NACCO Industries, Inc. (NC) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 NACCO Industries Incorporated Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to hand the call 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 second quarter ended June 30, 2012. If anyone has not received a copy of this release or would like a copy of the 10-Q, please call me at (440) 449-9669 and I will be happy to send you 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 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 second quarter release which is available on our website. I will now turn the call over to Al Rankin. Al?

As you know NACCO announced consolidated net income of $21.8 million or $2.60 per diluted share, on revenues of $773 million for the second quarter of 2012, compared with consolidated net income of $19.2 million, or $2.28 per share on revenues of $811 million. Of particular importance during a quarter, we announced that on June 28th that Hyster-Yale Materials Handling would be spun-off from NACCO industries. We had a filing of registration statement with the SEC related to that proposal and Hyster-Yale as independent company will own and operate the company’s materials handling business in its entirety. Spin-off is expected to occur during the third quarter of 2012 and if you look at the implications of that looking backwards from the second quarter over the trailing 12 months Hyster-Yale had revenues of about $2.5 billion, net income of $81.8 million, earnings before interest, taxes, depreciation and amortization of $140.4 million, it had depth of $142.6 million, cash of $103 -- $143.1 million, so its net debt was actually cash positive $0.5 million. The remaining NACCO after the spin-off of Hyster-Yale, we’ll have revenues of $814 million, net income of $45.3 million, or had over the previous 12 months, net income of $45.3 million, EBITDA of $85.5 million, it had debt at the end of the period, at the end of the second quarter of $164.9 million, cash of $160.1 million, so it had net debt of $4.8 million. As you look forward and taking into account the additional expenses associated with becoming a public company, Hyster-Yale is expected to have ongoing annual incremental expenses something on the order of $3.5 million pre-tax. These expenses will commence on completion of the spin-off of Hyster-Yale when the normal and customary expenses associated with being a public company are expected to be incurred. Those include public reporting obligations, director’s fees, insurance and so on. NACCO Industries is expected to include -- incur additional public company expenses about a $0.5 million. Turning now to each of the individual business units for more detail on the second quarter, as NACCO Materials Handling Group, net income was $19.5 million and revenues of $602 million, that compared to net income of $19.2 million and revenues of $648 million a year -- in a year ago quarter. Revenues decreased, primarily as a result of unfavorable foreign currency movements, mainly caused by the weakening of the euro and the Brazilian real against the U.S. dollar though there was a decline in unit volume, primarily in Europe and the Americas, and a decrease in other revenue. The favorable effect of unit price increases implemented in 2011, early 2012, primarily in Europe and Americas partially offset the decrease in revenue. In the second quarter, our worldwide new unit shipments decreased to approximately 18,700 units from shipments of approximately 19,900 in the second quarter of 2011, and a declined from shipments of approximately 20,100 units in the first quarter of 2012. On the other hand, the worldwide backlog was approximately 24,200 units at June 30, and compared with 25,100 a year ago, but a lower number of 22,300 at the end of the March 31 -- at the end of the first quarter. Second quarter net income was comparable to the second quarter a year ago. The favorable effect of a lower income tax expense was offset by a decline in operating profit and the write-off of certain interest rates, swap contracts, as a result of refinancing its debt in the second quarter. Income tax expense was lower as a result of a release of $2.1 million of its deferred tax liability, which was provided for unremitted foreign earnings in the second quarter. The decrease in operating profit was mainly due to unfavorable foreign currency movements in the Brazilian real and the euro as they all weakened against the U.S. dollar. There was an increase in material costs and higher employee-related expenses that was partially offset, all others was partially offset by favorable price increases and a favorable shift in sales mix to higher margin products and markets. Turning to the outlook, at NMHG, the global lift truck market continues to -- growth continues to moderate, we expected to over the remainder of 2012 with volumes comparable to or up slightly from prior periods in the Americas, China and Asia-Pacific, and declining moderately in Europe, particularly Western Europe. Nevertheless, NMHG anticipates a slight increase in overall shipment levels and parts volumes in the remainder of 2012, compared with 2011, primarily as a result of new product introductions and marketing programs. Of course, NMHG will continue to monitor ongoing market conditions and adjust manufacturing levels if that turns out to be necessary. Expectations for cost -- material cost increases have moderated during the first half of 2012 and NMHG now expects commodity prices in the second half of 2012 to be similar to those in the last half of 2011. Price increases implemented early in 2012 have offset the higher material costs experienced in the first half. Commodity prices do, however, remain sensitive to changes in the global economy and so the company is going to continue to monitor economic conditions and the resulting effects on costs to determine the need for future price increases. NMHG's new electric-rider, warehouse, internal combustion engine and big truck product development programs are all continuing to move forward. The new electric truck program brings a full line of newly designed products to market. The company launched the 4 to 5 ton electric truck in Europe in early July of this year and expects to launch the final model of the program in the first quarter of 2013. In mid-2011, the company introduced in certain markets a new range of UTILEV branded lift trucks, those are basic forklift trucks that meet the needs of lower-intensity users and this new brand series of internal combustion engine utility lift trucks is gradually being introduced into global markets over the course of the year. All of these new products are expected to improve revenues and enhance operating margins, as well as help increase customer satisfaction. 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. In addition, stricter diesel emission regulations for new trucks go into effect in 2012 in certain global markets, and NMHG expects to launch a range of lift trucks in 2012 that will include engine systems that meet these new emission requirements. Net income is expected to decline modestly in the second half of 2012, compared with the second half of 2011, as a result of the absence of one-time items, primarily the elimination of certain post-retirement benefits, which resulted in a $2.9 million pre-tax gain in the 2011 results, an anticipated shift in sales mix to lower margin products and markets during the remainder of this year and higher marketing, engineering and employee-related costs. Specifically, results are expected to decrease in Europe, Middle East and Africa market segment based on the anticipated decline in market growth in Europe as the economy continues to be depressed, as well as the anticipated effect of a weak euro on results. Cash flow before financing activities for the full year 2012 is expected to be higher than 2011, primarily from reduced working capital requirements as the global lift truck markets continue to moderate in the Americas, China and Asia-Pacific, and decline moderately in Europe. Longer term, NMHG is focused on improving margins in new lift truck units, particularly in its internal combustion engine business, through the introduction of its new products. And in addition, NMHG is strategically focused on gaining market share through its new products, which meet a broad range of market applications cost effectively, and through enhancements to its independent dealer network and its marketing activities. Turning to Hamilton Beach, Hamilton Beach reported net income of $2.2 million in the second quarter. Revenues were $111 million that compared with net income of $1.3 million and revenues of $104 million a year ago. The improvement in revenues was primarily the result of an increase in sales of products with higher price points, particularly in the U.S. consumer market. The net increase was partially offset by unfavorable foreign currency movements caused by a strengthening U.S. dollar against the Mexican peso and Canadian dollar. The increase in net income in the second quarter was primarily the result of increased sales, offset by higher product costs and the absence of $900,000 pre-tax of costs related to moving the Hamilton Beach distribution center to a larger facility a year ago. Lower interest expense related from lower debt levels also contributed to the increase in net income. As you look forward over the rest of the year, the middle market portion of the U.S. small kitchen appliance market was under pressure at the end of 2011 and that pressure continued in the first half of 2012, we expect that to continue. Hamilton Beach's target consumer and the middle market mass consumer, continues to struggle with financial concerns and high unemployment rates. As a result, sales volumes in this segment of the U.S. consumer market are expected to remain challenged and retailers are likely to remain cautious. Nevertheless, Hamilton Beach expects improved volumes in comparison to weak levels in 2011. International and consumer -- and commercial product markets are anticipated to continue to strengthen compared with the prior year. Ham Beach continues to focus on strengthening its North American market position through product innovation, promotions, increased placements and branding programs, together with appropriate levels of advertising for the company's highly successful and innovative product lines, such as the relatively recently introduced Scoop, a single-serve coffee maker. Hamilton Beach expects The Scoop, the Two-Way Brewer and the Durathon iron product line, all introduced late last year, to continue to gain market position over time as broader distribution is obtained. The company is also continuing to introduce innovative products in several small appliance categories. In the second quarter -- second half of the year, Ham Beach expects to launch the Hamilton Beach Open Ease Automatic Jar Opener. These products, as well as other new products introductions in the pipeline for 2012, and expected key placements and promotions for the third and fourth quarters are expected to enhance revenues and operating profit in the remainder of the year. As a result of these new products, placements and promotions, and the company's improving position in the U.S. consumer, commercial and international markets, Ham Beach expects an increase in revenues in the second half compared with year ago. Overall, Hamilton Beach also expects an increase in net income in the second half of 2012, as a result of anticipated increases in revenue and the absence of a charge of $1.3 million pre-tax, for the write-off of the capital lease relating to an asset no longer being utilized, partially offset by an increase -- expected increase in operating expenses. The company also expects the 2012 cash flow before financing activities will be slightly lower than 2011. At Kitchen Collection, we reported a loss of $3.2 million on revenues of $42.3 million, compared with a net loss of $2.7 million on revenues of $40 million. Revenues increased, as a result of sales at newly opened Kitchen Collection stores and an increase in comparable store sales at the Kitchen Collection store format. Comparable store sales improved due to a higher average sales transaction value and an increase in sales transactions and customer visits. The increase in revenue was partially offset by the effect of closing unprofitable Kitchen Collection and Le Gourmet Chef stores since June 30, 2011. At the end of the second quarter, Kitchen Collection operated 265 stores compared with 240 stores a year ago. Gourmet Chef operated 55 stores compared with 61 stores a year ago. Total stores at year end 2011, were 276 Kitchen Collection and 61 Gourmet Chef stores. The increase in Kitchen Collection's 2012 net loss was primarily the result of higher store costs due to an increase in the number of Kitchen Collection stores and lower operating margins at both Kitchen Collection and Gourmet Chef comparable stores, primarily caused by an increase in SG&A expenses. Selling, general and administrative expense increased mainly as a result of higher employee-related costs and travel expenses. Many of these increased costs were the result of store format changes, completed at all of the Le Gourmet Chef stores and the remodeling of 50 Kitchen Collection stores during the second quarter of 2012. Looking forward, the outlet mall retail environment remains challenging as continued high unemployment rates and other consumer financial concerns are expected to continue to affect consumer sentiment and limit spending levels for Kitchen Collection's target customer for the remainder of the year. However, company expects to have an increased number of Kitchen Collection stores in 2012 and anticipates revenue in the second half of 2012, will increase compared with the year ago. Kitchen collection also expects an increase in net income for the second half of 2012 compared with a year ago, primarily in the fourth quarter of the year. The -- Kitchen Collection expects that the momentum achieved by the new stores opened in 2011 and in the first half of 2012 to continue for the remainder year and expects improvements in operating results at both store formats. 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 the further improvements in store formats and layouts at both the Kitchen Collection and Le Gourmet Chef stores. The company completed the format changes of all of its Le Gourmet Chef stores in the second quarter of 2012 and expects to complete the remodeling of 30 more Kitchen Collection stores in the third quarter of 2012. Although, the company anticipates increase in product and transportation costs in 2012, it expects to offset those increased cost through price increases and other actions. And cash flow before financing in 2012 is expected to be comparable to 2011. Our North American Coal's net income for the second quarter was $7.1 million on revenues of $19.2 million. That compares with net income of $4.6 million and revenues of $19.4 million a year ago. The net income increased in the second quarter, primarily due to a gain of $2.3 million pre-tax resulting from the sale of certain land in Texas in the second quarter and improved earnings from the unconsolidated mines as a result of an increase in deliveries and contractual price escalators and lower operating expenses at the Mississippi Lignite Mining Company, primarily due to a decrease in production levels resulting in more costs being capitalized into inventory in 2012, and year-ago also contributed to the increase in net income. These improvements were partially offset by an increase in employee-related expenses. North American Coal expects solid operating performance at its coal mining operations over the remainder of 2012. Tons delivered are expected to be comparable to deliveries a year ago, provided customers achieve currently planned power plant operating levels for the remainder of the year. Limerock deliveries for the second half are expected to be higher than deliveries in the second half a year ago. Royalty and other income in the remainder of 2012 is expected to be moderately higher than in the same -- the same period a year ago. The new unconsolidated mines, which are in development and will not be in full production for several years, are expected to continue to generate modest income in the last half of the year. And North America Coal also has new project opportunities for which it expects to continue to incur additional expenses in 2012. 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 expected to be issued in late 2012. Overall, North American Coal expects net income in the second half of 2012 to be comparable to the second half a year ago. Anticipated gains on sales of dragline assets held for sale are expected to be fully offset by higher selling, general and administrative expenses as a result of increased employee-related costs and development activities and lower operating results at the unconsolidated mining operations, particularly in the fourth quarter. Cash flow before financing activities for 2012 is expected to be substantially higher than 2011, mainly as a result of expected asset sales. That completes my overview of the news release, which went out last evening. I'd be happy to answer any questions that you may have at this time.

[Operator Instructions] And you have a question from the line of Jason Miller [ph] with Ionic Capital [ph].

Can you explain why it's time to spinoff the materials handling business at this point of the cycle? And then an unrelated question on the Kitchen Collection side, how should we think about a return to profitability and that you -- could you monitor on the store-by-store basis or there is some examples you can show us where the older stores or selected stores are profitable. So that there's a way forward to profitability in that business?

Let me take the Kitchen Collection question first. We do monitor individual store profitability. We've been -- we are in a period where we've been making some significant changes to the presentation of our merchandise in both the Kitchen Collection stores and particularly in the Gourmet Chef stores. The Kitchen Collection store format is generally quite satisfactory in its profitability. And we expect it to improve particularly as we weed out some of the poorer performing stores and add additional stores that are -- we expect to be good sound performers. The Gourmet Chef format as I've indicated -- as a company has indicated pretty consistently in our quarterly earnings commentary has not been performing at a level that we consider anywhere near satisfactory. There are certain mall locations that we are moving out of because they are less profitable. The rents relative to sales volumes that we think are reasonable for those stores are too high. On the other hand, we are very hopeful that the revised format that we have put in place will bring those stores to greater profitability. I think the other factor that requires patience in the Kitchen Collection format is that a consumer who purchases it, both of those types of stores has been under a lot of financial stress. And our hope is that that financial stress will moderate over the next 2 to 3 years and that will mean that comparable store increases can be reasonably significant. The consumer for the Kitchen Collection stores has been hard hit on the other hand. Those stores have a fairly basic product offering. The Gourmet Chef Stores consumer is a little bit higher end, but still in the same general category but it's more discretionary in terms of the types of purchases than perhaps the Kitchen Collection store products are. So it’s another reason why there has been particular stress on those. And we’re hopeful that the team has good plans for those. But the core profitability of a large cross-section of our stores is quite strong. Turning to your question about the spinoff of NACCO Materials Handling Group, we've been through a period where NMHG has made a great many enhancements to its operating profile. It has a very strong product offering across the line. Its manufacturing facilities are smaller in number and a much more efficient than they were a few years ago. A great deal of cost has been removed. Our supply chain activities have been centralized and we have a great deal more sourcing in low-cost countries. And costs of poor quality have come down very dramatically in the last few years. The business is really operating at a -- very soundly. And while the volume levels in the industry have not returned to the levels of 2007, 2008, the business is really very well positioned at this point. As I indicated earlier, it has essentially no net debt. So financially it is in a very strong position as well as being in a strong position from an operating point of view. And we see -- as a result of being in that position that we gain several advantages from being able to move forward with sound business as a separate entity. And those advantages, particularly include the greater flexibility to pursue strategic growth opportunities, joint ventures, acquisitions, but particularly joint ventures where some kind of cross-shareholding and the companies may be of importance. And we’re a separate independent company, can have security that it is attractive from the point of view of both sides. We think that we can use the same kind of management incentive program that we think has been very effective at the NACCO industry’s corporate level, which is the granting of restricted shares for long-term incentive purposes of restrictive shares, come with -- restricted shares, come with enough cash to pay the taxes on them. And they can’t be sold for 10 years. So the employees, we believe are highly motivated to take a long-term point of view with regard to the performance of the business. They have a real stake in it, just as a broad cross-section of our shareholder base has a very long-term stable point of view about the business. We think that given the enhancements in the operating performance that I describe, that this is also a particularly good moment to have management focused and rewarded on serving each of the market segments and customer application needs and responding flexibly to changing market conditions, growth markets and enhancing our market share position. All the pieces are in place, we think, in order to do those kinds of things. You can also coupled that with given these improvements and it’s a -- and real strong performance in operating and financially that gives Hyster-Yale direct access to equity capital markets and probably greater access to debt capital markets. And not coincidentally, it gives investors some more focused investment options than had previously been the case. So we think the timing as really very appropriate now, for going forward with this spin-off. I should also say that each of the remain -- the businesses that will remain with NACCO at least its largest ones, North American Coal and Hamilton Beach, are also operating in a very sound and favorable way. Kitchen Collection has a way to go to get to where we want it to be but it is much smaller entity in terms of its profitability and potential profitability. So we feel that we have businesses, 2 entities, Hyster-Yale and NACCO that will have very strong returns on invested capital, very significant free cash flow in both cases, net debt roughly around 0 with the cash available for opportunities that may come along. So in both cases, we think now that they are very well-positioned for the future. We can also do this in a way that I think provides us with the great deal of continuity. Our shareholder base will have great continuity. And I will continue to serve in leadership role -- in the leadership role in both companies at least for the foreseeable future. And so we expect to have strategic stability and continue to do exactly the same things that we have been doing in the past but hopefully with more intensity and more commitment. So we think this is the right time and that we can capitalize on lot of hard work that’s going on over the last 4 years, particularly at NACCO Materials Handling Group as a separate Hyster-Yale material handling company.

Is there level of debt though you might be comfortable with without making acquisition that perhaps might enhance the returns to equity holders or could be paid out in the form of a dividend as well?

Well, certainly, we will be looking at those issues in the context of the separate companies as they go forward. We have not obviously since those companies haven’t been performed. The separate independent Board of Directors have not considered what the dividend policies will be. We have had, as you know, a share buyback program that was begun and carried out sort of until we got into this spin-off mode. And there is no reason that the Board won’t take a look at those kinds of programs in the future. I would much prefer to find thoughtful opportunities to deploy additional capital within the businesses at the kinds of returns that they get today. On the other hand, I think the best way to answer your question is to say that the debt levels in the net debt equation are, we believe quite appropriate for each of our businesses. And it’s worth noting that we have refinanced each business in the last relatively few months, all 4 and on very favorable terms, in terms of historical perspective. And so the debt position that we believe is appropriate for each business is really in place at this point. So the opportunity is to use the cash, again, a wise and thoughtful way and that’s the subject that we will be taking out with the directors of the 2 independent companies.

Sure. I would just say, given how senior float is currently buying back stock doesn’t really make the situation worse versus one-time dividend where we have uncertainty about what the tax rules are going to be but where there will be a 15% treatment, which would help return value to shareholders and allow us to continue to benefit from the future growth, just my perspective on that. I am sure you’ve considered.

Well, we certainly have considered it. And I just say that at something we have thought about a great deal. But we would expect that any share buyback if we continue to do that would enhance the value remaining in the hands of the shareholders who are still there after a share buyback. And that’s particularly the case when you look at the multiple depending on whatever multiple you want to take a look at. These -- this is not exactly an expensive situation relative to the kinds of returns on invested capital that I described earlier. So you have a company that is generating a high degree of free cash flow, a very high returns on all of its significant businesses, the only exception at the moment is Kitchen Collection. And we feel pretty good about to getting that to acceptable levels relatively shortly. And so, buying ourselves is not necessarily -- a strategy that we should set aside. And I am sure that the Board will take all of that in the consideration the 2 Boards as they considered but certainly it would be a very different -- I am just suggesting it would be a very different equation. If the multiples were much, much higher in the levels that they are at, I think the value equation changes. And as you know the shareholders of NACCO are very patient long-term shareholders. They have been in it for -- the major shareholders have been in it for a very long time and expect to continue to be.

[Operator Instructions]

Okay. It sounds as if there are no more questions at this time. I think Christie can answer some questions and I’ll just turn it over to her for concluding remarks.

Again, thank you for joining us today. We do appreciate your interest and if you do have any additional follow-up questions, please call me again my number is (440) 449-9669. Thank you so much.

And ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.