Hyster-Yale Materials Handling, Inc. (HY) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Mariana and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2016 Hyster-Yale Materials Handling Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Christina Kmetko. You may begin your conference.

Good morning, everyone and welcome to our 2016 third quarter earnings call. I am Christina Kmetko and I’m responsible for Investor Relations at Hyster-Yale. Joining me on today’s call are Al Rankin, Chairman, President & Chief Executive Officer of Hyster-Yale Materials Handling; Colin Wilson, President & Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President & Chief Financial Officer. Yesterday, we published our third quarter 2016 results and filed our 2016 third quarter 10-Q. Copies of the earnings release and 10-Q are available on our Web site. For anyone who is not able to listen to today’s entire call, an archived version of this webcast will be on our Web site later this afternoon and available for approximately 12 months. I would also 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 were set forth in our earnings release and in our 10-Q. Also, certain amounts discussed during this call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our earnings release and available on our Web site. Our consolidated third quarter 2016 revenues were $629.3 million down from $652.1 million in the prior year quarter, and our net income decreased to $12.3 million or $0.75 per diluted share from $20.9 million or $1.28 per diluted share last year. Consolidated operating profit was $5.4 million for the third quarter of 2016, compared with 29 million for the third quarter of 2015. In previous guidance we’ve stated that we expected operating profit to decrease significantly in the third quarter driven primarily by the lift truck segment and that occurred as planned. Although the lift truck segment was better than expected while the Bolzoni and Nuvera segments were lower than expectation. Our consolidated net income was better than we forecasted mainly as a result of income tax benefit. Our EMEA lift truck segments recognized a $3.2 million tax benefit from the release of valuation allowance previously applied against certain Italian deferred tax assets and our Americas lift truck segment had a $2 million adjustment for U.S. tax benefit for manufacturing activity, certain foreign earnings and pretreated and research and development credit. Now, let me explain the main factors driving the year-over-year decrease in our consolidated operating profit. Specific factors in each of our segments contributed to this decline. In our lift truck business, third quarter 2016 revenues were down 9.2% to $591.7 million from $651.6 million in the prior year third quarter and operating profit decreased to $20.5 million for the third quarter of 2016 2016 compared with $35.6 million last year. The decline in revenues was primarily as a result of lower shipments in the Americas and Europe and deal specific price reductions predominantly in the Americas. At the operating profit level, lower revenues combined with unfavorable currency movements mostly at EMEA contributed to the decline as did higher SG&A expenses. On the positive side we continue to see benefits from material cost deflation and our backlog increased significantly year-over-year. Despite the decline in our results, we are seeing benefits from the implementation of our strategic initiatives and we continue to make headway with certain target account. Our bookings were 1,800 units from prior year third quarter and our backlog of 30,600 units went up modestly 30,500 units at the end of the second quarter of 2016. I would also like to point out that while our lift truck revenues were lower for the quarter, our gross profit was only slightly below where we expect it to be and our operating profit was actually higher than we anticipated as a result of lower actual operating expenses than forecasted. In early July of 2016, we completed the acquisition of Bolzoni. This segment contributed incremental revenues of $36.2 million in the third quarter of 2016. However, this segment reported an operating loss of $2.5 million and a net loss of 2 million, as a result of $2.6 million of purchase accounting adjustment booked in the third quarter that were related to the second quarter of 2016. Bolzoni also recorded $1.7 million of expense related to the amortization of acquired assets. Finally, Nuvera successfully installed its first field cell system units for class one, two and three trucks and recorded revenues of $1.4 million compared with $500,000 in the prior year. However as a result of Nuvera’s ramp up of inventory for increased production of these units, the operating loss increased in the 2016 third quarter to $12.6 million compared with 6.6 million in the prior year. This larger operating loss is mainly due to an increase of $5.6 million in development and production startup expenses primarily resulting from unfavorable inventory adjustment caused by higher initial cost of prototype and early production components at low volumes compared with expected selling prices. In addition Nuvera’s marketing cost increased as it begins transitioning product development to commercialization and production. Those are the significant factors affecting our operating results now let me turn to outlook. I’m going to provide a very high level look at our 2016 fourth quarter outlook and our 2017 expectations to our three different businesses. We have provided more detail for the geographic segments in the earnings release we issued last night. As a consolidated company, we expect consolidated cash flow before financing activity to be a use of cash in the fourth quarter of 2016 which is a substantial decline from the fourth quarter of 2015. In 2017, excluding the cash pace for the Bolzoni acquisition cash flow before financing activities is expected to be positive and increased significantly compared with 2016. At our lift truck business, we expect the overall global lift truck market to increase slightly in the fourth quarter of 2016 compared with the prior year quarter primarily as a result of market growth and Eastern and Western Europe and China. Given our current backlog, we expect units and parts revenue in the lift truck business to increase in the fourth quarter compared with 2015. Operating profit for the lift truck segment is expected to be lower in the fourth quarter of 2016 than in the fourth quarter of 2015 as anticipated increases from parts and unit revenues are expected to be more than offset by lower product pricing and higher operating expenses. Likewise, fourth quarter 2016 net income is expected to decline compared with last year's fourth quarter after excluding the unfavorable 7.5 million valuation allowance adjustments related to Brazil taken in the fourth quarter of 2015. In 2017, global lift truck markets are expected to be comparable to 2016 but because of the anticipated market share gains, we expect unit and parts revenues and operating profit to increase in 2017 compared with 2016. We expect 2017 net income to decrease modestly from '16 as a result of a higher effective income tax rate and the absence of tax benefits recognized in 2016 that are not expected to reoccur. Finally, we expect cash flow before financing activities at the lift truck business to be positive but decline substantially in the fourth quarter of '16 compared with the fourth quarter of '15. Excluding the cash paid for the Bolzoni acquisition, cash flow before financing activities is expected to improve in 2017 compared with '16. At Bolzoni, The majority of the revenues are generated in the strengthening EMEA market, primarily Eastern and Western Europe, and, to a lesser degree, in the North America market. We expect Bolzoni's fourth quarter 2016 revenues to be comparable to the revenues of €36.2 million, or approximately $40 million at current exchange rates, reported by Bolzoni for the fourth quarter of 2015. Excluding the cost of the acquisition, estimated integration costs and purchase accounting adjustments, Bolzoni's fourth quarter 2016 operating profit and net income are expected to be accretive and slightly higher than the third quarter of 2016 and we the implementation and the anticipated cost reduction and sales enhancement programs to generate gradual growth in Bolzoni's revenues, operating profit and net income, with 2017 quarterly income gradually increasing as more operating leverage is gained from sales growth. Finally at Nuvera, progress toward full commercialization is expected to continue throughout the remainder of 2016 and into 2017 following shipments of the first Class 1, 2 and 3 Nuvera Fuel Cell System units, which began in this past quarter. Customer interest in these products is higher than initially projected and production is ramping up for sales of an increased number of Nuvera Fuel Cell System units. New orders are being received and negotiations for several large orders are expected to reach completion following several successful customer demonstrations. Further demonstrations are planned and are expected to provide additional sales opportunities. As a result, we expect Nuvera Fuel Cell System unit shipments and related revenues to increase modestly in the fourth quarter of 2016 compared with '15 and increase significantly in 2017 over this year. Nuvera expects to continue to focus on commercializing its fuel-cell technology by expanding its product line and integrating technology into the Hyster and Yale lift truck product ranges. As part of this process, Nuvera is focusing on reducing manufacturing costs per unit as production increases and greater economies of scale are achieved through the combination of its technology and innovation with the lift truck business' supply chain, manufacturing and distribution expertise. However, this cost reduction process is expected to continue during Nuvera's rapid production ramp up and transition from product development to full commercialization. Until the lower cost structure is fully in place and supply chain and manufacturing efficiencies are fully realized, development and inventory costs are expected to result in continued inventory adjustments to reflect current selling prices, but at a decreasing rates. In 2017, as Nuvera continues to generate additional revenue and works to reduce manufacturing costs per unit. We expect to moderately lower net losses in 2016 including significant inventory adjustment especially in the first half of 2017. Nuvera’s objective is to reach quarterly breakeven operating profit sometime in 2018. That concludes our prepared remarks. I would now open up the call for your questions.

[Operator Instructions] Your first question comes from Mike Shlisky with Seaport Global. Your line is open.

Good morning, guys. Can you hear me, okay? These is just some phone issues here in New York.

Yes, I can hear you.

Okay, great. Thanks a lot just want to touch on couple of model questions, for Nuvera is the higher cost that you saw in the third quarter here, is that going to be additive to your previous sort of outlook for an operating loss of $14 million to $15 million for the back half of the year or do you just pull forward some of your costs from 4Q into 3Q?

I’m going to ask, Ken to give you a more technical explanation in a minute, but basically we’re encouraged in the outlook for the business, the volumes are going to be we think moving up significantly to 2017, but the pace at which we reduce our costs is continuing at sort of roughly the pace that we’ve been anticipating. So the increased volume leads to higher level of losses in the short term, because the components we’re using at the moment are prototype and development components and the volumes are very low, so there are no economies of scale or very limited accountings of scale. And the accounting requires that some of those costs of the products, which will be sold in the future being recognized in the current period. So there is a -- we’re in a situation where the implications of the sale are not being recognized in the period in which the sale is actually occurring, but are being recognized earlier. So that -- with our improved expectations and acting on those by bringing in more inventory, we have a situation where the inventory charge that we’ve outlined in the earnings release was occurred in the third quarter, that it effects units that will be shipped in the fourth and particularly in the first and maybe even in the second quarter of 2017. Ken you want add anything to that.

Yeah, Al, I think if you got the dynamic correctly stated. Mike, because we’ve bought that inventory in front of the demand, we are taking those write-downs to the realized value that’s we’re required to under GAAP and as we see the ramp-up we’ll be buying inventory to fill the pipeline. The question coming down to is how do we reduce costs over this period of time to reduce that margin gap, which will then cause us not to have to consider the pull forward of the loss on the inventory before we build it.

I should say right there that we have plans being executed to reduced cost, so it isn’t as if we’ve now got to figure out how to reduce cost, but in working with suppliers and changing components and changing certain designs and so on, it takes time to have that occur.

Yeah.

So, Ken suggesting that those costs won’t come in the line with the pricing until later in 2017 and certainly in 2018, as I think we said in an earlier press release that we have to have a level of -- appropriate level of volume and our target margins, where we get to the target margins, we have to get to target cost and that process is going to take us significantly through 2017 to get to the point where that we want to get to.

Yeah. I think the answer to your specific question, the answer is yes. I think our loss that we would expect for the full year 2016 is higher than the last estimate we gave you and its due to impart this pull forward of losses on the positioning of inventory ahead of our build to meet, what we expect to be enhance customer demand. Now, we’re buying a lot of product that has been built with prototype tooling we expect to get economies of scale and standard tooling in place to lower those cost.

And reengineered components and different suppliers and reduced cost from those suppliers.

Okay. I didn’t want to focus on this in my question, but maybe I’ll just follow up by asking I think I mean if you mark down everything now that does that artificially pull forward the potential breakeven for Nuvera at some point?

It’s hard to say how that might work, but it certainly would reduce the losses in later period, if that’s the question you’re asking.

Okay.

Whether it expects the timing of breakeven is harder to say, right Ken. Certainly it reduces the losses of future periods that we would expect it during this startup phase.

Yeah. The losses will be higher now, they’ll come down more quickly because you won’t push -- you won’t have a matching of the cost of what we paid for inventory compared to the cost of the price of what we saw. So, when you get to breakeven you don’t need to make this adjustment, we wouldn’t have an issue when we got to breakeven anyways. So, I think instead of kind of a straighter line trajectory, you end up with more of acceleration down to breakeven.

So, here is the dynamic that I would think in terms of, we think our prices are competitive. We think there are maybe opportunities as we get later into 2017 and 2018, that actually had somewhat enhance prices, because we believe that our products will have sufficient competitive advantages to justify some increment relative to our competitors. Second on the cost side, we feel comfortable that we get to our target cost towards the end of 2017 and into early 2018, and at some point we pass through the breakeven point and then we progress toward our target margins, so there are two different points there. But nothing has particularly change there in terms of our expectations of the timing of reaching our target cost roughly speaking. And our pricing expectations roughly speaking. What has changed is our confidence in the volumes during this development period if anything has changed.

That’s certainly good news. Why don’t we just move on to the lift truck segment as well, in your release and your comments also mentioned that you expect to see growth in the business in 2017, probably outperforming, sounds like even some of your share gain efforts. I was wondering, just one word of just kind of a short review on what kind of growth you're expecting there, on the top line, [indiscernible] pretty higher bar set for yourselves for a couple of years out. I mean is it going to be a very small -- I know, the small growth rate, is it a high composite [ph] growth rate? And I was wondering if you think your operating profit as well which is also looking to grow, will it scale in line with your revenue or you're still going to be facing some pricing or SG&A costs next year as well?

Let me comment at in a general sense if I could. Our share gains, the process has in the course of our expected results for full year 2016, are looking encouraging to me. They're looking encouraging and particularly in the Americas, in Europe, in total it's reasonably flat, pretty flat, and [indiscernible] is pretty flat. On the other hand inside those numbers, by region, are some significant differences in -- if you look at it by product line, and we -- if you look on a global basis we're feeling pretty good about our electric counterbalance line, we're feeling pretty good about our narrow aisle line, our low cost and of our motorized hand line had some sheer challenges but the margins are slim, and the sales dollars are relatively small. And in our internal combustion engine product lines, the results have been extremely encouraging from the share point of view. Now the complexity here if you look at it in aggregate, is to see narrow aisle and motorized hand markets have been growing fastest. The electric counterbalanced lines have been growing more moderately and the place where we have the strongest share position by a significant margin is in the Class 4 and 5 set of markets, particularly in the Americas and the markets for those products at this point in the cycle has actually been declining. So, despite the sheer increases in product line by product line, the mix of product lines has had an impact on us. It's most severe at the moment in the Americas in our big truck product line where there's been a significant contraction in the volumes, and the revenues over the course of 2016 in total. And then there are in addition to those factors and the implications that they have for our sales volumes. We also have some pricing actions which are taking place, but those are of two somewhat different types. There are certain areas where we are establishing a stronger position in certain products lines particularly and the warehouse product lines and in order to be competitive in some of the large accounts particularly ones that we’ve been winning, we have to have our prices that are below our average margins. And so that very much selected a pricing that is related to competitive situations in part of our long-term share gain progress with customers that we haven’t been doing business with, but we also have some areas, where our costs have favorable particularly in big trucks in Americas and despite the down market. We are in a position to gain share, because we can reduce prices, because the costs have gone down. And so those products you may remember, made in Europe and shipped to America. So they’re denominated in terms of euros from a cost point view and large [Indiscernible]. So there are lot of factors that are at work, but generally speaking we feel pretty good on the share side. Now those are shares of bookings that I just gave you and may you want to know in particular that in the third quarter as our earnings release indicated our bookings improved compared to 2015 by something over 3,000 units. On the other hand our shipments compared to 2015 declined by 2,000 units. So there is swing between the bookings and the shipments of 5,000 units. And that’s the basis for the comment that as we look forward into fourth quarter and particularly 2017? We have a healthy backlog that is a result of the enhanced share and enhanced market levels, and we think those programs are going to continue to pay-off during the course of 2017 and obviously, bookings in the first half of the year will affect the second half of the year, so some portion of the bookings in 2017 will affect the shipments in 2017. So you put all those factors together and that leads to the comments that we gave you with regard to 2017. And as far as the margin side, some of the factors the combination of currency and the pricing I discussed will be effecting the overall mix of products that we have, that’s moved toward lower margin products and away from the higher margin products is effecting our overall margins. Margins and as far as the GS&A, I think our expectations are in 2017 they’re going to be pretty comparable to 2016. So, from our perspective the period of putting in place additional GS&A capabilities to meet the needs of our share gain program is pretty much over, now it’s a question of getting the full benefit from those over time, which we’re working very hard on and which we feel is moving in the right direction. And so long explanation and answer to your question, but hopefully helpful to you in explaining the rather complicated dynamics that are going on.

Sure, I just have one quick follow up to that question and on your answer. Is it fair to say in the class four or five in the logic our units that there is an overlap here perhaps with some of what we’ve hearing from the I/O [ph] work platform providers to listen and so on is about saying the order transformed several years ago during their recession, were pretty weak, they sold only small amount of units and now entering the efficient cycle of that smaller unit class from several years ago. And now we’re still looking a pretty low efficient level into 2017 as well in that kind of category. Or is your business really not in that size not really tied into the aerial work platform proficient cycle.

Yeah. I wouldn’t want to compare to the aerial work platform cycle, but I would say this that particularly in the Americas, we’ve had a significant slowdown in big trucks and in particularly the larger end of the counter balance trucks that lies below the big trucks. And it certainly related to industry slowdown, there may have been some kind of buying that occurred to some degree after the downturn. So, I mean I inclined to think about its a little bit less from a replacement point of view than I am from a cycle point of view and perhaps a margin or perhaps unit volumes that were higher. And the 2011, 2012 period because they were so low and the 2008, 2009, 2010 period or something along those lines, but let me ask Colin Wilson who is also on the phone if he has anything he wants to add to that perspective. Colin?

It’s pretty much industry related. So our big truck is down because business is down in Texas today with the oil and gas, down in metals because of the low price of steel, it’s down in the paper. That industry is a little bit soft. So, it’s very much related to the health of the customers and the industries that we sell those products into. And as Al said it really if you look at the demand up to about 4 tons capacity is pretty healthy but then compared to where it’s been over the last couple of years, we get 5 tons and above and that’s where you see the softness. So I think the simple answer is, I don’t think it’s at all related to the same dynamics as you were talking about on the other work platform. I think it’s very much related to the industry segments into which we sell these trucks.

Your next question comes from the line of Mig Dobre with Baird. Your line is open.

I want to follow-up on a couple of Michael's questions here, maybe going to Nuvera, I want to clarify that you're saying that in the fourth quarter the operating loss is going to be similar to what we've seen in the third?

No, I think what we've said was that our full year operating loss that we previously provided will be higher as a full year loss. In the third quarter we had to take the inventory that we had on hand and take the market adjustment down to the sales value or the replacement value. And in that regard we've kind of taken that. Now as we build product and we buy new inventory we'll be buying that and sourcing it hopefully at lower costs, as we get lower costs the gap between the realizable value and the cost repayable will shrink, on a per unit basis. So, we don't -- I guess the way I would say it is again our loss will be higher for the full year than what we've previously provided you.

Okay I understand that part, but I'm still wondering, I mean you're pretty specific as to what you expected in the back half for Nuvera loss. Now it's higher. I'm just trying to understand, how much higher?

Largely in the third quarter and largely due to the one-time -- I won’t call it one-time, but to the developmental expense that we incurred related to the components and we've brought a lot of that inventory in for future build, in that quarter. So, that’s when those charges were incurred.

If we end up with a lot of waters Mig, and we need to buy more inventory, its volume related as well. So, that's where it’s a little bit difficult for us to give you a full estimate.

But you're also talking about this been an issue in the front half of 2017, compared to what you've put up in the third quarter, how should we think about that? I mean are we -- yes, how do we think about the front half of '17 if you're saying that the fourth quarter is going to tick down in terms of the loss?

As I said in my comments earlier, one of the complications of the accounting requirements is that the cost associated with the sales, come in earlier periods -- some of the costs associated with the sales come in earlier periods in the sales. And so over the course of '17 things may well average out. But that really isn't the case in '16 as some of the components that have been brought in are really related to '17 already.

I think our guidance was that we expect to have a lower overall operating loss in 2017 compared to '16 and that I think what we're saying here is that our first half of '17, those significant inventory adjustments will moderate.

Yes, now having said that, we feel that those numbers could be influenced by the volume -- would be influenced by the volume in '17. Now, practically if we've additional bookings in '17 over and above the numbers that we are currently thinking, they come to pass. We may actually have those bookings shipped in ‘18 rather than ’17 and the reasons for that are largely related to bringing up the manufacturing process in an orderly way over the course of 2017 and it would be our hope that we could work with our customers to tie in shipments to sensible, orderly manufacturing ramp up and also that has the benefit of tying more closely to the cost reduction programs, which are underway at -- in the Nuvera business. So I just want to caution that all of these comments about 2017 are highly volume dependent and that’s the best prospect that we have at the current time.

And I appreciate that, I guess my struggle as an analyst trying to put together a forecast is this. If it’s difficult to gain visibility in basically next quarters or the next the six months, operating income. How can you have visibility 18 months out to be able to say that your operating loss is going to be slightly lower than 2016. So I was just sort of looking to gain insight as to what makes you think that that’s possible. And what the front half versus the back half of ’17 would look like, based on what you know your expenses to be. But maybe you can’t provide me with that, I don’t know.

That’s the point. Is it’s certainly transparent to us in terms of our expectation based on all of the moving part that I described. Now the moving parts could change in terms of timing and so on and so forth, but certainly we have visibility, but we’re just not going to get into the level of detail that I think you’re suggesting. I just bring you back to the point that in the third quarter and a comparison to a running rate basis, we had some special charges related to the inventories and that gives us the inventory we need for a while. Now we may choose to bring in some more, the timing of that is going to be to some degree order dependent and then it ties into the actions we have to take from a GAAP reporting point of view, but you know let me just back away from all this and from you know quarter-to-quarter analysis, or even 2016 and ’17. If the real question here in our minds is are we feeling increasingly good and confident about the long term prospects of the Nuvera business, the answer is we are. And getting there simply has cost associated with it, but we feel that the products, that we have are highly competitive. That many of the customers for using fuel cells, already have them and are going to be -- or who are going to be adopting them are increasingly active in this marketplace and causing it to grow more quickly. And they at a minimum are interested in dual sourcing, so that in a product which is involving in terms of its capabilities and in terms of the customer’s sort of risk profile if you will, they’re very interested in many cases in dual sourcing. And there are really only two of us with effective competitive product out in the market place. So, the market is continuing to ramp up, if anything at a greater pace than we were anticipating. And we think we’re going to get our fair share of that market. And we feel that over the next 18 months the cost are going to come in to line and so from our point of view there is a great deal of uncertainty about specific numbers and any [technical difficulty] during that period, but we’re feeling that the program is really moving in the right direction from our vantage points.

Okay. I guess I understand that and I appreciate your thoughts on it. But maybe if I’m to look at this through a slightly different angle, looking back since Nuvera came into the fold. There really have been some changes that you had to make with regards to your really cost forecasting, more than anything else. You had additional marketing and research and development cost that came in and added another kind of layer of expense, which if my memory serves me right were not initially anticipated. Now, we’re talking about the inventory dynamics that as early as the Analyst Day, we’re not really anticipated or disclosed publicly. So I guess I’m wondering here as to does this business surprise you with regards to how much cash is requires and how much expense it requires versus what you thought initially. And as you’re looking at the long-term, at what point do you say, hey look we need to adjust our thinking here because recently we have dynamics that we did not necessarily anticipate when we started on this journey?

I’ll just leave it, we feel better about the business. Of course we would wish that there were lower cash expenses associated with getting where we want to, but this is a startup business, remember that we bought a product -- a potential product capability that needed to be commercialized. The technology was there, nothing has changed. Forecasting all the detailed cost from our point of view, we do the best we can, we’ve given to you. It’s not atypical to have them go up, in some ways from our point of view we want to keep a tight rein on the cost, so that everybody feel accountable and their budgets are not too big and then cause them to feel comfortable and then we do have over runs. But at this point the expectation of specificity and is not something I’m very comfortable with. I think the people running the business are doing a very good job, we’re bringing Hyster-Yale capabilities to bear especially on the supply chain and the manufacturing side of this, we've great expertise and kind of help them. But at the end of the day what's really critical here, is that the payoff, we consider to be, if anything, bigger than we had anticipated when we started down this path. So, we feel good about the equation. I certainly take your point that we'd rather have lower cost of doing it. But the most important thing is to do it in the best possible way and to recognize the uncertainties that’s associated with the startup businesses.

Your next question comes from Joe Mondillo with Sidoti & Company. Your line is open.

On the Bolzoni business, I was just wondering it seems like even if you exclude the acquisition related expenses as well as all the purchasing accounting even the amortization that's going to stay with that business, if you exclude all that, it looks like the business was operating at about 4.4% operating margin which I think is below the sort of historical margins that, that business is been running at, correct me if I'm wrong. Just wondering it seems like the profitability there should be a lot higher and it seems like you're looking for a little bit of improvement in the fourth quarter, but just wondering sort of what's going on there and if you see sort of the 5% to 6% operating profit margins, that it seems like you're capable of getting to bouncing back pretty quickly?

Well, I think our basic view of story at Bolzoni remains pretty constant. I think it's perhaps one of the factors at the moment is that if you remember that the process of acquisition was extremely complicated. And it was a process because of Italian law for public companies that meant that effectively our detailed planning process was delayed significantly from what we had anticipated when we first went into this. And indeed that the acquisition itself occurred somewhat later, as well as the assessment of the sort of operating plans were going forward. But I think that the sales volumes are not way off where we anticipated that they would be when we thought about things a quarter ago. I think that you focus on the sort of cost in the third quarter, I don't think our perspective has changed significantly on the fourth quarter. What I would say is that our important challenge is to take advantage of all the opportunities that we saw in the acquisition of Bolzoni and we're working hard to do that. You remember that there were opportunities to change our sourcing patterns to take advantage of the Bolzoni capabilities those plans are underway they take time, they’ll mature much more in 2017, we have programs to try to help Bolzoni’s cost structure by leveraging the volume capability that or position that the lift truck business has in terms of purchasing power. We want to enhance the market share position of Bolzoni particularly in the Americas. And as [indiscernible] matter there is always a period of some unsettlement in the immediate after math of an acquisition. It’s oddly easy to think about this acquisition as if it occurred at the beginning of the year, because we announced that I think when December --?

In February.

When we’ve announced that we have discussions first time…

That was in February.

February, essentially [multiple speakers]. And so -- but we’ve been thinking about it. A lot of the thinking is associated with the beginning of the year, I guess is the point and there has been some -- but we’ve only had it for quarter, as a practical matter.

Yeah 100% only for quarter.

I understand, I guess I’m just wondering is, I understand a lot of the things in the synergies that you’re going to try to put in place. Its way too early for progress that happened. I’m not really concerned with that. I understand that’s going to take a little time, I’m just wondering are the margins a little lower than maybe the last 12 months or third quarter of last year. And if so, is there anything, is it just revenue being down year-over-year, I don’t know -- even know what the year-over-year what the year-over-year change of revenue is, is that a mix issue and it’s just sort of a onetime type thing or you know what’s going on with the actual business in the third quarter excluding any of the things that you’re intending on doing?

I sort of pass over the third quarter and look at the fourth quarter and our expectations are pretty much in line with what we anticipated before. I’ll just leave it at that.

Okay.

That’s what our thinking is at this point. So in that sense nothing fundamental has changed. Remember in the third quarter, just as an incidental matter, I don’t think we mentioned in the press release, but it’s always vacation time and a lot of things go on in the summer in Europe well beyond what happens in terms of the U.S. and so there probably are some elements there that effect the third quarter, but on an ongoing basis, we are still looking at fourth quarter and reasonably similar terms.

Okay.

Yes, Italy, Germany and are three other main locations the summer schedule, in the third quarter affected us. But that affected third quarter last year, so that’s comparative, but it gives you kind of a sense of third quarter affecting third quarter run rate in Bolzoni, yeah the third quarter of this summer close schedule would effect it. I think our guidance here is that we are expecting revenues in the fourth quarter close to their fourth quarter last year. We have had some comments about Class, one in five product -- Bolzoni products aren’t typically sold for [indiscernible] Class 3 or for a lot of Class 2 product. They really are a counter balance products and those markets have been mixed around the world somewhat higher end.

The heavier end of those markets.

So those industrial customers that would have those type of attachment, they were being a very significant one were [indiscernible] is focused on is also effected by that. So, end user demand for a Class 1, 4 and 5 product really helped drive the story on the top line.

Okay. In terms of the guidance that you could provide for Americas you’re talking about operating income being down year-over-year in 2017. Is that excluding some of the onetime cost that we saw in the first half of the year in 2016?

In terms of the total --?

So, if you exclude -- there is a loss on the recovery of assets 2.8 million in the first quarter. Have you excludes those operating income for the year at Americas in 2016 is going to be a little higher than the GAAP numbers. So, if they’re higher are looking at GAAP numbers or are you looking at excluding some of those onetime type items and it’s going to down from there?

Yeah. I think we’re talking about GAAP numbers and of course first half we also have acquisition cost that were in those GAAP numbers.

Right. So, the GAAP numbers are going to be more depressed and so you’re saying the 2017 is going to be down from even those sort of depress levels in 2016?

Yes.

Okay. I guess that brings to me to my follow up than if that’s the case I guess the biggest issue that came through in the press release which isn’t surprising at least this year, at least is the mix obviously the heavier trucks, big trucks are not seeing as much demand in that there was a higher margins which is understandable. I’m just wondering as we go into 2017 it seems like the comps should be easier especially in the back half of the year. Could you talk about the backlog trends within big trucks, is that backlog continuing to decline and that’s why you’re sort of pointing to the fact that this mix issue is going to continuing into 2017?

Sure, Joe. Let me back up the question before, because I want to make one clarify and comment. We have an awful lot of good tax adjustments, favorable tax adjustments in 2016 that we don’t forecast to reoccur in 2017. But it a swing on the tax line, it’s not -- it gets us back more normal rate because those desecrate items that we recorded in particular two in this quarter and others that we noted through the year 2016 that we don’t forecast reoccurring. So, I just want to make sure that we, I was talking about from a net income level not necessarily from a half profit level.

Well, in the press release you say full year 2017 operating profit in the America segment operating profit is expected to be decrease?

The Americas?

Yeah. That’s what I’m talking about Americas.

I’m sorry.

So, I’m just clarifying are you continuing to see a declining backlog of big trucks and is that why you’re sort of pointing to this mix issue continuing to remain in 2017.

Well, let me just say that I think that our unit shipments, if you’re really asking about effective unit shipments, our big truck shipments volumes will be lower in ’17. They are a lot lower in ’17 than they were in ’15 and still be somewhat lower in ’16, but as you suggested that will be mainly in the first half. So --.

I guess what I'm suggesting is the back half of the year is going to have an easy comp and I would think -- the easy comparison and even I mean -- you've been seeing for a couple of quarters the sort of headwind of a tough mix issue. So I'm wondering is the backlog -- I guess could you just clarify, is the backlog of your big trucks continuing to decline or has that stabilized?

I think it's probably pretty much stabilized at this point, but the comparison in shipment terms will show that the first half of next year would be adverse.

And it's a geographic shift as well. I would expect, Americas backlog would be down, AP's [ph] backlog will be down, Europe's been a pickup, but even when you get the anecdotal story in Europe, purchasers now are taking longer to make the decision. And I think we had a couple of competitors out there who put out releases that were talking about that, that are based in Europe, that produced product in that heavy range.

But the broader picture is, we expect significantly greater bookings in 2016 than we had in 2015 in the Americas, although big truck is down. And in 2017 we expect again to have significantly greater bookings than 2016. And the big truck as I said earlier is likely to be down in terms of bookings comparisons in the first half, but at a much more moderate level than was the case in '16 versus '15. [Multiple speakers]. But the overall backlogs have been rising as you've noted and we certainly hoped that trend will continue over the course of next year. Now we ramp up our volumes from a production point of view in a disciplined and structured way so that we don't lose efficiency and production. And so, that's a factor we’re taking into account too in terms of -- we don't want the backlogs to get too long, because our customers would become concerned. But on the other hand we're in no hurry to ship units as long as there have not been any customer issues and we want to make sure that we do it in the most efficient possible. Let me ask Colin if he wants to add anything to this general discussion. He may not. But Colin?

I think certainly as we've gone through 2016, just really focusing on the bigger trucks, our team in the Americas was crawling the market down, we didn't in fact see the market going down. If anything they are more optimistic about the prospects for 2017, however we haven't really seen it in the numbers yet. And so, what they're hearing from the market is more optimistic noises, but we're being very careful not to plan significant increases until we actually see the bookings coming in. I think the same can be said for the smaller four to seven four to eight ton [ph] capacity units.

I just wanted to ask just lastly in terms of Nuvera. How much was the actual prototyping costs and if you’re doing 30 trucks in the third quarter, what sort of level do you think you need to get better sourcing costs to lower the source of production -- the cost of production?

I think the only comment I’d make on that is that yeah I don’t know that we had in this earnings release, but in previous one, we had indicated that if we can get to 700 units a quarter at target margins that we would be -- and there were some power cap units as well, hydrogen producing units. But we can get to breakeven and I think that equation is still roughly accurate, but the complexity in terms of forecasting is that if our units go up, even above 700, but we are not at the target margins yet, you may actually have somewhat larger losses, although the business is doing better in terms of building its position in the marketplace. But generally speaking that’s the equation that we are looking at. So from volume point of view, we expect to significantly enhance volume and are really encouraged about 2017 at least at this stage of the game. And on the other hand our target costs structure is we’re still aiming at some time hopefully in the early part of 2018 to get to that level.

Okay. And can you comment on what your backlog at Nuvera looks like relative to the 38 units that you shipped in the third quarter relative to the 700 plus units that you need to get to break even?

I’m really not going to comment on the backlog, I think the earnings release used some pretty precise specific language in that regard, about the nature of the discussions that we’re having with customers including some very large potential bookings about which we feel very positive for the regions that I described few minutes ago.

Okay. Thank you for taking my questions.

Yeah.

[Operator Instructions] Your next question comes from Mike Shlisky with Seaport Global. Your line is open.

Thanks for taking my next question to your guys. I’ve started too hopped on this with the Nuvera, but just want to confirm, Ken, do you LIFO or FIFO for Nuvera at this point?

LIFO.

LIFO?

LIFO, LIFO.

Okay. All right. Got it.

I’m sorry go ahead.

I didn’t hear you, FIFO for LIFO sorry.

Lower cost remark that would apply to either. So you have a LIFO adjustment, but just still have to recognize lower cost for market.

Got it. Just wanted to confirm that. And then I just trying to make sure I also got -- so this inventory change here, what’s happened now is that was kind of draws your attention by your auditors [ph] or is this a cost that you just decided you have some kind of -- you have flexibility here, is this your internal decision?

It is a GAAP requirement and as -- and we’re reflecting it, but what is changed is inventory accumulation that we have for purposes of building. And that had to be recognized in the third quarter.

Yeah, Mike. We’ve been [technical difficulty] that because of its size we called it out.

Yeah. We’ve been posting a lower cost for market adjustments. Our volumes were very small up to this point. We’ve now bought inventory to produce higher volumes and that’s what’s driving the need to call out the lower cost to market.

Got it. Okay. Okay. Thanks a lot more sense out. Thank you.

[Technical difficulty] and maybe we should have been clearer about that, but I think Ken described it very precisely a minute ago.

Yeah. That’s the, that’s the usual way I got it. And then the other thing I want to ask about on the call here is about your tax rate, you said you will get more normalized tax rate in ’17 after there was some unusual stuff going on in ’16 on the positive side. Can you really update us as to where you think you’re normalized tax is in 2017?

We’ve always talked around it about 28%, 27%, 26% blended rate. Mike it really comes down to how much of our income we earn in the U.S. and to a lesser extent in Brazil and Italy versus other places in the world that have lower effective tax rate. And what you saw between Q2 and Q3 was this mix shift because of the larger Nuvera loss and because of reduction in our income we expected in the U.S. segment, that less of our income would get taxed at the highest rate and more of our income would get taxed at lower rates. And it’s just a mix shift across and of course in the quarter, it looks really odd because we’re adjusting down to that lower rate, and we’re accruing at a lower rate the entire years’ worth of -- year-to-date worth of pre-tax income. But the numbers to focus on are really the year-to-date numbers. And I think typically in the past we’ve talked about the effective rate that’s shown in the payable, less of a permanent getting you to a tax paid or tax approved after permanent adjustments compared to that your pre-tax income. And if I do that we’re at 15.6% year-to-date in 2015, we were at 27.7% last year a year-to-date in 2015. So, you can see that we did drop about 12% year-over-year in that effective rate, but that’s the mix shift issue, that doesn’t account for the two discrete items we have in the quarter. The one we announced with the second quarter earnings release as a subsequent event the Italian tax ruling that allowed us to reverse our valuation allowance we previously had as well as the US tax items we noted related to R&D and manufactures credit. So, I think you got set those on the slide, they kind of happened this quarter, and we should see an increased R&D credit due to the investments we’re making in the commercialization of Nuvera’s technology going forward.

That’s perfect Ken. Thank you so much.

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

All right. Thank you so much for joining us today. We do appreciate your interest. And if you do have a follow up questions please feel free to give me a call. You can reach me at 440-229-5168. Have a great day.

This concludes today’s conference call. As a reminder this call will be available for replay at approximately two hours by dialing 855-859-2056. The Oncore passcode for the replay is 91062222. Again this call will be available for replay in approximately two hours by dialing 855-859-2056. The Oncore passcode for the replay is 91062222. Thank you.