NACCO Industries, Inc. (NC) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 NACCO Industries Earnings Conference Call. My name is Taheesha, and I’ll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. 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 first quarter ended March 31, 2012. If you’ve not received a copy of the earnings release, or would like a copy of the 10-Q, please give me a call at 440-449-9669 and I will be happy to get you the 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 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 2012 first quarter earnings release, which is available on our website. I will now turn the call over to Mr. Al Rankin. Al? Thank you.

Good morning to all of you. NACCO had consolidated net income of $25.2 million or $3 a share on revenues of $803 million in the first quarter of 2012. That compares with last year’s first quarter $62.8 million or $7.48 a share. Revenues were $745 million. It’s important to remember that in the first quarter of 2011, net income included $39 million after-taxes for the settlement of the Applica litigation. If you exclude that amount, adjusted income in the first quarter was $23.8 million or $2.83 a share. NACCO Materials Handling Group reported net income of $21.2 million and revenues of $629 million in the first quarter and that compares with net income of $22.3 million on revenues of $586 million a year ago. The revenues increased in the quarter as a result of an increase in sales of higher priced trucks and an increase in sales in Western European markets, as well as an overall increase in unit volume mainly in North America. An increase in fleets’ services revenue had the favorable effect of the unit price increases implemented in 2011 and early 2012 primarily in the Americas and Europe also contributed to the increase in revenues. In the first quarter 2012, worldwide new unit shipments increased to approximately 20,100 units from shipments of approximately 19,400 units in the first quarter of last year and declined from shipments of approximately 20,700 units in the fourth quarter of last year. The worldwide backlog was about 22,300 units at the end of the quarter. That compared with 24,800 units a year ago and 24,700 units in December of 2011. Our first quarter net income decreased modestly compared with the first quarter of 2011 primarily due to higher employee-related expenses partially offset by an improvement in gross profit. The improvement in gross profit was mainly due to a favorable shift and sales mix to higher margin products and markets and the favorable effect of price increase is partially offset by martial cost increases. Looking forward NACCO Materials Handling Group expects the global lift truck market growth to continue to moderate in the remainder of the year, with volumes comparable to or up slightly from prior periods in the Americas, China and Asia-Pacific and declining modestly in Europe particularly Western Europe. And nevertheless NMHG anticipates a slight increase in unit booking and shipment levels and parts volume in 2012 compared with 2011 primarily as a result of new product introductions and marketing programs. NMHG’s backlog is expected to be modestly lower in 2012 compared with 2011, although commodity costs stabilized and decreased slightly at the end of 2011 and early 2012. Those markets are highly volatile and commodity price increases particularly for steel are expected -- still expected in 2012. Prices increases implemented in the first quarter of 2012 are expected to offset a significant portion of these anticipated higher material costs overtime. NMHG’s new electric rider, warehouse, internal combustion engine and big truck product development programs are continuing to move forward. The new electric rider, lift truck program brings a full line of newly designed products to market and the company expects to launch the final 2 models in this electric truck program in the second quarter of this year. In mid 2011, the company introduced into certain Latin American markets, a new range of UTILEV branded forklift trucks, which are basic forklift trucks that meet the needs of lower-intensity users. This new internal combustion engine series of utility forklift trucks is expected to be introduced in the global markets during 2012. All of these new products are expected to improve revenues and enhance operating margins as well as help meet specific customer needs. In the context of these new product introductions, the company will continue to focus on improving distribution effectiveness and capitalizing on its product capabilities to gain additional market share. Net income is expected to decline in 2012 compared with 2011 as a result of the absence of one-time items including the elimination of certain post-retirement benefits which benefited 2011 results and anticipated shift in sales mix to lower margin products and markets during the remainder of the 2012 and higher marketing and employee related costs. The majority of the decrease in net income is expected to occur in the second quarter of 2012 with results in the second half of the year are expected to improve modestly compared with the second half of 2011. In the second quarter of 2012, we expect to see some increase in -- significant increase in our SG&A expenses related to ramping up our strategic programs focused on both market share and product distribution improvement and also some lower less rich mix of product being sold with the result that our margins are expected to be lower as well in the second quarter. Overall, the results for the year are expected to be down in both the Americas, in Europe, Middle East and Africa market segments. Cash flow before financing for the full year is expected to be higher than 2011 despite a significant increase in capital expenditures 2012 compared with 2011. Longer term, NACCO Materials Handling Group is focused on improving our margins on new lift truck units especially in its internal combustion engine business through the introduction of its new products. In addition, NMHG is strategically focused on gaining market share through its new products, which meet a broad range of market applications cost effectively through enhancements to its independent dealer network. Hamilton Beach reported net income of a $1 million in the first quarter revenues were $104.9 million that compares with a $1 million of net income on a $100.6 million of revenue a year ago. The revenue increase was due to an improvement primarily the result of an increase in sales of products with higher price points. Net income in the first quarter was comparable to last year’s first quarter, however despite an improvement in gross profit, operating profit decline compared to 2011 as a result of increased selling general and administrative expenses, lower interest expense resulting from prepayments of Hamilton Beach’s term loan in the third quarter of 2011 and the first quarter of 2012. That offset the reduction in operating profit. As you look forward, the middle market portion of the U.S. small appliance market in which Hamilton Beach participates is expected to continue to remain under pressure. Hamilton Beach’s target consumer, the middle market mass consumer, continues to struggle with financial concerns and high unemployment rates. As a result sales volumes in this segment of U.S. consumer market are expected to remain challenged. International and commercial markets are expected to be stronger than the U.S. mass consumer market. Hamilton Beach continues to focus on strengthening its North American market position through product innovation, promotions and increased placements in branding programs together with appropriate levels of advertising for the company’s highly successful and innovative product line such as the Scoop, a single-serve coffee maker and Hamilton Beach expects that the Scoop and the Durathon iron product line both introduced in late 2011 to continue to gain market position over time as broader distribution is attained. The companies are also continuing to introduce innovative products in several small appliance categories. And the second half of this year, Hamilton Beach expects to launch the Open Ease automatic jar opener. This product as well as other new product introductions in the pipeline for 2012 are expected to affect revenues and operating profit profitably -- positively. As a result of its improving position in the U.S. consumer and commercial and international markets, Hamilton Beach expects an increase in revenue in 2012 compared with last year. Overall, Hamilton Beach expects 2012 net income to increase compared with 2011 as a result of anticipated increased revenue and the non-recurrence of 2012 of one-time cost incurred in 2011 partially offset by an expected increase in operating expenses. Hamilton Beach expects the 2012 cash flow before financing activity to be comparable to 2011. Kitchen Collection, reported net loss of $2.8 million, $45.3 million of sales and that compares with a net loss of $3.3 million and $14.9 million in sales. Kitchen Collections first quarter revenues increased primarily as a result of sales at newly opened Kitchen Collection and Le Gourmet Chef stores and an increase in comparable store sales at both Kitchen Collection and Le Gourmet Chef store formats. Comparable store sales improved due to an increase in sales transactions and customer visits and a higher average sales transaction value. The increase in revenue was partially offset by the effect of closing unprofitable Kitchen Collection and Gourmet Chef stores in the period after March 31, 2011. As of March 31, 2012 Kitchen Collection operated 270 stores compared with 239 at March 31 a year ago. Gourmet Chef operated 57 stores that compared to 60 stores a year ago in total 276 stores and 61 stores respectively. Kitchen Collection reported a lower net loss in the first quarter of 2012, primarily as a result of higher sales and improved gross margin at Kitchen Collection comparable stores and favorable effect of the absence of $700,000 of cost incurred in the first quarter of 2011 related to combining Kitchen Collection’s 2 warehouse facilities into one facility. The improvement was partially offset by higher employee-related expenses in 2012. Looking forward, the outlet mall retail market remains challenging, has continued high unemployment rates and fuel prices along with other consumer financial concerns are expected to continue to affect consumer sentiment and limit spending levels for Kitchen Collection’s target customer in 2012. However, the company expects to have an increased number of Kitchen Collection stores in 2012 and anticipates revenue in 2012 will increase compared with 2011. Overall, Kitchen Collection expects an increase in full year net income for 2012. However, further improvements over the favorable first quarter of 2012 results is expected to be concentrated in the fourth quarter with weak comparisons in the second and third quarters. Kitchen Collection expects the momentum achieved by the new stores in the fourth quarter of 2011 and the first quarter of 2012 to continue in the remainder of 2012 and expects improvement in full year operating results at both store formats as new stores opened in 2011 developed an establish customer base and as additional new stores are opened in 2012. In addition, Kitchen Collection anticipates improvements in operating results as the company continues its ongoing program of closing underperforming stores. Enhanced sales and margins are also expected as a result of further improvements and store formats and layouts it both Kitchen Collection and Le Gourmet Chef. Those are expected to be completed about the end of the third quarter of 2012 and as a result of further refinements of promotional offers in merchandising mix in both store formats. The renegotiating of store leases and the combination of Kitchen Collection to distribution centers as well as the absence of the number of costs incurred in 2011 that are not expected to recur in 2012 are also expected to contribute through improve full year results. Cash flow before financing is expected to be comparable to last year. North American Coal's net income for the first quarter was $9.2 million revenues at $24.3 million. That compares with $7.1 million and revenues of $17.9 million. Revenues net income increased in the first quarter compared with the previous year primarily due to an increase in deliveries at the consolidated mining operations namely as a result of improvements at customers power plant and an increase in royalties and other income received from third parties. The increase in net income is partially offset by a higher operating expenses at the Mississippi Lignite Mining Company. The increased production levels resulted in fewer costs being capitalized in the inventory in 2012 compared with 2011. Our North American coal expects to improved operating performance as coal mining operations in 2012. Tons delivered are expected to be slightly higher this year provided customers achieved currently planned power plant operating levels. Limerock deliveries are expected to decrease modestly in 2012 as customer requirements are expected to be lower as a result of the continued weakness in the Southern Florida housing and construction markets. Royalty and other income is expected to be moderately higher than 2011. The new unconsolidated mines which are in the development stage and will not be in full production for several years are expected to continue to generate modest income in 2012. North American Coal also has new project opportunities for which it expects to continue to incur additional expenses. In particular the company continues to move forward to obtain a permit for its Otter Creek reserve in North Dakota in preparation for the expected construction of a new mine. The permit is anticipated to be issued in mid-2012. Overall, North American Coal expects full year 2012 net income to increase compared with 2011, mainly as a result of expected improvement in tons delivered at the Mississippi Lignite Mining company. Other higher selling general and administrative expenses as a result of increased employee related costs and development activities are expected to partially offset the improvements in net income. Cash flow before financing is expected to be substantially higher than 2011 mainly as a result of a receipt in the first quarter of $20.2 million for drag line sold in the first quarter of 2012 to the Mississippi Power Company. Now, that completes our prepared remarks and I’d open it up for any questions at this point that you may have.

[Operator Instructions] And you have a question on the line from Schon Williams from BB&T Capital Markets.

Just wanted to walk through some of the pieces here. I was a bit concerned about the order patterns within the care of handling. It looks like Q1 orders within Material Handling was down about 15% on the year-over-year basis. It’s the second quarter in a row where you had -- your book-to-bill ratio has been below 1. Can you just -- can you add some color there in a rare, where did you see the weakness on the year-over-year basis either in a -- either geographically or within the product mix and then talk about maybe where do you see that where do you see that water pattern is going from here, should I expect this type of level that continue or do you see any strength coming in the next couple of quarters?

There are a number of facets to answer or to address in answering your question. First, we are at a backlog level that is fairly comfortable from our point of view in an abstract sense in terms of meeting customer needs. Having said that volumes were or bookings were less than we had hoped for in Europe and that’s a very tricky area for us to calibrate right at the moment. As you know, European economies are unsettled and it’s useful to know that our weakest position is in Germany which is by far the strongest market in Europe. So weakness in Spain and Portugal or Spain and Italy is really more significant does lead our dealers to focus on using inventory that they have in stock rather than reordering and effect hedge their bets. Well at the same time, they are maintaining a better flow of retail orders. There is -- sometimes that disconnect in the short term between retail orders and bookings that our dealers are making and our factory shipments which of course are the basis were determining our revenues. So there are some issues in Europe. They are compounded by the fact that large orders, given the environment, from larger accounts can be delayed because of uncertainty about markets and there also lumpy and so it’s hard to project. Our current thinking is that our position in the market will improve as we worked through those factors in the second, third and fourth quarters. So in our observations we’ve incorporated the best judgments we can about future orders it’s always subject to change depending on the circumstances. If you move to the Americas as opposed to Europe, Middle East and Africa, North America volumes in the high dollar value trucks have been very substantial. And some of our promotions and the low value trucks come later on in the year and so the unit numbers can be not necessarily a real indication of dollar volume flow and you can get a lot of spikes in the lower dollar value items depending on the timing of how we approach working with our dealers on that portion of the business. But I would call -- I would say that overall the situation in North America was really quite comfortable and looks as if it’s going to be even stronger as we look forward. Latin America had a weak couple of months in January and February better in March. We expect to see an improving trend there. We made a couple of dealer changes that unsettled conditions for buying trucks. We think we’re now through that, that one of those is closed and our program to put stronger more financially stable dealers in place is continuing to move forward appropriately. So, we feel that Latin America is coming along. We have a bigger separate business in Brazilian market has been a complex one recently in terms of currency fluctuation, the availability of government financing and very complex set of rules that we operated in there. It looks as so things are going to be better in the second, third, and fourth quarters than they were in the first quarter. So, there is no simple easy answer to your questions, but generally speaking our objectives are improved market position over the remaining portion of the year and at this point we have seen overall markets as I indicated in my remarks, weakening in Western Europe but generally similar or strengthening a bit in other parts of the world. So, I think that’s the answer I would give you to on that.

Okay. And I want to follow up on the some of the commentary. You’d indicated it looks I guess Q2 is going to be an especially weak period for material handling from a cost perspective. I just wanted to see if you could add any additional detail on and it sounds like the maybe the SG&A spend is going to ramp in Q2. I just want to make sure I understood that correctly and then if it is SG&A spend, I mean, what exactly is it I mean you just have a number of marketing events occurring in Q2 -- surrounding the new product introduction. If you just add a little color there that will be helpful.

A good bit of it is really related to our marketing activities. And we have a number of programs in place that are likely to generate more cost in the second quarter. Frankly when we put our original forecast together for the year, we expected more of those costs in the first quarter than actually occurred. So the results in the first quarter were better than we had expected and we didn’t carry some of those. They involved several different kinds of programs. A very important one is a program to work with our dealers to increase their coverage by having a central very thoughtfully driven hiring program that places additional sales people with our dealers. It’s working very well but we coupled that with some subsidization of those new sales people in the short run. We believe that the volume production capability of our dealer sales force was probably close of being maxed out at the volume levels we were operating at. So in other words, our sales people were very busy with the business that they already had and there was less time to go out and develop new business because they were consumed with working with our existing customers. From our point of view, that’s not the position we want to be in. We want to build our capabilities so that we can take advantage of the new products, electric truck line; I outlined the utility truck that I mentioned in the internal combustion area. The standard truck in the internal combustion engine all those to in addition to our really exceptionally well received and performing premium line. So, we need to have enhanced capability in the field and part of the subsidy program is related to providing some favorable adjustments as dealers get new volume. So, the assumptions that we’re making in the second quarter are that some of those programs are coming home to in the form of expenses somewhat in advance of generating the benefits that we expect to them so being. Really in total that’s a big portion of change, there is also some margin erosion between the first and second quarters as we see it now. We’ll have to see but we think that the mix will be a little less rich, but the main effect is that we do see some sort of miscellaneous revenues and the margins on those declining in comparison with the first quarter, which was pretty strong in those areas but they can still move things around in a small way. In addition we had some pick-ups in our material price free area and that will not reoccur in the second quarter. So that’s another piece of it. There is a bigger currency variation in the second quarter because we had more hedged a year ago in the first quarter and so there is a little more negative in currency in comparison to the 2 years. Those are the major factors that I would cite as increasingly we work our way through those as we look forward into the third and particularly the fourth quarter. The third quarter, of course ,is always somewhat weak as a result of summer vacations and plant shut downs and so on and so forth. So I think that’s the answer I would give you.

Okay and then maybe just one more on material handling -- can you help me frame, how you guys are thinking about in terms of the goals or the milestones for the U.S. product either I don’t know is it -- is 2012 just kind of a -- this is the kind of test that year and you want to just kind of you want to get some product out there and kind of see how it goes? Do you have unit goals that we could talk about I mean is this the product that if we do 100 or 500 units you will be happy or is this the product that you could be doing in 5,000 or 10,000 units this year? Can you just tell me think about what are the goals that you have for that product in 2012?

They are above the low end numbers that you used, but I wouldn’t get into the specifics but I think that would be inclined to describe the couple of aspects to that program which we think are very important. First of all, in general, it’s going to be a lower margin truck in some sense because this is a -- in large measure sourced truck and so it’s not following through our manufacturing plans and although it’s under our supervision. So we don’t have the capital tied up we don’t have the leverage in the plant from selling these products. But they meet real customer needs and those are customers that we haven’t been able to reach before and we will not only be able to serve them appropriately. But the UTILEV and the existence of the UTILEV and the standard truck will allow us to more appropriately price our more expensive premium truck. And therefore got margins without sort of having to compete at the lower end of the market the middle to lower end of the market with the truck that is over designed and more costly than those customers need to meet their needs. So it’s all part of the broad strategy to enhance our margin position in internal combustion engine trucks while we still are meeting customer needs. And then as I guess what would say is the sense of your comment that 2012 is very much -- should be thought of as an initial entry year, not only in terms of the phasing or bringing that on and especially in countries where special engine emission requirements are needed, but also in terms of the sequence of things and getting the dealers established and identifying the customer base and so on and certainly 2013 and 2014 will be more robust years from that vantage point. But, it gives us a full arsenal of trucks to be able to sell that meet our customers’ needs and it’s worth noting that there are certain countries around the world where the percentage of applications that require either the standard or the utility truck is much higher than is the case in the United States. So, it’s particularly important in our overseas market that we’re well-positioned to be competitive with the kinds of trucks that others may offer in those markets.

Okay, thank you. That was helpful. Now, just turning to Hamilton Beach, I know that the -- I think the gross profit dollars within that unit were fairly similar to last year, but in terms of the gross margin in Q1. Gross margins-- I went back over time and it looks I’d have to go back 4 to 5years to time when gross margins were that low within Hamilton Beach and I just wanted to see if -- I want to make sure I understood it where there are any kind onetime effects that hurt you in that unit and then maybe if you could just talk about the pricing environment within Hamilton Beach and my concern would be that the mass retailers continue to squeeze all that consumer product and that in maybe my concern will be that this is just the beginning of further price erosion. Can you just help me understand where the pricing is, where gross margins can go within that Hamilton Beach unit and maybe what -- why the numbers are so weak in Q1?

Well, I think to the extent I can give you perspective on it gross margin percent may have been a little low compared to the previous year, but we have quarters from time to time that our level and I don’t know that we think that gross margins are likely to be materially different and 2011 as compared to 2012 for the full-year. We get orders for lower margin products and some of the lower margin products have high dollars associated with their lower price points and some of that kind of occur in the first quarter, sometimes it occurs in the third quarter in preparation for the fourth quarter, but it’s really mainly probably related to that sort of situation. I think that those are really the most important drivers.

There is nothing, roughly.

We do have some foreign currency in the first quarter which is not insignificant as an impact as well And as we indicated SG&A is up also but as far as your question is concerned is to gross profit, we think that roughly speaking the levels we’re at are sustainable kinds of levels and that’s the basis in which we’re thinking about future quarters.

Okay. So, it sounds like Q1 is possibly kind of lumpy. It’s a lumpy business and maybe that’s what we saw in the Q1 period, but there is nothing in your mind that is structurally getting worse about the either on the distribution side or the manufacturing environment for Hamilton Beach is that right?

Right.

Okay. And just kind of lastly turning to coal we’ve seen a lot of data out there. I mean it shows that the thermal coal inventories are getting exceptionally high. I understand that you guys obviously you have a very captive customer base. You’re not really participating in- you’re not really participating in thermal market can real degree it’s a private market for you guys but I still think like some of the same factors or maybe that’s disrupting that market would be effecting your business. I mean that’s primarily the mild winter that we had, we’ve decreasing -- was causing some disruption in terms of lower power generation and then the other concerns that’s out there is just the exceptionally low gas prices, low natural gas prices causing utilities to do as much switching as possible. I wonder if you could just kind of address whether you guys saw any of that back in Q1 and then whether you see that being an overhang as we move throughout 2012, because from your commentary it sounds like other than maybe assuming the operators continued to work the plan. It doesn’t sound like low nat gas or mild winters has really affected you guys.

Well, the first thing to note is that the comments we have in the outlook are all based on the latest indications from our customers as to their expectations for the coal that they will need to operate at the levels that they chose to operate the power plant. So that’s a regular process of communication and we get updated regularly. So it’s not something that we are just speculating on. These are based on -- these comments are based on what our customers are telling us. With regard to the first quarter, the weakness and the warm weather and the lower demand did lead to a pull-up of one of the scheduled maintenance periods that had affected the end of the first quarter a bit more than we had anticipated. And I think that was a comfortable moment for them to have more gas-fired production as well. I guess the first quarter obviously was the better quarter than a year ago. You may remember that point of view of year-to-year comparisons that there were some operating struggles at our Mississippi Lignite Mining Company or at the power plant at the Mississippi Lignite Mining Company. And so, they had more downtime than they or we wanted and that was substantial degree. So, it’s worth keeping in mind in terms of the comparisons with this year that there were some power plant operating problems last year that appeared to be significantly ameliorated and as far as both the first part of this year that is the first quarter, the results as we indicated in our release were improved and we anticipate that those comparisons will be pretty good for the rest of the year as well. And that’s always assuming that the customer has continued to operate their power plants at the level that they currently forecast and both from a demand point of view and from the point of view of the underlying operating performance of the power plant itself and whether they are meeting the expectations in terms of up time that they had in their plants. So, that’s about as much detail as I can give you.

Okay, and that’s helpful. And then lastly on Coal, it seems like the Kemper County project is kind of back in the news. You have some concern. I guess there is some ambiguity I guess as to the legal status and whether the courts are going to kind of take another look at it. In your mind is--are these major roadblocks to that project going forward or is this kind of a normal course of building a coal power plant in the United States?

It’s the best that we can tell it's just normal course our customers moving forward. You saw that they purchased a drag line for $20.2 million right at the end of the first quarter. That’s a fair amount of money. They have changed hands. We need to -- we needed to have that transaction occur at the time that it did in order to stay on schedule that everybody is planning for. That’s the best evidence I can give you.

Okay. With that there was just a purchase from one of your other mine sites?

We purchased that drag line some time ago and over the years when we see a good opportunity to purchase the dragline we’ve been willing to invest our capital in them. Obviously the economics of a first class updated used dragline are significantly better than the economics of a similar new dragline. So it is one way that we can help our customer have in these new coal operations, have lower costs and better dispatch cost from their power plains.

Right. I’m just wondering if you got something else this coming offline that three offset that dragline?

It’s a -- we bought my recollection as we bought in Europe and we brought it over it’s been sitting at port and New Orleans for some time in anticipation of just what’s happened.

[Operator Instructions]. And we have no more questions at this time.

Okay well thank you everybody that’s been listing in. We appreciate your participation. Christy.

Yes we are again thank you for joining us today and we do appreciate your interest. If you do have additional questions you can reach me at 440-449-9669. Thanks so much.

Ladies and gentlemen, there will be a replay available after this call. It will be in for an hour. It will be available for 8 days. Your access code is 31263120. The number you will dial to get the replay will be (888) 286-8010. Thank you for your participation, you may now disconnect. Have a great day.