Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 NACCO Industries Inc. Earnings Conference Call. My name is Vienna and I'll be the coordinator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Christina Kmetko.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO's results for the fourth quarter and year ended December 31, 2011. If anyone has not received a copy of this earnings release or would like a copy of the 10-K, please give me a call and I will be happy to 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 Industries is Ken Schilling, Vice President and Controller. Al 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 2011 fourth quarter earnings release which is available on our website. I will now turn the call over to Al Rankin. Al?

Thanks, Christy. As you know from looking at the press release, NACCO had net income for $54.4 million in the fourth quarter. That's $6.47 a share. Revenues were $951 million. Those numbers compared with the net income of $38.4 million or $4.59 a share and $866 million of revenue in the previous year. For the full year, net income was $162 million. That's $19.28 a share. Revenues were $3.3 billion. That compared with $79.5 million or $9.53 a share on $2.7 billion of revenues in 2010. If you look at the full year 2011 and the full year 2010 and you compare those after excluding the litigation cost and the settlement from the 2011 numbers and also from the 2010 numbers, the adjusted income was $124.9 million or $14.85 a share for 2011. And that compared with $91.7 million or $10.99 a share for 2010. For the full year, NACCO generated consolidated cash flow before financing activities of $122.5 million. That was comprised of cash provided by operating activities of $155 million and cash used for investing activities of about $33 million. For 2010, NACCO generated consolidated cash flow before financing activities of $57.3 million. So substantial cash flow, free cash flow, cash flow before financing, in both 2010 and substantially increased in 2011. Turning to the individual subsidiary companies, NACCO Materials Handling Group reported net income of $23.6 million. Revenues were $677 million. That compared with $13.3 million net income and $570 million in the fourth quarter of the previous year. The revenues which increased 19% were increased primarily as a result of increased unit volume in the Americas and Europe, a favorable effect of unit price increases implemented late in 2010 and early 2011, primarily in Americas and Europe. Worldwide new unit shipments increased to 27,700 units in…

[Operator Instructions] The first question comes from the line Schon Williams, BB&T Capital Markets.

I wonder if we could just start off with material handling. I had an opportunity to view the new UTILEV fork lift down at the MODEX show in Atlanta a couple of weeks ago. I think I understand the product positioning. But I wondered if you could maybe talk – maybe give a little bit more color about how you anticipate that rollout happening. What geographies are going to be getting it, during what time period, what market do you see possibly being the primary market? Is this really positioned to be a North American unit? Or are you going to use it – I mean, it sounds like you're using it on a global basis. But I'm trying to figure out, does this become a little needle mover for any specific geography. And then lastly, could you just talk a little bit about how the distribution of the UTILEV product has evolved? I mean do you have dealers already set up to take that product in 2012? Are you still working through those issues, maybe just some updates there?

Well, the UTILEV will be distributed through our regular dealer channels. We will not be distributing it through a separate distribution network. It is designed to ensure that our dealers have a full range of product to meet differing customer needs. The UTILEV is designed to meet the needs of the utility market. We have a standard truck especially focused in 5,000 and 6,000 pound internal combustion engine market. That's very similar to the sort of truck that Toyota has. We think it has some outstanding characteristics. And then we have our traditional premium products. So 3 products are meant to give our dealers the ability to meet differing customer needs with appropriate products. And the use of those trucks can range from customers who buy large numbers of trucks who may have within that group needs for different capabilities. So they could buy a premium and a standard and conceivably a utility truck. The utility truck is likely to have particular applicability in lower-intensity applications. And those are particularly frequent in the less developed markets around the world. They certainly are applicable as well in Western Europe, North America and other more highly developed parts of the world. But that truck is really essential to serve effectively certain Asian markets and certain developing markets, for example, in Latin America and Eastern Europe. So we expect to roll that truck out over the next year or so to all major markets. And to some degree, the timing of those is dependent on meeting different standards that are required for operation, for example, in E.U. or in United States. Different engines are required, different certifications, and all of that process is underway. Our objective is to have these trucks generally available in due course. But we would expect them to have differing impacts in different countries. Let me emphasize the importance in the developed countries of the standard of product which we introduced last year in – or 2010 I believe in the United States and in 2011 in Europe. That is an extremely important product to give us the ability to meet applications that simply don't require all of the premium features that we have in our premium product line. So our hope is twofold: one, that these will allow us over time to increase our share position in the internal combustion area; and two, to improve our overall margins, because we will be less inclined to sell premium, more costly products into applications where those costs do not need to be incurred. So we see this as both opportunity to gain share and margin.

And then I wonder if you could just talk about pricing. I mean you talk about certainly keeping an eye on commodity cost. Was there new pricing that went through at the end of the year or anything that's gone through in the beginning of this year? Have you done any kind of across the board increases that I should be aware of?

We have had increases at the beginning of this year, and they'll come into effect, not quite sure of the timing, February or March, late February, March sometime. But we advised of those earlier on in January, I believe.

Okay. And then what about, in relationship to the Tier 4 implementation, I mean is there additional pricing that will come along with those trucks, or are you having to you essentially eat some of the upgraded features that come along with that type of truck? I'm just wondering if the Tier 4 equipment creates a 5% increase to a truck, are you able to pass that through to the customer, or is that something that you're seeing some resistance in terms of customers accepting that higher price point?

Well, I think the way to think about it is every competitor has to introduce those at essentially the same time in the markets that require it. And so I think it's very realistic to assume that, that simply is what everyone faces and everybody will be increasing their costs. This is a very expensive program, especially in certain trucks. And I think everybody expects costs to go up as a result of that. Perhaps the more likely effect is to cause customers to rethink the trucks that they use to accomplish certain applications. There could be situations where they move away from certain kinds of internal combustion engines, adopt electric trucks, do other things that mean that they don't have to buy as many of those trucks that have certain kinds of Tier 4 engines in them. I don't think that's true of the broad range, but it may be true selectively. So you may see some shifting in mix as a result.

Okay. I mean do you think that puts you at a disadvantage given your historical presence on the ICE side of the fork lift industry?

No, we have an absolutely outstanding relatively new electric product line, 4-wheel electric product line. We think it's really essentially an industry-leading product line. And we feel we're in very good position to gain business that may shift from internal combustion engine to electrics. We have a very, very strong position in 4-wheel electrics.

Okay. That's helpful Just kind of moving on to housewares here, it looks like there were a number of product recalls within the Hamilton Beach unit in Q3, and then I think that continued into Q4. Was there any material impact to earnings as a result of that recall and do you feel satisfied that you've kind of resolved any engineering problems or technical issues with some of that product?

The answer to that is absolutely, those problems are resolved. And secondly no, there was no material impact on us. And our suppliers of those products are committed to deal with costs that are of that type. So it's very important, because they have the primary control over the quality of those. We have a substantial operation in China, which assists and helps to oversee and ensure the highest quality products coming from all of our suppliers. But part of the discipline here is how that's handled contractually. So these were smaller events. They were not major product lines or major volumes. And I think they've been handled expeditiously and appropriately, and they didn't have a big impact.

Okay, perfect. And then it looks like Kitchen Collection, there was a sizable increase. I'm actually referring to all of Kitchen Collection, both KC and Le Gourmet Chef. There was a sizable increase in the number of stores in the fourth quarter. I think together we're talking about somewhere around a 10% increase on a year-over-year basis. Seasonally, there are some – I guess there are some temporary stores that opened up in Q4, so take…

We've really discontinued the notion of seasonal stores. The fact is many of those seasonal stores were kept open, some were not. And so I think this is a more clean way to present it and that's really the way I would look at it. These are the number of stores that we're operating at 12/31, and they're pretty comparable. What we're doing at the moment is net increasing the number of stores in Kitchen Collection, not at a really rapid rate. But as we look forward, it was pretty rapidly rate. Last year, a lot of stores were opened. And in Gourmet Chef, we had a number of stores in malls where the rents were simply at levels that don't permit us to make – either don't permit us to make any money and have losses or where the profits are not satisfactory. That's why it's so critical, as I was suggesting in my comments, that in 2012 we're determined whether the new format and presentation of our merchandise in Gourmet Chef can enhance the volumes to a level that can make them attractive, assuming that we have the stores in the right malls with the right rental prices. And I would think we're going to have lot more visibility of that by the end of 2012 than we do right at the moment.

And then just in terms of the absolute number of stores maybe on the KC side, I mean could we see another 5% or 10% increase in the store count or do you think that the Q4 level just kind of carries through into 2012?

Well, you've raised an important point. We will have a modest increase in stores in 2012. But more importantly, as I suggested earlier, we have a new format that is going into place. And this requires some modification in the presentation of the merchandise in those stores, and it is a process that consumes a great deal of management time in order for it to be done correctly. And the management really concluded that as far as 2012 is concerned, it was more important to gain the benefits of having the new format implemented properly at as many stores as possible over the course of 2012 in a way that would not be disruptive to the selling efforts in our stores, and that means particularly at the end of the year. So you can expect that this is a year that has a lot more retrofitting, and a lot less -- a lot fewer new stores. But we think that the increase in same-store sales that comes from this set of changes more than justifies the switch-in emphasis for the year 2012.

Okay. And then turning our attention maybe to coal, I wonder if you could maybe call out some of the specific projects that maybe you're most excited about here in the near term. I mean in my mind, Liberty would probably be the biggest fish that's a little bit down the road. But I mean, I'm just thinking of some of these smaller projects like Demery, Camino Real, Caddo Creek. Could some of those starts actually ramp up in 2012, and obviously not be at full run rates, but could we actually start to see some modest volumes out of those smaller projects?

I think you're going to see pretty modest increases from those in 2012. The most important factors in this year will be the Liberty project which we expect to move forward into a new phase over the course of 2012. And a lot of effort is going into putting that mine in place and making sure that we're ready for production. We do have important activities underway in North Dakota. We do, I think, call those out as part of the new projects that we're continuing to work on, obtaining a permit for the Otter Creek reserve. We have some other discussions going on in North Dakota. So there are a couple of things in North Dakota that could be very important for the company in terms of its longer-term results. But none of those would have a big impact in 2012. Frankly, the biggest impact in 2012 will come from our customers and particularly the Red Hills Power Plant operating at a much higher level of capacity than has been the case until just recently. So we are hopeful that some real improvements have been made which will lead to much better results in the Red Hills operation. There is a great deal of leverage if we get additional volume. And the power plant runs at high rates. And so that's what we're really focused on. All of the others in effect are more long term, but we're spending a great deal of time focused on the longer term, because it's a difficult environment in the U.S. given some of the environmental pressures that are at least being generated with this administration in Washington. And so we're looking at other ways to participate in the business internationally, export, other markets, it can be good for the company and its shareholders. So there's a great deal of effort going into our long-term strategic thinking this year and then the hope that operationally the volumes will be better where we need them.

And just help me, I mean why do you feel so comfortable that Red Hills will make some operational improvements? I mean has there been any change in management there or any change in process or change in machinery that would mean that…

There's a relatively, a very new team of people working at the Red Hills power plant. We've established an extremely effective relationship with them, the cooperation levels in trying to get the best results for both of us I think are very encouraging. A great deal of it relates to the nature of the way maintenance activities are carried out. And we think that what they're doing now has already had a big impact in December and January as a result of programs that they had put in place late in the year and particularly during the last period of planned scheduled maintenance. So we're hopeful that the kinds of things literally have already been done, there are more, but I think we've already really moved the needle forward on that.

Okay. And then last question for me. The priority uses of cash, I mean cash continues to build on the balance sheet here, maybe just talk about where you see the priority uses of cash kind of going forward and then maybe talk or maybe address the buyback, it looks like you did a little bit of activity in Q4 but maybe how you feel about more of that going forward?

Well, we have been going through a period where you have to look at the cash situation quite carefully because we have been using some of the free cash flow that has been generated to reduce the debt in our businesses. So typically, we only have seasonal debt at Kitchen Collection. At Hamilton Beach, you saw that we paid down $60 million of debt. We will anticipate we will be continuing the program of increasing -- decreasing debt at Hamilton Beach, particularly in the shorter term. And then establishing a more permanent level of debt for that business and we expect that process to be complete this year. So then as it generates needed cash, that should be available for corporate NACCO uses unless Hamilton Beach comes up with thoughtful ways to apply it to its business which, at least at this point, we don't see the same is true at Kitchen Collection. At NACCO Materials Handling Group, there's a great deal of cash on the books at the end of the quarters. And we have a pattern of higher use of cash during the month and therefore it's not really all cash that's available. In addition, some of it is in Europe where it's less needed and then finally we still have a large amount of term loan B outstanding. I would expect over time, over the course of this year that we will address what the level of that kind of longer-term financing ought to be. And I would think that we will think through appropriate cash balances for Europe and have cash balances at month end that are much lower than they currently are. And as a result, I think we will have lower overall debt by a considerable amount at NACCO Materials Handling Group. So some of that cash that you're still seeing at the end of the year in the subsidiaries, it will be used for debt repayment and there should be more clarity as to just where that all settles out as we go through the course of 2012. And with regard to the corporate level of cash, we are pursuing a share buyback, as you pointed out. You may remember that when we announced that, the price of the stock was considerably lower than it is today. That of course is what leads to our having not accomplished as much in terms of purchases as we had hoped that we might in the fourth quarter. But still we have a program out there and we're hopeful that we'll be in a position to acquire more shares as we look forward. So that's really the plan that's on the table right at the moment and that's the whole structure of our focus on cash and what we're thinking about right now.

The next question comes from the line of Bruce Geller, DGHM.

I just wanted to see if you can give a little bit more color on the outlook for the material handling business. It was noted in the press release and your comments that net income is expected to decline materially. Can you give a little more color around the word material? It seems like a strong statement and I'm a little confused as to why you did point out some one-time items which actually seems to be the first mention of some of these one-time items, I've heard this year like the elimination of certain post-retirement benefits. So maybe you could just elaborate on what some of those one-time items were in 2012 and what you are thinking in terms of the materiality of the potential decline in the coming year?

Well, one of the one-time items was the elimination of certain post-retirement benefits that resulted in a gain that benefited 2011. I think a larger impact was in the currency area. And I think it's important to note that we do expect higher marketing and employee-related costs as we look forward. We're in a position where we feel that we have the products and the position with our distribution to provide more support capabilities to our dealers in anticipation of helping them gain additional market share. Those kinds of programs are very much focused around sales and marketing programs and support activities in terms of sales coverage, building of our national account capability, other actions of that nature. And I think the other thing is that we don't see particularly robust markets in 2012. We see the European business coming under considerable market pressures, it's very difficult to forecast exactly how significant they'll be. But as you can imagine in areas like Portugal, Spain and Italy, they are a higher impact than they are in Germany. Our share is lower in Germany and higher in those other countries I mentioned. So there are some problematic aspects in those countries. And there are just a variety of things that come together to make things little bit tougher in 2012 than in 2011. That's pretty much where I'd leave it.

So how does this all coincide with your often-stated goal of the 7% operating margin for that business, in what sounds like was a pretty good year in 2011 and you're now anticipating a down year. In 2012, your operating margin only peaked at 4.3%, quite a bit below your goal. So how do the comments you just made coincide with that goal of 7% margin?

Well, there are a couple things to keep in mind. It really ties in very closely. First of all, in order to achieve the target margins that we have, we need to have enhanced share. Our factories are not operating at the capacity level that we would like them to be operating at this point in the cycle. I would also say at this point, the cycle is somewhat weaker for 2012 than we had anticipated that it might be. And that's true in both Europe and Americas. So both of those factors mean that attaining our objectives is more difficult. Finally, there are some margin issues, particularly in the internal combustion engine product line. And I've indicated that earlier in response to the questions then, that with the utility standard in premium product line, or with the addition to the premium product line of standard and utility products that we believe we can get both enhanced share and better margins on average. And so we feel that the pieces are still there, but we have a number of things we have to execute in order to get to the objectives we have. Getting to them is not easy. The returns on capital in all of these businesses with the exception of Kitchen Collection are really very high. Very attractive returns on total capital employed. And so I think we have those objectives very much in mind. In each of our businesses we feel over time that we can achieve them. We have them embedded in our compensation programs to some degree, the appropriate degree in each of the businesses, and those goals are out there for people to move toward. But I think you certainly should feel that with a -- the businesses that we have structured the way they are, that achieving those goals, is achieving pretty – a very substantial – it would be a very substantial achievement. But we're committed to doing it. But the markets aren't cooperating quite as much as we thought they would. And frankly, some of the programs just take a while to get to have impact, especially when you are trying to take market share. And we have a number of very good effective competitors, who would prefer not to see that happen.

So you mentioned capacity utilization is one of the challenges. And with the market leveling out here, it would seem it's going to be difficult to achieve a much higher level of utilization without order rates turning back up. So…

That's why the market share program is here in place. That's the whole point. We have to get the market share in order to get the capacity utilization up. That's the point I was trying to make.

Sure. But to get that market share that's going to pressure the margins, obviously.

Not necessarily. Because I think to be honest, we will focus a great deal on parts of the market that our sales force is not actively aware of. And we think we have product line such that, if we actually call on accounts where we're not doing business and present our story effectively, we believe that we can close a substantial portion of those. So I don't view it as necessarily a price issue. I view it, it does have attendant cost, particularly for sales coverage and to some degree those will need to be shared with our distribution. But it's not necessarily just a price question.

Well, my question was more on margin, not necessarily price. But you're obviously spending a lot more money to try to gain that share. And your comments that it's not necessarily going to affect margin, doesn't coincide with your commentary in the press release. So that's – I'm just trying to tie…

Now, let me clarify between operating profit margins and margins at the gross profit level. And with regard to the gross profit level and those margins being under some form of pressure, I think I mentioned that there's some adverse country mix and that there are increased sales in some markets, where margins are lower. That's a different issue.

Yes, I hear you. As a shareholder, ultimately I care about the operating – the level of operating income. I think to me it's more important than a market share number or a gross profit number.

Believe me, nobody cares more about the operating profit number than I do, but I do take a long view and so does everybody in our company. We don't do things unwisely I hope, and we do them thoughtfully. We have disciplined programs, but we are prepared to invest where we think that's appropriate. And I would also say that we're not overly controlled in that process by the way that GAAP accounting treats certain kinds of expenditures which are, as a practical matter investments in the future that you have to make if you want to move things forward as opposed to things that are capitalized on the balance sheet. So we try to do it in a very disciplined fashion. I think you should feel that the profitability in terms of the returns on the invested capital, total capital involved, much less on the levered basis are very, very attractive even at the current operating profit levels at NACCO Materials Handling Group. So we do see though that over the next couple years, to put a more positive perspective on this, we do think that the markets are going to go up, that volumes will go up, that our share will go up, and all those things will come together in a way that'll move us both to a higher capacity utilization in our plants and to higher profitability.

So I'm sorry to keep pressing you on this, but how much was the gain from the elimination of certain post-retirement benefits?

I'm not going to get into more details. There will be some -- whatever level of information is in the 10-K will be available to you, and we really have not gone into more detail in the kinds of disclosures that we provide than what I just communicated to you.

Al, I'd just point out that our third quarter Q and third quarter earnings release was the quarter that we did call this out and I'd prefer the question being raised by the gentleman to go back to those filings.

Isn't it important though to have shareholders understand what the aggregate nature of the one-time items are, because you call them out in the press release as being a factor year-over-year looking forward. But then you're not telling us how much of a factor they are. I'm just asking for some assistance.

And we don't give earnings forecasts either.

I wasn't asking for an earnings forecast, but I'm just trying to gain an understanding of the underlying profitability of the business in 2011 versus what the one-time items added in 2011, so I could try to make my own forecast for 2012 based on the underlying operating profitability of the business in 2011.

My suggestion would be that you follow up and we will work with you to identify the material that's in the 10-K and in the previous 10-Qs. And I think you'll find that you have enough information if you do the analysis to figure out at least a reasonable portion of what you're talking about.

Okay. My last question revolves around some of the prior commentary about excess cash and paying down debt and share repurchase. One item that wasn't discussed was the dividend, and I'm curious what your thinking is there, where the dividend is on your priority list and how you're thinking about that for the coming year?

Well, we generally have discussions with our Board about that issue over the course of the second quarter. Historically, really for a very long time, our policy has been to increase the dividend at a modest rate each year. But when we get to discussion of that with our Board, we always consider alternatives, but it's been a pretty good policy for us over the years.

[Operator Instructions] There are no questions at this time. I'd like to turn the call back to Christina Kmetko for further remarks.

Al, did you have anything you wanted to follow up with?

No. I think that pretty much summarizes it. I think as we said in answer of the last question, there are some downsides at least as it appears at this point in the year on balance at NACCO Materials Handling Group, and that comes off the back of a year that was considerably better than we anticipated that it would be. And I think we've suggested that there are some improvements, albeit more modest in the other 3 businesses. And so we've got some pluses and some minuses overall. That's all I have.

Thank you all for joining us today. We appreciate your interest. If you do have any additional questions, you may give me a call. My phone number is (440)449-9669. I'll turn it back to the operator.

The company would like to remind you there will be an audio replay of this event available later today. To access the replay, please dial U.S. toll free (888)286-8010 or international (617) 801-6888 and enter the replay code 61815127. And thank you again. This does conclude today's conference. You may now disconnect and have a great day.