Good morning. My name is Keith and I will be your conference operator today. At this time, I'd like to welcome everyone to the NACCO Industries Inc. 2015 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session. [Operator Instructions] Thank you. Christina Kmetko, Investor Relations, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2015 fourth quarter earnings call. I am Christina Kmetko and I'm responsible for Investor Relations at NACCO Industries. I will be providing a brief overview of our quarterly results and business outlook, and then I will open up the call for your questions. Joining me on today's call are Al Rankin, Chairman, President, Chief Executive Officer; J.C. Butler, our Senior Vice President Finance, Treasurer, and Chief Administrative Officer, as well as the President and Chief Executive Officer of our North American coal subsidiary; and Elizabeth Loveman, NACCO's Vice President and Controller. Yesterday, we published our fourth quarter and full-year 2015 results and filed our 10-K for the year ended December 31, 2015. Copies of our earnings release and 10-K are available on our website at nacco.com. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. As we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a matter of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties were set forth in our earnings release and in our 10-K. Also, certain amounts discussed during today's call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our 2014 fourth quarter earnings release available on our website. Before I discuss our results,…

[Operator Instructions] Your first question comes from the line of John Choi from Medina

It's actually John Choi. Congrats on the Bisti deal. I wanted to know if there are many contract mining deals of the size available in the marketplace, and also when are you expecting to achieve full production here?

Al, do you want me to take that?

J.C., why don't you take that one?

Yes, so your question, two-part question. One was do you expect – how many of these are available in the market. It's hard to say. Clearly, the coal industry is in a tremendous amount of turmoil right now. My own view is an industry in turmoil may create opportunities, and it's hard to tell where those opportunities might be. This is an instance where there's an existing mine and a miner is leaving, actually exiting the United States at this point. And so an opportunity was created, an RFP was run, and we were successful. There may be all sorts of other opportunities that spring up across the United States for surface mining opportunities in the future, but right now it's hard to tell. The number of coal miners – coal mining companies that are in bankruptcy and even some utilities that are struggling may create opportunities for us. But to specifically say how many are available, it's a hard number to state precisely. Your question about full production, you know, this is an existing mine serving an existing power plant. Once we take over as the contract miner, it will be at its regular run rate of 5 million to 6 million tons per year, and it really just depends on when we step into that position. It’s going to be – we believe it’s going to be sometime later this year. That’s what we’re told by our customer. And once we get there, we’ll pick up steady run rate production.

Okay. That’s really helpful. Thank you. I guess my next question, so we’re going to generate substantial free cash flow as you ramp production for unconsolidated mines and approach our 2017 targets. What are priorities of cash going to be then?

Well, you mean within the coal company? I think, at this point, we think that the first priority of course is to put capital back into our existing mines, and that is particularly our consolidated mine, the Mississippi Lignite Mining Company. But other than that, there are not a lot of capital uses within the coal business that we anticipate. We’ve got a fair amount of debt, and over time, we expect to see that reduced to some degree, but that’s where our thinking is right at the moment. We haven’t developed our thinking any further than that.

Okay. And on MLMC, we faced a similar dynamic about five years ago when diesel had fallen sharply. Is the fuel impact for 2016 versus 2015 kind of comparable to what we saw in 2010 versus 2009?

J.C., I don’t really have that number in mind. It’s the mechanical formula is the main thing I would say.

Yes, I mean Al, I think that’s correct. It was a similar dynamic because we had the big drop in diesel fuel in 2008 and 2009 that created a similar situation, but I don don’t actually have numbers going back that far to give you a comparison.

Okay, maybe I think the important point is if those numbers turnaround, which is something that we can’t predict, then the profit prospects will improve. And if they go up significantly, then the profit prospects would improve significantly.

Okay. And if you could backtrack one step, I think you guys had given us kind of priorities of cash just for the coal company. But kind of on a consolidated basis, on an overall basis, can you kind of go through your priorities of cash?

Yes, and at this point, what we’ve said is our first focus would be to look for opportunities inside the businesses that we have, and – but I think, as a practical matter, we expect those to be reasonably limited. We would then look for adjacent businesses, particularly at Hamilton Beach. We were fortunate enough to have the Weston opportunity come along. It was a very good fit. There are not many of those and we would be very, very careful. But we certainly do have an open mind about that. And then of course we would plan to continue to return cash to our shareholders. We have had obviously our dividend policy, and secondly, we have share repurchase programs from time to time.

Okay. My last question is one on HVB. I’m wondering how the M&A environment and the small kitchen appliance space kind of improvens or weakens our competitive positioning?

Maybe you’d say a little bit more about your question in terms of what you mean by the M&A environment and how it affects our business.

Yes, there’s been some consolidation within the space, and I’m wondering how you guys view that and how that either improves or weakens our competitive positioning. It could be in terms of…

Well, the consolidation that has taken place in recent times has been more a consolidation of competitors in the small appliance business with businesses that do a large amount of business with similar kinds of companies that the small appliance business deals with large retailers and so on. And so it isn’t – there hasn’t been a huge amount of direct change in recent years as a result of the M&A environment. It’s really been quite some time since there’s been a really significant acquisition that affected the direct competitive position of the participants in the industry by having one appliance business come together with another. I think that would be the main comment that I would have for you at this point.

Okay, thank you.

Your next question comes from the line of Brian Leonard with Keeley Asset Management. Your line is open.

Good morning.

Good morning.

Good morning.

Bear with me. I have a handful of questions on each subsidiary. So, I’ll start out with North American Coal. Why was SG&A up so much? It looked like both professional fees and employee costs were high. Kind of walk through that and when do you expect that to normalize?

I think the best answer to that is to say that we have an incentive compensation program which takes into account the opportunity that’s achieved for the Company through new arrangement such as the Bisti Fuels deal. And so there is a charge for that which, in comparison to previous years, comes off the back of low incentive compensation payments significantly because of the Centennial situation. So, I would expect that SG&A would normalize in 2016. J.C., do you have anything you want add to that?

No. I think that’s correct. The other part of the question was about professional services fees. We did incur some professional service fees in order to get the Bisti deal put in place, which helps. And we also have this ongoing legal situation in India that we are working through that’s causing some professional costs there as well.

So, there may be some outside service charges that are a little higher than normal.

Okay, makes sense. The decline in equity earnings of the unconsolidated mines this quarter, is that similar to what’s going on at Mississippi mining? Is there index pricing there as well?

So, at the unconsolidated mines, the way those contracts works is the customer reimburses 100% of our costs for running each one of those mines, and we collect a fee per ton, or per heating unit, typically measured by BTUs that we deliver. That the escalation, contractual escalation, on each of those fees that we receive is determined by general inflation indicators – CPI, PPI, GDP, things like that. So as goes inflation in the United States in general, that affects our fees over time.

Does that reset annually or is there certain other kind of…

It varies. Some reset annually, some reset monthly. Some reset quarterly. Some have a mechanism that uses a fixed number for 11 months and then has a true up in the 12th month. I mean it really just depends on the individual contract. Generally, over time, they all grow with inflation.

Okay. Moving to Hamilton Beach, what was the main driver for the gross profit decline? Was it more FX or was it more mix?

We had a significant decline in volume in the fourth quarter compared to previous years. Elizabeth, do you want to comment on that? Are you there?

Yes. That is the case, and FX was the other main driver.

And then where does the $1.5 million pretax charge for the environmental liability fall in the operating line?

That would be a component of SG&A.

So, it would be a component, okay.

Yes.

The working capital within Hamilton Beach was up on a dollar basis as well as percent of sales. What was the driver in that? Is it higher inventory balances? Is it more AR, AP?

It’s more AR and less AP. Inventories aren’t so bad, but it’s always a question as to how quickly the receivables come in. But I think we had some declines in AP. Do you want at anything to that Elizabeth?

No, I think that’s pretty much the story. And then there is just some timing always that impacts working capital.

Our – I think that’s probably about the best way to think about it. It’s really in the payables. I would expect that to come right back in line very quickly. So, it’s very short term.

Okay. What currency are you guys most exposed to? Is it the fall in the – because both Canadian dollars and Mexican pesos called out. Is one higher impact versus the other is your exposure, or is it just the decline?

Elizabeth, do you want to comment on that?

The peso and the Canadian dollar, I don’t have the split of the impacts between those readily available.

Okay. I can follow-up on that. Then lastly, is there any update on Wolf? I haven’t really heard you guys talk much about it. And then there was a press release this morning about some kind of commercial launch of Hamilton Beach. So, I don’t know if you want to talk about new products or not.

We are very pleased with the way the Wolf program is coming along. As you know, it was launched in 2015. I think the sales are at a level we’ve been very pleased with, and we expect further improvement in 2016. So that’s very much in line with our expectations, if not a little bit better. And the Hamilton Beach commercial, which I think is what you are referring to, is it not?

Yes, that’s correct.

Hamilton Beach Professional, rather, is another of our programs to provide offerings under different brands at the higher price points. And so to the extent that we can put things into the general retail market that have a commercial character to them, we would use a brand name like Hamilton Beach Professional. We think that’s another element of our effort to meet the objectives and the strategic initiative which involves establishing a significant position in only the best marketplace, which I believe is called out in the earnings release as one of our initiatives.

Okay. And then lastly, on Kitchen Collection, the tax rate was much higher this quarter than I would have thought or anticipated. Any drivers behind that?

Elizabeth, do you want to handle that to the degree that – we called it out as a nondeductible expense I believe.

Correct. The penalty that we are paying under the Affordable Care Act is nondeductible for tax purposes. It’s skewing our tax rate.

Got it. Is that something that you anticipate to continue? It appears to be the case.

That’s the law.

Yes, got it. All right. That does it for me. Thank you very much.

Thank you.

There are no further questions at this time. I’ll turn the call back over to the presenters. We did have a last-minute question queue up from Rob Wallendorf with Western Standard. Your line is open.

Good morning

Good morning.

Good morning.

Yes, I was just curious if you guys could help quantify what you mean with respect to a substantial decline in the North American Coal business year-over-year in 2016 to 2015? How would you define substantial?

I think we aren’t going to go any further than we went in our earnings release. First of all, you have to take out the effect of Centennial. And then we have, as we have indicated, a significant reduction in the Mississippi Lignite Mining Company at current diesel prices. And so that is an impact of substance. And finally, I believe that we called out royalty, did we not, Elizabeth?

Yes. We did.

Yes.

Okay. And then earnings from unconsolidated will actually be up year-over-year in 2015, right? So, it’s really MLMC and lower royalties than maybe lower limerock.

That’s correct.

Okay.

That’s essentially – MLMC royalty and limerock are essentially what makes up the consolidated operations. So you’ve got that right.

Okay. So everything in consolidated will be down. Unconsolidated will be up. And the base you are comparing 2016 to is the $32.634 million in kind of adjusted North American Coal income before income tax?

Yes. The adjusted number.

The results would decline substantially from that number.

Yes.

Okay. And then the last question was with respect to the share repurchase program. I was just curious given some of the commentary you guys have had already provided on the call about not necessarily having that much use or need for cash particularly over the next couple of years within coal and within some of the other businesses. Why not authorize a new share repurchase program?

Our board looks at this periodically. We’ve demonstrated through our past actions that we are quite prepared to do that when we believe that the circumstances in total for the Company make that the appropriate action. And I just leave it at that. We have an open mind and we have a record of looking at returning cash to our shareholders in a variety of ways, and we will continue to do that.

Okay, great. All my other questions were answered. Thank you for your time.

Okay. Thanks a lot.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Al, did you have any final comments?

No. I don’t, Christie. Thank you.

Okay. Thank you, everybody, for joining us today. We appreciate your interest. And if you do have any additional questions, please contact me. My phone is 440-229-5130.

Thank you for joining us today. As a reminder, this call is available for replay by dialing 855-859-2056 and also 404-537-3406, and entering the conference ID number 5970777. This concludes today’s conference call. You may now disconnect.