Good morning. My name is Sean and I will be your conference operator today. At this time, I'd like to welcome everyone to the NACCO Industries Inc. 2016 First Quarter Earnings Conference Call. All lines have been fixed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Christina Kmetko, Investor Relations, please go ahead.

Thank you. Good morning, everyone, and welcome to our 2016 first-quarter earnings call. I am Christina Kmetko, and I am 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, and 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 first-quarter 2016 results and filed our 10-Q for the quarter ended March 31, 2016. Copies of our earnings release and 10-Q are available on our Web site 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 For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our Web site later this afternoon and available for approximately 12 months.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 number 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 was set forth in our earnings release and in our 10-Q. Also, certain amounts discussed during today's call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our 2016 first-quarter earnings release available on our Web site. Now let's discuss our results…

[Operator Instructions] And your first question comes from Jacob Wagner with Oaktree Capital. Your line is low open.

Starting with Hamilton Beach, can you please provide some color on your international growth plans and how you developed your medium term sales targets, which imply pretty healthy international growth?

As we've said in our annual report, one of our strategic initiatives is to enhance our international sales activities. We have two areas, three in a way, where we have historically had substantial business and we are trying to increase the levels in those areas. The first is Canada. We have a strong position compared our competitors in Canada and we are very focused on working with the retailers in Canada to enhance our placement position. We feel that those efforts are moving in the right direction, continuing to move in the right direction. The headwind of course is that the Canadian dollar has been very weak and that's had an influence on the sales volumes and also an influence on the short-term profit structure. Secondly, we have a significant position in Mexico. Our sales volumes have been increasing recently in Mexico. The import rules changed to disadvantage certain Chinese products a while back. It took us some time to readjust to those and find some local sourcing opportunities in Mexico. We've done that, our business is improving, and we are concentrating on enhanced placements in Mexico, likewise in Latin America where we have had substantial business over the years. We've been increasing our sales representation in Latin America and certain countries in South America and generally those sales volumes are improving. Our two major initiative focuses are on Brazil and China. Brazil is probably as a practical matter coming along more slowly than we have hoped. I think that should be no surprise given the chaotic economic conditions in Brazil. On the other hand, our brands seem to be well received in Brazil and we are hopeful that we can build a substantial business over time. We have seen reasonable sell-through in the products that have been placed so…

And sticking with Hamilton Beach for one more, have those -- has that international build-out driven the big step-up in OpEx over the past two or three years? And would you expect that to continue as you continue to grow internationally, or will that normalize?

I should have mentioned in connection with international that we also have efforts to expand our commercial business internationally, and that business has been growing in a substantial way. So, I left that piece of the equation out. I think a great deal of our expansion has come from our domestic operations. As you know, we added the Weston business a few years ago. That was both a new channel and new products for us. We think that business is developing in a sound way. We've also had considerable success with our placement position in the U.S. consumer business, both with regular placements and promotional placements. And we have of course had a pipeline of new product development along the way which has been a part of that whole process. So it really isn't the international area at this point in total that is driving the sales increases that I think you referred to over the last few years. It's more of the domestic operations, although we have been building our international business.

My question was more on the expense side, the increase over the past two or three years.

We have had some additional expenses that have been associated with Brazil and with China. We also looked carefully at India and made some initial forays. We've not focused on that, at least not at this point. And I would say that the sales volumes are beginning to increase in China and Brazil, and that is helping to mitigate the increase that was associated with the upfront investment. There is some SG&A involved, certainly, and that's a part of the buildup. I don't have a specific breakdown that I would put forward for you, however.

Okay, makes sense. Moving to North American Coal, given the move in diesel prices, why did gross profit per ton increase at MLMC?

We really don't look at things in terms of gross profit per ton. It's not a measure that we think in terms of. We think about our profitability at MLMC, it's really determined at that particular mine by the number of tons that are sold to the customer, that the customer takes, based on the power plant operating levels, and the price which is determined by the index structure that comes to pass during that period of time. That's what really determines, though, the profitability at any given period as far as MLMC is concerned, and I think that's where I would leave it, unless J.C. wants to add anything. You do have a decrease in tons at MLMC, as we point out in the news release, and so there were more outage days in 2016. That's a mine that really, because it's a consolidated mine and because of the nature of the contract, it's different in the way it works from the unconsolidated mines in the sense that there is a fixed cost base and the revenues cover the fixed costs and contribute to -- and the variable costs and contribute to profit. So if you have fewer tons, you're going to have lower profits.

This is J.C. Butler. The only thing -- I really wouldn't add anything other than just in its most simple form, we provide the tons the customer needs. We've got a formula price percentage to which we sell the coal. Largely the costs are fixed, but on the margin, there are some variable costs we can control and I think the guys at the mine are doing a great job of controlling costs.

So given the move in diesel prices, shouldn't the price have gone down?

As we have said, I think the way the index structure works in relation to our costs is that the index structure has caused our revenues to decline by a greater amount than a decline in the actual diesel costs that we are incurring in our operating expenses. So, as a result, it's squeezing the margins.

The formula price affects the price per ton that's driven by indices, the price per ton that we receive for the coal. Overall, diesel costs is really a gross kind of thing. How many gallons did we burn and what did we pay for it in the quarter?

Right, okay.

You've got to remember that mining, there's a lot of work that happens around a mine. It's not like an assembly line where you are incurring costs during a given week related to the coal that's delivered that week. There's lots of activities going around all over the mine site. So, it's thinking about that really in a longer-term perspective that really makes more sense for a mine like this.

Okay. At Centennial, should we think of the $31.5 million of mine-level assets as basically funding the ARO at Centennial?

No. Those are not related.

The assets are the assets. The ARO is the future final mine closing liability.

[Indiscernible]

Certainly, the liabilities are related to the reserve assets, but there's no connection between those two numbers.

The objective over time is to reduce the assets in a wise way that are associated with the former Centennial operations. That number has come down from previous quarterly levels. We have a variety of different kinds of assets in that, and they can range from assets associated with reserves. They can, the assets can be associated with mining equipment. And we are working on all those.

One of the things we call out in our Q is that there's $17.5 million worth of assets held for sale.

Okay. And then the last question. Can you provide any more color on what types of opportunities and aggregates you're pursuing at North American Coal?

The most important ones that we are pursuing when the opportunity arises, and we don't have a lot of control over it, are ones like the Bisti opportunity that came to pass recently where we had an opportunity to make a proposal, to become the miner in replacement for someone else, and that was a successful process for us. We look for other opportunities, but they have to present themselves. We can't really make those happen. To the extent that your question is are there likely to be many new coal mines, new power plants, that are coal fired built? The answer is typically no. And we will look for other opportunities, as we have done in the past, in aggregates and other areas, but the -- at least for the time being, in the coal side, we don't see major opportunities lying ahead for us unless we can, unless new opportunities present themselves for mining for existing coal fired power plants.

And specifically to aggregates, that's a business that we operate that really exists entirely in Florida running drag lines for aggregate producers. We certainly are spending time looking at ways that we could expand that business, but largely in line with its current business model.

[Operator Instructions] And the next question comes from Brian Leonard with Keeley Asset Management. Your line is now open.

Good morning. I just wanted to follow up on the last questioner's question on North American Coal. I was under the impression that we would see a decline in gross profit for the simple fact that diesel pricing was coming down. At least that's what was communicated by you all last year heading into this year. Is that more of an impact to revenues, and you made it up somewhere else for the gross profit? Like how does that dynamic work and how do I reconcile that?

First of all, I think you have, we call out different, in our earnings release, the different segments of the business. One is our unconsolidated mining operations, and those are basically fee based, they are unconsolidated, and we are paid fees for doing the mining on those different properties and secondly, we have the consolidated mines, and by far the most significant of those is the Mississippi Lignite Mining Company. And I think that's the only one that we called out that has an impact from diesel prices. And we simply said the profits from that would be under pressure for the reasons that I gave a few minutes ago, which is that, basically, the index price for diesel fuel has declined, so the revenues have declined, and the costs of mining have not gone down by as much as the decline in revenue. Now, in the first quarter, in addition, as I said a few minutes ago, the number of tons also declined in the first quarter compared to previous, and that causes a decline in the profits from our consolidated mining operations.

But if I look on your earnings release and the supplement to North American coal as you strip out Centennial, I don't know what page it's on.

Can you say what page you're on?

That I don't know. I'm looking at it on the computer. It is after the EBITDA reconciliation. So I don't know the page…

11.

…where it's at. But it shows that your gross profit for consolidated mines at $6.4 million versus gross profit of $4.8 million last year. So if diesel is a big component of that, or a bigger component of that, I would have thought that it would have been much closer to last year, if not below.

Remember that Mississippi Lignite Mining Company's Red Hills mine is not the only thing that's in that number. The Company is in there.

[Indiscernible] below, I'm sorry. But it is Florida.

But Florida is in there, and royalty is right below it. Florida -- the Florida limerock business is in there as well. I think too you need to take into account that some of our comments are related to the prospects for the year in comparison to results for 2015. And so I think our comments about the diesel fuel expense particularly related to the prospective quarters.

Which I mentioned earlier, you can't think of these mines as necessarily having all of the costs in a quarter related to all of the production -- all of the sales that happened in that quarter. This is -- mine is a big complex thing where you are doing lots of work and it's not all related to every ton of coal that's delivered.

But as I look for the remaining three quarters, is it going to be similar to this or it's really just kind of variable where you can't really project it out? I guess is diesel fuel still your major concern where you should see a decline in gross profit year-on-year?

What we have said and what we continue to believe is true is the decline in diesel prices over the last couple of years, it's not even a couple of years, it's more like 18 months, has had a significant effect on the formula pricing that's used for each ton of coal that is sold. In a given quarter, of course you have to then think about the number of tons that are sold as well. In a given quarter, you have to think about gross costs as well. Now, I think in the first quarter, our guys did a great job at controlling costs, not just -- diesel fuel price is one price part of the cost. The number of gallons used is another one. But there are lots of other costs in a mine site as well. I think the other we called out were lower costs for major repairs.

Okay. CapEx is going to be up, as you guys mentioned, in North American Coal. What are you spending then or was that planned to be spent on?

It's all-- essentially all associated with the Mississippi Lignite Mining Company, and since that's a mine that is consolidated and we bear the responsibility for capital, we have a replacement of equipment that has to occur on a regular basis, and that's all associated with that.

Is there any opportunity to transfer some of the Reed [indiscernible] Centennial equipment [Multiple Speakers] CapEx?

We have done a complete analysis of the opportunity to use Reed equipment in our other mines. And I think that was accomplished. And it's a very significant reduction in the capital balance for Reed operations, but it's already occurred. We do continue to look at opportunities when other mining operations could use that equipment, but it's got to make sense for the mine that would be [Multiple Speakers].

The bulk of that has been done already.

Correct.

Okay. And Hamilton Beach, given your exposure to Canada, is Canada your largest international exposure?

Yes.

I know you call out currency is an issue, but is currency a bigger issue than not, especially in that division?

It has two impacts, frankly. The Canadian economy is not all that strong at this point. They've had a lot of impact from a decline in mining and commodities, and the currency decreases the revenues, and getting price increases to compensate for the difference in exchange rates to flow through into the marketplace is extremely difficult. So, the margins are squeezed in Canada at the same time that the revenues decline. The best way to think about it is that our products essentially all are sourced in China. The Chinese have pretty much booked the Chinese currency to the U.S. dollar. The U.S. dollar has appreciated, so our Chinese costs have appreciated on a trade-weighted basis. And it causes the squeeze to both margin -- to both revenues and margins in Canada.

Okay. I saw that working capital decreased quite a bit in this segment. Given the revenues were down, I'm assuming a good part of that was due to that currency. But why was working capital down so much in the quarter, or the components of that?

The volume was down, and we manage the receivables, we manage the inventory, and we manage the payables in a thoughtful way. Our cash conversion cycle isn't dramatically different in the two periods. I would note, however, that there can be swings that are related to the receipt of receivables in particular, which is hard for us to predict from one quarter to the next, and particularly at year-end. But we think that the working capital performance for Hamilton Beach in the first quarter was very good.

No, I would agree. Hopefully, it will be sustainable throughout the year. How is the inventory levels, and how do you see that progressing throughout the year?

We feel -- we monitor our inventory levels based on the inflow of orders. We do that on a very frequent basis. Obviously, we have to give our suppliers a significant lead time and there's a shipping time associated as well as a manufacturing time. So, there are some limits with regard to the speed with which we can have an impact on our inventory levels in terms of working with our suppliers. But those numbers are adjusted very quickly, in some cases as often as every week as we see changes in our sales rates and volumes. We have a pretty good sales forecasting system, but things vary. Consumers change their behavior, they change their interest in particular products from year-to-year and period-to-period and so all of that has to be taken into account. I think if you look at the comparison of our inventory management with our competitors', you'll find that it's very good.

Okay. In Kitchen Collection, the gross margins were very good at 45.4%. I think it's been the highest in quite some time. Why was it so high, is it kind of sustainable, because it tends to build throughout the year due to seasonality but what are your thoughts there?

The team at Kitchen Collection has put a tremendous amount of effort into trying to manage the discounts, and to keep the margins as high as is reasonable and competitive. I think the first-quarter results were terrific. We certainly will try to sustain the margins at that level. It's a very healthy level for this kind of business. I think that's about all I can say on it.

[Operator Instructions] There are no further questions. I turn the conference back to Miss Kmetko for closing.

Al, did you have any final comments you wanted to make?

No, I have no final comments.

Thank you very much for joining us today. If you do have follow-up questions, please contact me, 440-229-5130. Thanks and have a good day.

This concludes today's conference. And as a reminder, a replay for this conference will be available for seven days by dialing in at 855-859-2056 and referencing conference ID 92431196. Again, a replay for this conference will be available for seven days by dialing in at 855-859-2056 and referencing conference ID 92431196. Have a great day.