containment actions.
If you turn to the outlook. Global market levels for units appeared to have stabilized in 2009 at current low levels, especially in the Americas. Parts volumes also appear to be stabilizing around current levels. NMHG is not anticipating a market upturn of any significance in the last quarter. Perhaps better put, we are not planning for any upturn. We're going to wait until we see it before we respond.
It’s very difficult to look forward in the market and of when the markets will turn up. As a result our current expectation is for significantly lower levels in all lift truck markets in the last quarter of 2009 and significantly lower unit shipment levels and a reduction in parts sales in the fourth quarter of this year, compared to last year. We do expect unit bookings and parts sales to increase slightly compared with the third quarter of 2009, however.
Now obviously, in light of this dramatic downturn NMHG has taken number of steps over the last year and half, almost two years to respond to the market outlook. We continue to take actions to resize the organization as market conditions warrant. We do it through both restructurings and reductions-in-force.
I indicated that in early October we announced the closure of the Italian facilities that’s expected to be completed in early 2010. Benefit should be approximately $3 million in 2010, $3.5 million in 2011 and a running rate of just over $3 million as we look forward.
That restructuring program supplements the benefits of the Irvine, Scotland restructuring program, the closure of that plant as well. We are approximately $2.5 million in the fourth quarter and we expect about $15.5 million in 2010, and annually about $18 million thereafter.
In addition, the estimated benefits at the current reduced workforce level from the reductions-in-force implemented over the last two years are expected to be about just a shade under $12 million in the fourth quarter and approximately $50 million on current annualized basis. It's important to note that approximately 75% of that relates in someway to manufacturing operations and reflects the very low current levels of those activities.
Additional actions that we’ve taken include capital expenditures restraints, additional planned plant downtime, restrictions on spending and travel, suspension of incentive compensation and profit-sharing, wage freezes and salary and benefit reductions, all of which are expected to continue to reduce expenses in the fourth quarter of 2009, compared with 2008.
We've continued to monitor the situation closely, and if we have to make further adjustments we will. It hasn't kept us however, from moving forward with our product development programs. We have warehouse truck and big truck product development programs, and especially the new electric-rider lift truck programs that are progressing essentially as we had planned.
The new electric-rider lift truck program will bring us a full line of newly designed products. We’ve introduced two series in the second quarter. We expect to introduce additional series in the fourth quarter of this year. We'll complete the program by introducing the remaining series over the course of 2010.
Obviously, NMHG having suffered the losses we have so far this year expects to operate at a loss for the full year. However, modest unit and parts volume improvements that benefits from new product introductions and restructuring programs, reduce material costs and product costs as well as our further general expense reductions are anticipated in the fourth quarter, and they are expected to lead to a moderate loss in the fourth quarter.
Cash flow before financing activities is expected to improve further in the fourth quarter, primarily as a result of a reduction in working capital and low capital expenditures.
Hamilton Beach reported net income of $6.9 million in the third quarter on revenues of $118.9 million, compared with net income of $1.3 million for the third quarter of 2008 on revenues of $138 million. Despite the decrease in revenue, net income increased in third quarter, compared with 2008 primarily from an increase in gross profit.
Lower product cost resulted from the decline in commodity cost, sales of higher margin and higher priced products, lower freight cost and cost of reduction initiatives which partially offset the decline in volumes and those were the primary factors for the improvement in gross profit over the prior year third quarter.
The decline in sales was really across a good many channels and reflects weak sales volume in certain segments of the market place, as well as some one time replacements or short-term replacements perhaps is a better way to put it in the previous year.
So turn to the outlook at Hamilton Beach. The economy and obviously consumer financial concerns still make it a very uncertain and challenging retail environment, results vary as I said from channel-to-channel and from customer-to-customer and its resulted in lower retail expectations for the normally strong fourth quarter holiday selling season now.
It may improve relative previous year in terms of the overall market place, but they are still at very low levels. So, we anticipate revenues in the fourth quarter that are going to be lower than the fourth quarter of the previous year.
As a result of these anticipated lower full year volumes obviously we took aggressive cost containment actions early in year and in fact late in last year I’ve reported on those in previous calls.
Those actions along with initiatives to improve pricing and product positioning and to reduce product and transportation cost are expected to continue affect results favorably in the fourth quarter. So we should have significantly improved fourth quarter net income, compared with a very weak fourth quarter in 2008.
Overall full year 2009 net income and cash flow before financing activities are expected to improve significantly, compared to the very weak 2008 results, before the goodwill impairment charge of about $18 million.
And if the company's markets which appear to stabilize begin to deteriorate again which is looking somewhat less likely, but we still keep it in the back of our minds, our revenue and earnings could be adversely affected.
Kitchen Collection reported net income of $300,000 on $48 million of sales, compared with a net loss of $3.3 million on revenues of close to $46 million in third quarter of the previous year. Revenues increased primarily as a result of increases in new store and comparable store sales at both Kitchen Collection and Le Gourmet Chef.
Comparable store transactions and customer visits were up, although the average sale was lower at the Kitchen Collection stores as consumers continued to seek value brands and buy basic need items in the current economy.
However, the Gourmet Chef stores had an increase in average sales transaction as a result of improvements in merchandising and fewer markdowns, despite a decrease in comparable store transactions and customer visits.
Kitchen Collection reported slightly better than breakeven earnings in the third quarter, and that of course as I've indicated, compared with a large loss in the third quarter of 2008. The improvement that was driven primarily by fewer product markdowns and improvements in merchandise offered at both formats, Kitchen Collection and Le Gourmet Chef.
In the prior year, the Le Gourmet Chef store format was substantially updated including the products offered and that required some significant markdowns in 2008. Kitchen Collection's third quarter also benefited from lower product costs.
As to the outlook, the same uncertainties affect Kitchen Collection that affect Hamilton Beach and although the factory outlet malls, seem to be responding to this downturn better than some other channels, and despite the weakness that Kitchen Collection expects to see improved fourth quarter holiday selling season, compared with previous year.
Due to continued strength in the Kitchen Collection stores and the expectation of significantly improved margins at Le Gourmet Chef which results from the conclusion of the new product enhancement in store merchandising programs which are really starting to pay off now.
In addition the opening of seasonal store locations during the holiday season, capital expenditure restraints and administrative cost control measures implemented in late 2008 and 2009 are expected to continue to improve results in the fourth quarter.
Overall, Kitchen Collection expects that its current sales and merchandising programs and sustained improvements in logistics are going to lead to significantly improved fourth quarter and full year results, before in comparison with 2008, before the charges of $3.9 million for goodwill and intangible impairment.
Cash flow before financing activities is expected to be about breakeven and significantly improved compared with 2008.
North American Coal net income was $11.4 million on revenues of $38 million, compared with $7.0 million on revenues of $39.0 million in the previous year. The increase in the third quarter net income was primarily attributable to the receipt of lease bonus payments of $7.1 million pre-tax for leasing certain oil and gas mineral rights controlled by North American Coal to a third party.
Increased earnings of unconsolidated mines, mainly due to contractual price escalation and improved results at the limerock dragline mining operations, primarily due to the new cost reimbursable management fee contracts, also contributed to the increase in net income.
These increases were partially offset by reduced operating results at the Red River Mining Company as a result of difficult mining conditions and by an increase in income tax expense which results from shift in the mix of pre-tax income to entities with higher income tax rates.
As far as the outlook is concerned, North America Coal expects full year 2009 net income to improve in comparison with 2008, although results in the fourth quarter, excluding the pending Red River Mining company sale transaction are expected to be lower than fourth quarter of 2008. In addition, full year cash flow before financing activities and before the effect of the pending Red River Mining transaction is expected to increase.
Tons delivered by the lignite coal mines are expected to decrease in the fourth quarter, as compared with 2008 as a result of some early October inclement weather conditions and an increase in customer power plant outage days.
In addition, contractual price escalation is not expected to affect fourth-quarter results as favorably in 2009, as it did in 2008 because of recent declines in commodity costs. An increase in income tax expense resulting from a shift in the mix of pre-tax income toward entities with higher income tax rate is also expected to continue to unfavorably affect our fourth quarter results.
On the Red River Mining transaction, I’d note again that in April of this year, North American Coal entered into an agreement to sell the assets of the Red River Mining Company to its customer for $42 million in cash, subject to closing adjustments that sale which is subject to customary closing conditions, including regulatory approval, does appear to be on track and is expected to generate a substantial gain and enhance cash flow when the transaction is completed late in 2009.
The company has a number of new project opportunities for which it continues to incur additional expenses, and expects to incur those in the fourth quarter. In the second quarter of 2009, North American Coal entered into a new contract mining services agreement to provide approximately three to 400,000 tons of lignite coal annually to a new customer. Initial deliveries are expected to commence in 2010.
In addition, in the third quarter of 2009, North American Coal entered into a new contract for mining services to provide approximately 650,000 tons of lignite coal to a customer that currently purchases lignite coal from The Sabine Mining Company, with initial deliveries expected to begin in 2013.
The company is also continuing to pursue other contract mining opportunities. We are continuing to seek permitting the Otter Creek Reserve in North Dakota in preparation for the eventual construction of a new mine.
We’re continuing to work on a project with Mississippi Power to provide lignite coal to a new coal gasification Integrated Gasification Combined Cycle power plant at Mississippi, and we're pursuing a new mine in Texas and we're anticipating that we'll sign an agreement sometime in the fourth quarter of this year.
That completes my summary of the third quarter results and the outlook for the fourth quarter. We’ll be looking at 2010 and its outlook during the next couple of months and be in a position in our next earnings report to provide some prospective on what we see in 2010.
At the current time, we think that conditions are still quite uncertain and so we’re less clear about market prospects for the next year, then we might normally be at this time of the year. So, we’ll be pulling together our perspective on 2010 as we look forward.
Obviously, the biggest driver in 2010 will be recovery in markets in the forklift truck business and settling in with the full benefit of all of the cost reduction and cost containment actions that have been taken in that business over the last year and half or two years.
That completes my remarks. I'd be happy to answer any questions if there are any?
While we are waiting for listeners to have questions to press star one, let me provide you with my contact information for any additional questions you may have after the conclusion of today's call. That phone number is 440-449-9669. With that, are there any questions?
Yes, ma’am. Your first question comes from the line of [Lionel Joliwag].
Thank you. Just that the -- we start at NMHG I mean obviously you have done a very good job on the cash front and I saw in your guidance that you expect to generate more cash in Q4. I am just wondering I mean how much more do you left in working capital in Q4 and going into 2010?
Well I would say that in large measure we expect to be pretty much at the point of having completed our working capital program by the end of the first quarter. It could be some more minor adjustments. There is one portion of working capital, which relates to the retail operations that are being divested, its working capital. But it's not really part of the capital of the wholesale business but there is a process of winding down the amount of capital tied up in those businesses, which takes a while.
So I would simply distinguish between wholesale working capital and the others. The other thing I would note with regard to your question is that and my answer to it is that when I say that the working capital will be wound down, what I really mean is that receivables and inventory will be largely wound down. I think it still remains to be seen a little bit when payables will level out, and we've seen some upturn in payables in the third quarter, and that might take until the first quarter here to have some stability.
We've been working off inventory, and obviously the flipside of that is that we're not buying inventory, and therefore our payables are low. So, in that sense there's further opportunity on the payable side.
I know you were in compliance with the covenants of your credit facility at NMHG this quarter, but it remains pretty tight and it forces you to basically keep a lot of cash at NMHG. I'm just wondering have you considered refinancing your credit facility.
It seems that the credit markets are yet to reopen and a lot of companies has been issuing secured notes, which would effectively take out all the covenants you may have. I mean is it something you've been looking at or you'll be looking at going into year end?
Well, what I would say is this, that we always look at the financing of the business, and certainly the state of the current credit markets is a factor. However, we have a lot of tools at our disposal for ensuring that we're in compliance with our covenants, and as a result we feel quite comfortable that we can live within our covenants, and given that we are inclined to keep in place a very attractive borrowing rate that we have in our existing borrowing agreements.
I think perhaps the question might relate in the end of us, might relate more to whether we should in some way reduce our borrowings by using some of our cash to reduce those borrowings or whether we keep them outstanding as we anticipate an upturn and in that sense, we'd be looking at it but not so much in the sense of re-financing sooner than we'd be prudent, but we certainly are keeping in mind credit market conditions and what we think they might be at such time as our existing agreements mature.
But as you well know any company and any business that refinances agreements that’s were made at the time that our financing agreements were entered into is paying a significantly higher interest rates and in fact the covenants tend to be more restrictive and not less restricted even if there is more collateral provided.
Your next question comes from the line of Frank Magdlen. Please proceed.
Frank Magdlen - The Robins Group
Looking at your various businesses and it's been difficult to gauge final demand and right-size the businesses, but where are you in that process of thinking. In another words, if business stays relatively flat at this lower level, have you completed enough downsizing or in the downsizing plan have you anticipated some upturn in the next six to nine months where we could see breakeven say in material handing maybe a little sooner.
Let me just go through the businesses. And we feel that the coal company is at levels that it [ought] to be add. The business is doing well. We think it will do well next year. We at Hamilton Beach, we have taken significant actions. We think that they remain at the proper level unless something dramatic happened on the downside, which we certainly don't expect although we watch very carefully.
At Kitchen Collection, it has a done very effective job of streamlining their operations both in the Chillicothe headquarters and also in the store operations and we feel very comfortable there. NACCO Materials Handling Group, I think is using this as an opportunity to try to ensure that it has the most cost effective structure and work pretty well through that and expect that we will be by the end of the year. I don't see much opportunity for further reductions in people.
I think what we really want is the full benefit of the actions that we have taken. Secondly, we got number of new products out in the market place, which we believe can help us enhance our share position in both the Americas and in Europe even in light of market that is not recovering in the way that it has been typically in past downturns. Then certainly as to breakeven we have, the objective of breaking even as quickly as possible very much in our sights, and as we go through our planning process, we are going to keep that very clearly in mind and have some perspective on that that's better than we have right at the moment, when we talk to you next.
In the meantime, I think that you should feel that the actions have been taken are prudent and wise, both with regard to our manufacturing facilities. We really have an outstanding footprint in our manufacturing facilities in two senses there, one in terms of the number of facilities and what they're focused on, and also in terms of their enhanced ability to deal with currency issues, either by low cost sourcing of purchased materials, by outsourcing certain activities from higher cost plants into lower cost environments where we don’t operate them but are purchasing them.
So the manufacturing footprint I believe in Europe, the Americas and in Asia Pacific is a very sound one. And what we need now to do is to ensure that with a combination of market upturn and the new programs that we have and product pricing, marketing distribution that we can gain and which will help us to gain share between market growth and share gain efforts that we can fill up the facilities in due course that we have.
I think as far as our SG&A levels are concerned that they are about where we feel that they should be or they will be very shortly, we see very limited opportunities, really effectively none in the Americas, maybe some additional opportunities in Europe and I think when the retail structuring of core brands are completed in Asia Pacific, there may be some modest opportunity there but that’s pretty well complete at this point. We’ve got a lot of improvement opportunities or improvement actions that have been taken which should provide a payback for us as we look forward.
Frank Magdlen - The Robins Group
Thank you. Could you just give a little color into the new order rate, it's up a little bit sequentially, where is it coming from, is it particularly the new products or is it particularly any particular type of industry?
That’s a hard question to answer really because there are so many products, so many channels, so many market segments and I would prefer to really focus on the fact that, particularly in the Americas we seem to have hit a bottom and if anything, it’s getting a little bit better. In Europe it's not quite so clear, as to whether things are going to get better. September was a little better than the previous couple of months.
But, while reading anything into one month's result is a more than I can interpret. So, I think the European economy has been weak, but it’s showing some signs of upturn in a general sense and when that flows back in forklift truck business, we’ll have to see. So and then there is always sort of the customer driven side of it. It certainly it hasn't helped us. They have companies like General Motors and Chrysler and Ford under the kind of pressure that they’re under as far as our US markets are concerned.
So, there are many factors that work and we keep working with our dealers to and our national accounts efforts to exploit the opportunities wherever they are. But obviously, the automotive sector is very weak at this point and that's one that we don't see coming back. Probably some of the warehousing segments will start to strengthen sooner rather than later. But again, I am just reluctant to make any prognosis at this point because we haven't seen enough trends to really make it reasonable to make any kind of judgment about those things.
Your next question comes from the lines of [Shawn William]. Please proceed.
Al could you help me over see the margins within Material Handlings in wholesale this quarter? I mean you guys were stripping out the restructuring costs, you were largely breakeven in Q2, and any of that benefit didn't seem to carry over in Q3. I mean was there anything that artificially boosted margins in Q2, or anything that's providing a particular drag in Q3 that's kind of not normal?
Well, it's probably wise to keep in mind that third quarter is the summer holiday period. As you can well imagine, this is a year in which we certainly wanted to take our summer holidays, and because the people are off, and we have the fixed cost still hitting us. But I think there has certainly been some pressure on prices, and I think we're hopeful that, that pressure will begin to abate. Why has there been pressure?
I don't think it's just because the markets are down, I mean everybody is competing for a smaller pie. I think it has much more to do with the fact that some of our competitors appear to have had enormous inventories at the time the market collapsed. We were not in that position nearly to the degree that our competitors were.
Obviously, we had some inventories, we had to work through, and some pockets where there are longer supply chains. But some of our competitors have had huge amounts of inventory and they like us are trying to liquidate inventory and working capital under these conditions and to pay back the banks at a time, when that covenant constraints can be significant.
So in my judgment that’s probably led to some pressure on prices I think our material costs have been declining, we gave you an indication of that. These are very unsettled periods. There is a lot going on and some of these numbers effects LIFO and accounting transactions and currency has had a significant impact as well. I think perhaps the thing to do is to wait and see how the fourth quarter starts to shape up.
I think I said in my remarks that in the fourth quarter, we’re hoping to have a pretty moderate loss. So I think what you’re going to see is that things are going to stabilize, as some of the elements that affect the one or two quarters will dissipate. We hope to be in improved condition in the fourth quarter. Our unit volumes were down in the third quarter in comparison to second quarter as well. So that affects the absorption and addition to the factory downtime from vacations.
I mean did you mention and was there a LIFO charge in the quarter, was that material?
No, they’re just constant adjustments that we take in terms of what's capitalized and how variances are hitting and so on, and so forth. It just, there are a lot of moving parts is really all I meant to say.
Can we go back to the saving and can you help me just on what is truly incremental versus what's already kind of baked into the numbers. I mean obviously the Modena closure that will be incremental next year. I mean are there still incremental saving from Scotland that should be carrying through into Q4 and into 2010 are those numbers have we really realized the full savings that we are going to get from that and that's already baked into the Q3 numbers and there aren't real incremental savings beyond what you already seeing in Q3.
With regards to Irvine there are probably not a lot of further incremental savings. We think are pretty close to the running rate. Obviously if you look at 2010 as a year, it will improve because we had in the first quarter some substantial cost associated and no benefit particularly from the Irvine closure, so only in the last half of the year where you have had the fuller impact. I agree with you the program at Modena, the closure of that facility will be a benefit.
We are completing some additional cost reduction actions including additional layoffs that are reflected in the charges that we took this quarter that will have an impact on a reported earnings point of view probably practically beginning in the first quarter Ken rather than this year. And from a cash point of view it will be little further on but from a reported earnings point of view that will have an impact. Those programs are underway. So there are some programs that are underway, but I think it's getting the full annualized benefit, which we're hoping to really see in a significant way in the fourth quarter, and then have that flow thorough over the course of 2010.
Right, but there shouldn't be any real incremental improvement from Q3 into Q4 just from Irvine I mean you'll get benefit next year just as those savings are annualized, but there's no kind of incremental dollar pickup in Q4 versus Q3?
Then what are you expecting dollar wise for 2010 that's incremental to 2009?
I don't know that I could give it to you dollar wise. I just gave you the annualized number, which I think we put in our release. It's approximately $16 million, 15.6 in 2010 and $18 million thereafter.
So you think you got half of that in 2009, so I mean, ballpark, I could say there's another $7 million to be gained in 2010?
I'd rather not get that specific. I think you can draw your own conclusions. I haven't got the numbers and I wouldn't like to be quite that specific, but during the general thinking process that I would say is a good way to think about it.
Can we just briefly talk about GE Credit, your finance arm for material handling? We haven't talked about that business much. Are you seeing any drag come from that business? Has GE changed the way in which they are conducting business within that unit that is negatively impacting you?
No I think its continuing to be to work in a very sound way. The most important GE program is really in the US and that’s a good program for both GE and for US. Outside of the US the programs are with GE are much more of a facility and if GE isn't competitive, their opportunities to get financing through other folks and I think but I would say in answer to the implicit question you have is that, well GE is certainly tightened up its approach and so have we.
We have potential, we have request for credit extension from borrowers whose credit quality has deteriorated and so we have absolutely a joint interest with GE in making sure that we’re lending in an appropriate way to ensure that we have a sound joint venture business, which is what we have with GE at the Americas.
All right, I mean but I guess to get back to my point then I mean has there been a material drag from that business?
If you are losing money, no.
So if can just to help you little bit on the income statement, if you look at the line, the income from non-consolidated, non-controlling interest, you can see that our numbers dropped $300,000 between last years third quarter and this years third quarter, now that also includes some other businesses in it but that is not a material change.
I mean that’s where that would be recorded.
Then Hamilton Beach looks like you, there was a statement in the press release, there was reduced distribution to certain retailers. I mean can you add a little color there I mean did you lose the distribution channel or partner there, is there and if so is there any chance we can replace that in the near term?
Well I think replacing it is replacing the volume as opposed to the channels is very important. May I just give you some examples some of our international businesses have been quite weak. We have the Hamilton Beach commercial business that sells a lot to restaurants, bars and it's even though it's at a lower end, it's a capital goods investment. Well what's happened to capital goods investment and restaurant business I mean it just collapsed, so that channel is very weak.
In the US consumer business, there are relative changes in the position of Wal-Mart, Kmart, Target, a Kmart [series] that is Target. Some of the smaller players they have done less well than others. The high-end business has declined for certain products quite dramatically. So there are a lot of different factors coming to play. In addition, we have certain seasonal in and out placements and we have a lot of discipline as to what we really want to go for and what we don't.
I think some of our competitors have had higher inventories and have been anxious to move some of that stuff. If you look at our results at Ham Beach, you can see pretty clearly that we like to be a profitable company, not just a company with a very large top line. And so we have a lot of discipline in that whole process. However, we're working very hard to ensure that we have the right products in the pipeline.
The other thing I'd urge you to have a little bit of caution on is that well there can be some of these seasonal placements or number of points of distribution, within a particular customer that can change, that also retailers have their own pattern of when they order, and that can influence the volume of sales, let's say in September as opposed to the volume of sales in October. Now, from a full year point of view, that's not going to affect the results. But it's hard to sort all that out.
I think clearly, some of our retailers are being cautious about the fourth quarter. They are controlling their inventories very carefully, and so they don't buy from us. They deplete what they have and then expect us to turnaround very quickly, sometimes on a dime. But that's the environment we're dealing with. I think as consumer behavior starts to improve, some of these issues will decline. But at the end of the day, it's going to be our own ability to innovate in areas where we can be rewarded with a reasonable margin.
I think several years ago, I don’t remember quite how many now, two or three years ago, we made some significant decisions to withdraw from some low margin business and its just doesn’t provide the returns that we need and we are not going to go back into those businesses and that’s irrelevant particularly relevant because if there is any one underlying trend, its in the market places where these kinds of products that Hamilton Beach sells.
It’s that the customers are looking for real value for money and they are trading down. All you have to do is look at their relative results of Wal-Mart with the increases across their business and compare them with certain comparable areas and target to see how consumers are behaving differently, now than they were just couple of years ago. I think that’s about the best answer I can give you.
Then last questions and maybe this one is for Ken here, any guidance maybe on the tax rate going forward, up, down, ballpark, any help there?
I think I'd look at the tax [holes]. We have income or more specially losses in jurisdictions that we do not benefit. You need to exclude those items and then once you do that, you end up with a rate that’s some what more consistent.
That's helpful, but that's the mechanism that works under those tax [holes].
Let me just point out and as an additional note to Ken's comment that as earnings come back in some of these areas and as volume improves from these very depressed levels that just as we are not getting a tax benefit now we are not going to have a tax cost in the future in those jurisdictions. So to the extent there is a silver lining in that, that's going to come back and benefit us as markets come back.
Now the other comment I am making to add to Ken's is that you really need to look at tax rates individually by subsidiary and I think you can do that but the sale of the oil and gas leases fro example at North American Coal we're taxed at a higher rate than many of our coal mining operations are taxed at.
Therefore their average tax rate has gone up and it's kind of peculiar item because the way the accounting works we got all the benefit of those payments in the third quarter in term of recording them as revenue and income. Then we charge an average tax rate so what you will see in the fourth quarter is that the tax rate in the coal company will go up and the reason it will go up is because of what happened in the third quarter not because of anything that happens in the fourth quarter.
So, you've touched on an area which I find very complicated and hard to get a good fix on. So I think thinking it through unit by unit is probably the most helpful way, and I think Ken's comments had more to do with NACCO Materials Handling Group than any of the other businesses. I think Kitchen Collection pretty straightforward, Hamilton Beach, pretty straightforward, the coal company.
I've given you the issue, and it depends a lot on where we get the benefit of depletion accounting and where we don't, and obviously we don't get it on an oil and gas mineral rights sale. Then NACCO Materials Handling Group we have these areas where we got to earn some income before we get the tax benefit.
It sounds to be as though the question have been completed, and we know that at the last conference call, somehow we didn't get the questions showing up, and ended things too soon. I hope we've covered all the questions at this session, and in any event, as Christy indicated to you before, she's available to follow-up on any further questions that may develop in your minds as you think more about this release. Okay. Thank you.
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