NACCO Industries, Inc. (NC) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the NACCO Industries, Inc. 2012 Third Quarter Earnings Conference Call. My name is Kim, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Ms. Christina Kmetko. Ms. Kmetko, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining NACCO's results for the third quarter ended September 30, 2012. If anyone has not received a copy of this earnings release or would like a copy of the 10-Q, please call me at (440) 449-9669 and I will be happy to send you this information. You may also obtain copies of these items on our 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 J.C. Butler, Senior Vice President, Finance, Treasurer and Chief Administration Officer. 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 third quarter earnings release, which is available on our website. I will now turn the call over to Al Rankin. Al?

Good morning. NACCO announced income from continuing operations of $10.2 million for the third quarter. That's $1.21 per share on revenues of $210 million and that compares with income from continuing operations in the previous year's third quarter of $8.2 million or $0.97 per share on revenues of $194 million. As a result of NACCO's spin-off of its materials handling subsidiary in September -- at the end of September of 2012, the financial statements which are attached to the earnings release and the earlier 2011 financial information in this release has been reclassified to reflect the materials handling operating results as discontinued operations. Consolidated EBITDA from continuing operations for the third quarter and for the trailing 12 months ended September 30 was $19.7 million and $88.4 million respectively. I'd note of course that EBITDA as used in the press release is supplemental non-GAAP disclosure. There are some reconciliations in the back of the news release. NACCO's Board of Directors will, at its next regularly scheduled meeting in mid-November, evaluate and determine a dividend payout rate. In doing so, the board will consider the financial conditions and prospects of the businesses which continue to make up NACCO Industries following the spin-off of the materials handling business. NACCO currently has an authorized share buyback plan in place, and given the completion of the spin-off of the company's materials handling business, the company is again able to make purchases under the existing plan. After the completion of the spin-off, NACCO and its subsidiaries finished the third quarter with consolidated cash on hand of $155.7 million, debt of $207.4 million, which leaves net debt of $51.7 million. That's after the acquisition of the Reed Minerals complex in the third quarter. Turning to the detailed discussion of the results, I'll begin with North American Coal, where net income for the third quarter of 2012 was $8.2 million on revenues of $38 million. That compares with net income of $5.8 million, revenues of $21 million in the year-ago quarter. On August 31, North American Coal acquired Reed Minerals, and the third quarter and 2012 financial results include $7.7 million of revenues and nominal net income from the Reed Minerals operations for the one month ended September 30. Revenues increased in the third quarter primarily due to the Reed Minerals acquisition, but also due to an increase in tons delivered at the Mississippi Lignite Mining Company as a result of fewer outage days at a customer's power plant compared with the third quarter of 2011. An increase in deliveries at the limerock dragline mining operations and higher royalty income also contributed to the improvement in third quarter revenues. Net income increased compared to the previous year, primarily due to a $3.3-million pre-tax gain resulting from the sale of a dragline in the third quarter, an increase in deliveries at the consolidated mining operations and lower income tax expense as the company realized a higher tax benefit from a shift to losses from entities taxed at higher income tax rates. These improvements were partially offset by an increase in employee-related expenses and higher professional fees, primarily related to the Reed acquisition. Looking forward, North American Coal expects steady operating performance at its coal mining operations in the fourth quarter of 2012 and in 2013. However, a decrease in tons delivered is expected in the fourth quarter of 2012 compared to the year-ago quarter as a result of lower customer requirements at the consolidated and unconsolidated lignite mining operations. These are expected to be more than offset by an increase in tons delivered at the newly acquired Reed Minerals mines. Tons delivered in 2013 are expected to increase over 2012 at both consolidated and unconsolidated mining operations, provided customers achieve currently planned power plant operating levels. Limerock deliveries in the fourth quarter are expected to be higher than the fourth quarter a year earlier as customer requirements are expected to increase. However, limerock deliveries are anticipated to decrease in 2013 compared with 2012 as customer requirements are expected to decline moderately. Royalty and other income is expected to be higher in the fourth quarter of 2012 and in 2013 compared with prior periods. Unconsolidated mines currently in development are expected to continue to generate modest income in the fourth quarter of 2012 and in 2013. The Five Forks Mine operated by Demery Resources Company has commenced delivering coal to its customer and is expected to ramp up production of coal moderately in 2013. Full production is expected in 2014 with 300,000 to 400,000 tons delivered. The company's 3 other unconsolidated mines in development are not expected to be at full production for several years. Liberty Fuels is eventually expected to produce approximately 4.8 million tons of lignite coal annually for the Mississippi Power Company's new Ratcliffe power plant currently being built in Mississippi. While the completion of the project is still contingent on resolving legal challenges to regulatory approvals for the power plant, the project is currently on track for initial coal deliveries to commence in mid-2014. Caddo Creek Resources Company is in the permitting stage of a project in Texas for which it expects to mine approximately 650,000 tons of coal annually for a customer that currently purchases its coal from The Sabine Mining Company. Initial deliveries are expected to commence in early 2014. Camino Real Fuels is also in the permitting stage of a project in Texas for which it expects to mine approximately 2.7 million tons of coal annually. Initial deliveries are expected to commence in mid-to-late 2014. In addition, in October 2012, North American Coal's subsidiary, Coyote Creek Mining Company, entered into a new agreement with Otter Tail Power Company and with Otter Tail Power Company's co-owners in the Coyote Station baseload generation plant to develop a lignite mine in Mercer County, North Dakota. Coyote Creek Mining Company will deliver to the Coyote Station co-owners, as an exclusive supplier, the annual fuel requirements of the Coyote Station plant, which are expected to be approximately 2.5 million tons of coal annually, starting in May of 2016. North American Coal also has new project opportunities for which it expects to continue to incur additional expenses in the fourth quarter of 2012 and in 2013. In particular, the company continues to move forward to obtain a permit for its Otter Creek reserve in North Dakota in preparation for the anticipated construction of a new mine. Overall, North American Coal expects 2012 fourth quarter net income to be lower than fourth quarter 2011 net income. Additional income from Reed Minerals is expected to be more than offset by higher selling, general and administrative expenses as a result of increased employee-related costs and development activities and lower operating results, primarily at unconsolidated mining operations. Net income in 2013 is expected to increase moderately over 2012 due to the expected favorable impact of increased deliveries, especially from the Reed Minerals acquisition, and lower operating expenses are expected to be partially offset by higher interest expense on greater debt levels. Cash flow before financing activities for 2012 is expected to be substantially lower than 2011, mainly as a result of the Reed Minerals acquisition. Cash flow before financing activities in 2013 is expected to be higher than 2012, but not back to the levels of 2011, due to an anticipated increase in capital expenditures to support the Reed Minerals acquisition. Over the longer term, North American Coal intends to continue its efforts to develop new mining projects. The company is actively pursuing domestic opportunities for new or expanded coal mining projects, which include prospects for power generation, coal-to-liquids, coal gasification, coal drying and other clean coal technologies. Furthermore, the company views its acquisition of Reed Minerals as the first step in developing a metallurgical coal platform, and the company believes that exports for coal and other new international value-added mining services projects may become available. And North American Coal also continues to pursue additional non-coal mining activities in aggregates and in sand mining. Turning to Hamilton Beach, reported net income of $5.3 million for the third quarter had -- on revenues of $124.8 million, compared with net income of $4.1 million in the year-ago quarter, when revenues were $126.7 million. Revenues decreased modestly compared with a year ago primarily due to lower unit sales volumes, mainly in the U.S. consumer and Canadian retail markets, and unfavorable foreign currency movements caused by a strengthening U.S. dollar against the Mexican peso and the Canadian dollar. The decline in revenue was partially offset by sales of products with higher price points, particularly in the U.S. consumer markets. The increase in net income in the third quarter compared with a year ago was primarily the result of the absence of a charge incurred in 2011 of $1.3 million, or $800,000 after tax, for the write-off of a capital lease asset; lower interest expense resulting from lower rates and debt levels; and favorable foreign currency movements, partially offset by higher employee-related costs. Gross profit also improved in the third quarter due to sales of higher-priced, higher-margin products, partially offset by higher product costs and lower unit sales volumes. Looking forward, the middle-market portion of the U.S. small kitchen appliance market in which Hamilton Beach participates has been under pressure since 2009 and is expected to remain stressed through the end of 2012 and into 2013. Hamilton Beach's target consumer, the middle-market mass consumer, continues to struggle with financial and economic 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 sales volumes from increased promotions and placements in the fourth quarter of this year in comparison with last year, and improved sales volumes in 2013 compared with 2012. International and commercial product markets are anticipated to continue to grow in the remainder of this year and next year compared with the comparable periods. Hamilton Beach continues to focus on strengthening its North American consumer 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 Scoop, a single-serve coffee maker. Hamilton Beach expects The Scoop, The Two-Way Brewer and the Durathon iron product line, all introduced in late 2011, to continue to gain market position over time as broader distribution is attained. The company is also continuing to introduce innovative products in several small appliance categories. In the third quarter of 2012, Hamilton Beach launched the Hamilton Beach Open Ease Automatic Jar Opener and expects to launch the FlexBrew single-serve coffee maker late this year. These products, as well as other new product introductions in the pipeline for the fourth quarter and in 2013, and expected key placements and promotions for the holiday selling season, are expected to affect both revenues and operating profit positively. As a result of these new products, placements and promotions, the company's improving -- and the company's improving position in commercial and international markets, Hamilton Beach anticipates an increase in revenues in the fourth quarter of 2012, provided consumer spending is at expected fourth quarter levels, and in 2013 compared with the respective prior year periods. Overall, Hamilton Beach expects fourth quarter 2012 and full year 2013 net income to increase compared with the comparable prior years -- periods, primarily driven by anticipated increases in revenue, partially offset by expected increases in operating expenses. Hamilton Beach expects that 2012 cash flow before financing activities will be lower than 2011, but higher in 2013 as compared with 2012. Longer term, Hamilton Beach will continue to work to improve revenues and profitability by remaining focused on 5 strategic initiatives: one, increasing placements in the North American consumer business through the development of consumer-driven innovative products and strong sales and marketing support; two, achieving further penetration in the global commercial market through a commitment to an enhanced global product line able -- aimed at the global hospitality and foodservice markets; three, expanding internationally in the emerging Asian and Latin American markets by offering products designed specifically for those market needs, by expanding distribution channels and by increasing the use of the Internet; four, entering the -- only the best market with a strong brand and broad product line; and five, enhancing Internet sales and support activities. Kitchen Collection reported a net loss of $1.2 million on revenues of $48.2 million in the third quarter, and that compared with a net loss of $0.5 million on revenues of $48.9 million a year ago. Compared with the third quarter of 2011, increased sales in the third quarter of 2012 from newly opened Kitchen Collection stores were slightly higher than the loss of sales from closing unprofitable Kitchen Collection and Le Gourmet Chef stores since September 30, 2011. However, this improvement was more than offset by a decline in comparable store sales, mainly due to fewer sales transactions. At September 30, Kitchen Collection operated 264 stores compared with 250 stores a year ago, and Le Gourmet Chef operated 55 stores compared with 62 stores a year ago. At year end, Kitchen Collection and Le Gourmet Chef operated 276 and 61 stores, respectively. The increase in Kitchen Collection's third quarter net loss was primarily the result of lower operating margins at both Kitchen Collection and Le Gourmet Chef comparable stores, caused mainly by a shift in mix toward lower margin product categories and an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased primarily as a result of higher employee-related costs and travel expenses. Many of these increased costs were the result of remodeling 26 additional Kitchen Collection stores during the third quarter of 2012. Now looking forward, the outlet mall retail market remains challenging and is expected to continue to be so, since the middle market consumer remains under pressure due to high unemployment rates, elevated fuel prices, other consumer financial concerns and distractions from the upcoming election, all of which are expected to continue to dampen consumer sentiment and consumer traffic to outlet mall locations, and limit consumer spending levels for Kitchen Collection's target customer in the fourth quarter and in 2013. Nevertheless, Kitchen Collection expects an increase in revenues in the fourth quarter compared with a year ago as a result of the opening of 34 seasonal store locations during the fourth-quarter and holiday selling season, and sales at new collection -- new Kitchen Collection stores opened since the fourth quarter of 2011. All of that is provided consumer spending is at anticipated fourth quarter levels. Kitchen Collection expects 2013 revenues to be comparable to 2012, although the company expects to maintain a lower number of stores through much of 2013 than in 2012. Kitchen Collection expects an increase in 2012 fourth quarter net income compared with the fourth quarter a year ago primarily from the increase in the number of stores in 2012, from enhanced sales and margins expected as a result of further improvements in store formats and layouts at both the store formats, and as a result of further refinements of promotional offers and merchandise mix in both stores. During 2012, Kitchen Collection reformatted many of its stores to promote a value and trend message at the front of its stores, which is expected to drive customers into the store. The company completed format changes at all of its Le Gourmet Chef stores in the first half of the year and is expected to complete the remodeling of a total of 82 Kitchen Collection stores in 2012, of which 76 had completed -- been completed through the end of the third quarter. Preliminary feedback on these changes is favorable, but making the changes has resulted in higher up-front costs during 2012 which are not expected to recur in 2013. As these new formats gain traction, they are expected to drive improved income in 2013. Cash flow before financing in 2012 is expected to be lower than 2011, but increase in 2012 compared with this year. Longer term, Kitchen Collection plans to focus on enhancing sales volume and profitability by building on its profitable Kitchen Collection store format through refinement of its formats and through ongoing review of product offerings, merchandise mix, store displays and appearance, while continuing to evaluate and, as lease contracts permit, close underperforming and loss-generating stores. In the near term, Kitchen Collection expects to focus its growth on increasing the number of Kitchen Collection stores, with store expansion expected to be focused on identifying the best outlet malls and positions within those malls. When adequate profit prospects are demonstrated at the Le Gourmet Chef format, the company's expansion will shift to increasing the number of these stores as well. That completes my remarks at this point and I'd be happy to entertain any questions that anyone may have.

[Operator Instructions]

It seems as if there are no questions, so we'll turn to some concluding comments from Christie. And we know that there are a lot of weather problems in the East Coast and so Christie can address any questions that may come up by those of you who listen to this webcast later on.

Thank you for joining us today. We appreciate your interest. If you do have any additional questions, please call me. You can reach me at (440) 449-9669. Thanks so much, and have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Additional replay of this conference will be made available through November 9. You may access the replay by dialing 1 (888) 843-7419 and use passcode 33644936 followed by the # sign. Thank you for participating. You may now disconnect.