Hyster-Yale Materials Handling, Inc. (HY) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyster-Yale Materials Handling 2017 Third Quarter 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. Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone and welcome to our 2017 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 and Chief Executive Officer of Hyster-Yale Materials Handling; Colin Wilson, President and Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President and Chief Financial Officer. Earlier this morning we published our third quarter 2017 results and filed our 10-Q. Copies of the earnings release and 10-Q are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. 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 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 website. Now let me discuss our results for the third quarter. I will start with the highlights and then get into the details. Once again this quarter, global lift truck markets continued the double-digit growth trend that we saw in the first part of the year. In fact, growth this past quarter was higher than in the second quarter. When you exclude China the market growth was not as substantial, but it was still very strong within almost 10% increase with increases in all of our geographic segments. In this strong market we had an 8% in our third quarter lift truck shipments driven primarily by strength in EMEA and we maintained a very strong backlog. On a consolidated basis, our revenues increased almost 10% to $691.1 million up from $629.3 million last year. Our operating profit increased over 200% to $17.9 million from $5.4 million and our consolidated net increased to $16.5 million or $1 per diluted share from $12.3 million or $0.75 per share last year. I want to point out that last year's operating profit and net income included $2.6 million of pre-tax unfavorable one-time purchase accounting adjustments related to our acquisition of Bolzoni. In addition, the third quarter 2017 net income includes discrete tax benefits of $4.9 million compared with discrete tax benefit of $5.1 million in the third quarter of last year. Over the lift truck businesses resolved for significantly better than we anticipated which more than offset modestly lower than anticipated results at Nuvera primarily due to fewer product shipments than expected. Bolzoni's revenue were higher than anticipated but operating profit was in line with our expectations. In our lift truck business third quarter 2017 revenues went up 9.6% to $652.3 million from $594.9 million in the prior year third quarter driven by substantial improvements in the Americas and EMEA mainly as a result of an increase in unit shipments in these segments. Overall in these markets, our channel mix is strong with more dealer sales and national account sales and our new products continue to sell well especially our new Class 5 standard product and our new electric products. However JAPIC's revenues decreased as this segments decrease in shipments of higher price, higher capacity lift trucks predominantly big trucks. Operating profit increased 17.6% to $24.1 million in this quarter compared with $20.5 million in last year and our lift truck operating profit margin increased to 3.7% from 3.4% in the prior year third quarter. These improvements were mainly driven by the Americas. Operating profit in the Americas increased substantially primarily from an improvement in gross profit of $10.8 million, the gross profit improvement was the result of increasing at volumes and improved pricing, net and material cost inflation. The higher unit volumes in the Americas was driven by increased sales of our Class 5 internal combustion engine lift trucks including the new standard truck and big trucks and our Class 1 and Class 2 electric trucks. Our gross profit improvement was partially offset by higher employee related marketing and product development cost in the quarter. Despite an increase in revenues, EMEA still generated an operating loss in the quarter albeit a much smaller loss than in the prior year. The seasonality in EMEA is normal. Benefits realized in gross profit from a favorable currency movements of $6.7 million and higher unit sales were mostly offset by unfavorable material cost, a shift in sales mix to lower price, lower margin products and an increase in operating expenses. In our JAPIC results declined due to higher operating expenses. Those are the significant factors affecting our lift truck operating results. Now let me turn to this lift truck business outlook. I'm just going to discuss the high level outlook, details regarding our individual geographic segments is outlined in our earnings release. Global lift truck market has remained stronger than expected all year and with this, we've continued to focus on the carefully paced ramp up in production and achievement of price goals, while maintaining a healthy backlog to manage production efficiencies. We have maintained a strong focus on account identification and industry strategies as a means to target sustainable share gain. We continue to achieve better pricing and we have seen greater demand for our higher value internal combustion engine trucks. We have also realized an overall positive mix of bookings through the year-to-date. While we expect a continued increase in unit shipments and unit and parts revenue in the fourth quarter compared with last year. An expected shift away from dealer shipments back to our national account shipments in the fourth quarter is expected to provide a modest headwind. We also expect our lift truck business operating profit to increase in the fourth quarter compared with last year. This improvement is expected to be primarily driven by the higher revenues and anticipated benefit from favorable currency rates partly offset by higher operating costs and material cost inflation net of price increases. However despite this operating profit improvement we expect fourth quarter net income to be comparable to last year's fourth quarter because higher interest expense and a higher effective income tax rate are expected to offset the fourth quarter operating profit. Now let me provide a high level look at what we expect for 2018. However, I'd like to note that we're still going through our detailed annual planning process and we will provide more color on 2018 with our yearend earnings once this process has been completed. At the global level, we expect the global markets in 2018 to be comparable to this year. Within our lift truck business, we anticipate the benefits from expected unit and parts revenue increases driven by a continued investments in our strategic initiative will be partially offset by higher operating expenses and moderating material cost inflation, which we anticipate to result in moderate increase in operating profit in 2018 compared with 2017. However we expect 2018 net income to decrease modestly from this year as a result of higher interest expense and a higher effective income tax rate as well as the absence of tax benefits recognized this year that are not expected to reoccur. Moving to Bolzoni, Bolzoni reported net income of $1.9 million and revenues of $44.3 million for the third quarter of 2017 compared with the net loss of $2 million and revenues of $36.2 million last year. Operating profit was $2.1 million this quarter compared with the $2.5 million operating loss last third quarter. As previously mentioned, the third quarter 2016 operating loss included $2.6 million of one-time purchase accounting adjustments. Bolzoni's revenues increased as a result of higher sales volumes driven by the Americas in EMEA market. In part due to increased sales to the lift truck business. The operating results improved primarily as a result of the absence of the one-time purchase accounting adjustments in 2016. The improvement in revenues and higher productivity despite the normal third quarter seasonality. Looking forward as a result of anticipated strong growth in both the EMEA and Americas market and the continued implementation of sales enhancement program, we expect Bolzoni's fourth quarter revenues to increase over the prior year fourth quarter. In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growths, we expect the implementation of several key strategic program to generate substantial growth in Bolzoni's operating profit and net income in the fourth quarter of 2017 compared with last year. Continued improvements in revenues operating profit and net income are also expected in 2018 compared with this year. Finally, in our Nuvera segment Nuvera shipped 18 units during the 2017 third quarter compared with 39 units in the prior year quarter. While the third quarter operating loss decreased $8.1 million from an operating loss of $12.6 million last year and $10.5 million loss in the second quarter of 2017. The lower operating loss was the result of lower product development and production start-up cost. As we've been discussing for two quarters now, progress continues to be made on the organizational realignment between Nuvera and the lift truck business. The transition of the design, sales and marketing and products responsibilities for the battery box replacements from Nuvera to the lift truck business is been completed, but the manufacturing of the current range of battery box replacements remains at Nuvera's Billerica facility at the present time. Due to the relatively high cost position and limited product range of current available battery box replacement we're taking a measured approach to developing the customer base by driving relationships with customers that are willing to pay a premium for the higher power density of the Nuvera battery box replacement solution and the product support now offered through our lift truck business. During the 2017, third quarter a number of additional units were built for further testing and development applications by the lift truck business and the sales of battery box replacements are increasing with production flat filled through the end of the year. We expect Nuvera to ramp up shipments during the fourth quarter from third quarter levels with shipments expected to continue to increase in the first quarter of 2018. As the supply chain measures and volume increase we expect that the cost for battery box replacement component will decrease and as new cost reduced models are introduced including the new 14 and 18-inch battery box replacements we expect the target customer portfolio to expand. By the second half of 2018, production of the new 14 and 18-inch battery box replacements is expected to begin at the lift truck businesses manufacturing plant in Greenville, North Carolina with a steady ramp up in demand anticipated. In addition the battery box replacement manufacturing Nuvera's Billerica facility is expected to be phased out and transferred to the lift truck business by the end of 2018. The phase out of production in Billerica, Nuvera will focus on the design, manufacturing, sales and marketing, fuel cells stacks and engines. In addition to growing demand for engines, for battery box replacements Nuvera has seen significant interest for its stack and fuel cell engines, for applications outside of this market and believes this can be a significant and profitable growth opportunity. As we indicated last quarter, during the third quarter the fuel cell engine and battery box replacements reached a sufficient level of maturity where we could perform a detailed review of the most likely [ph] forward financial projection for the Nuvera business. Taking into account a status and timing of engineering projects currently underway to cost reduced turn products, the timing of the introduction of new products, the project trajectory of sales by product type including development activities and sales of fuel cell stacks and engines for applications outside of the battery replacement market and the level of operating expenses required full commercialization. As a result of this exercise and based on our revised business model, we believe we now have better visibility of the future cost and actions require to reach profitable commercialization. Our current target is to achieve breakeven in the late 2019 period although this target could be achieved earlier or later depending on sales volumes for fuel cell powered lift trucks as well as sales in other markets. The expected path is for moderating losses over the next few years. Before I open up the call for questions I wanted to make a comment about our cash position and cash flow expectations. At the end of the third quarter, our cash position was $238.2 million which was substantially higher than the yearend balance of $43.2 million. Our debt balance is also much higher than at year end. These increased balances can be attributed to the new $200 million term loan facility we entered into in the second quarter. We expect our consolidated cash flow before financing activities to be use of cash in the fourth quarter of 2017 and we expect it to be a substantial increase from the fourth quarter of 2016 after adjusting for the unfavorable effect of an unplanned systems related acceleration of supplier payments in December 2016. We expect consolidated cash flow before financing activities to be positive and increase significantly in 2018 compared with the share excluding the favorable effect, the 2016 unplanned acceleration of payments had on 2017's first quarter balances. That concludes our prepared remarks. I will now open up the call for your questions.

[Operator Instructions] your first question comes from Mircea Dobre from Baird. Your line is open.

I joined the call just slightly late, so if I missed this, I apologize. My first question is on the Americas segment and the change in outlook. I mean I remember from the last quarter you talked about the second half 2017 operating profit being comparable to the second half 2016 and being down from a strong first half of 2017. Now in the third quarter you put a profit that increased 17%, now you expect the fourth quarter profit to increase substantially this is night and day different than what we've heard last quarter and I'm wondering what changed and how could have it changed so much in such short amount of time.

I think we feel more bullish about the industry's prospect, size of the market. Also the activity level within our dealer network, we're seeing all sorts of indicators turning positive, used truck business is doing better, rental demand is up and the mix of trucks we're selling is richer than we were anticipating earlier in the year, I think coming from different industry segments that are perhaps doing better than we were projecting earlier on in the year. So we have turned our outlook up for 2017 and 2018 on the industry size and also feel good about the mix that we're currently seeing.

Mircea, if you focus on the backlog numbers as well. Our backlog numbers are showing significant growth in value. We're seeing higher value trucks being placed in the backlog. I think we worked off a little bit of the backlog in terms of unit comp between end of second quarter and the end of third quarter, but again the value of backlog that's coming in is richer than what we had previously seen and expected.

Yes, sure I appreciate that and I obviously see it as well and I agree with it and I remember making this point last quarter also. The part that's not clear to me is how your profitability expectation could have changed this much. I mean it begs the question as to your visibility into cost. It seems that something has changed on a cost side that is allowing for better margin, am I misinterpreting this?

No I think there's a bit of timing play here. We had expect more high volume national count business to flow through in the third quarter then what we ended up with. Some of that is getting spread up more evenly. We also had currency improvement and of course SG&A was lower than our expectations.

Okay. In terms of demand obviously you have positive commentary and I appreciated that, but I'm wondering if you're looking into your business we obviously are seeing an inflection in the manufacturing activity overall. How does that kind of play out in terms of demand for heavier trucks for you? Where do you think we are in terms of current demand for these types of trucks versus the prior peak that you obtained? And as you look at the next call it 12 months, do you think the trend for better demand that we're seeing now is sustainable.

I think we're seeing demand improving over 2016, but if you go back to the sort of prior peak which was back in 2014 Ireland gas were going strong, steel business was strong on the basis of demand for pipe for oil and gas, the parts business was healthy, mining was strong, concrete was doing okay. So I don't think we are back to those sort of dynamics. You look at the oil being around $50 clearly it's better than it was but nowhere near good it has been. The ports we're seeing a little bit better activity in the ports. There's been some consolidation in the ports and it looks like their profitability is improving so we're starting to see a little bit of stronger demand coming out of the port segment. We're seeing pretty good demand coming out of Latin America. And a model is up on 2016, mining is starting to recover so all in all I think the environment is better and we're seeing a pickup and demand for equipment in those segments, but it's nowhere near the peak that it was back in 2014.

Sure I appreciate that and can you the sort of gage for us how far from the peak we are currently in terms of demand?

Well again you'd have to look at each of those segments.

Right.

So I mean we can maybe cover that outside the call. I don't have that information here. Last year we were sort of - we called out the headwinds, we were phasing. And those headwinds have abated but they we don't have the tailwind but we have back in 2014, but we can. I'm sure Ken can get those numbers.

Okay from a pricing perspective things are getting better as well. I guess I'm wondering here, is this is a function of just the initiatives that you've got individually, is this function of the industry where you're getting a sense that pricing is getting better for your competitor as well, any color helps.

I think there's two elements of price. I mean there's general price increases which we put in place earlier in the year and really we're seeing more of the positive pricing coming out of the Americas it's a little bit tougher in Europe and then also if you look at what I was, it's in our results so far, we've called out, we've had less [ph] national account business and some very low national account business that hasn't flowed through the P&L, so that's had a - that comes through a surprise, but it's really, we call it customer specific pricing so we've had a less customer specific pricing in 2017.

Okay, last question from me on Nuvera. I'm sort of trying to maybe get a little better clarification here as to what the expectations ought to be here for 2018. When we're talking about lower losses if you would, what sort of cadence are we talking about in 2018 versus 2019? Half the losses from 2017 more in line with 2017, how do we think about next year?

Obviously we have our own internal forecast, but they're highly dependent on what happens in the marketplace and as Christi pointed out in her summary, we're being selective about the customers that we chose to do business with so that we can get the margins that we think are appropriate. I think the way I would look at it is if, 2018 is still in our minds a significant year of strengthening of our product cost and meantime between failure, position, the quality and shifting production from bill Billerica to Greenville. My core feeling is that we should look at 2018 as a year of further strengthening of the commercial capabilities of the business and 2019 as the time when we really began to have a significant impact on the losses with the engineering programs that are underway, the improvement in costs and the movement to the Greenville facility.

So if I understand what you're saying here. You're pretty much saying look, in 2018 losses are probably going to be pretty much where they've been in 2017.

Well I don't want to get that specific about it. But I think it's, there's going to be a continued period of significant loss and in 2018. I do think that the longer term prospects continued to be for fuel cell usage continue to be at least strong as we were hoping they would and in fact, as interested to see at least in this preliminary house tax bill that support is continuing for the introduction of fuel cells as an alternative energy source and that I think will continue to stimulate demand for the product.

Well okay, lastly then. The goal posts are moving and have been moving on Nuvera. And I understand that this is an evolving technology and I think you guys are learning as you go, but at what point will the goal post stay actually firm and some decisions will be made vis-à-vis the cash drain and profitability of this business if this forecast that you currently have on better data now, doesn't quite pan out.

Well we expected to pan out and we're patient, we always have been and we expect to continue to be. But I would emphasize the point that you I think were touching on that we made in our earnings report that we have reached a point, where we're in a much better position now to gage cost of our components different volume levels for our battery box replacements to forecast the detailed impact of the engineering programs on the cost structures that we have, so we're in a much more stabilized position now and I have considerably more confidence in the forecast that we're putting together at the moment in terms of the likely outcome of those forecast from a timing point of view. Very difficult when you are really ramping up to commercial production and commercializing a technology that has been developed but hasn't been putting commercial operation. I think now we're really getting through that position and we're in a much better position to have confidence in our forecast. We signal that I believe in the last - in the second quarter, our conference call that we thought we would be in this position and we feel pretty good about our ability to look at this in a lot more detailed way, literally for each battery box replacement, product at every single component that's in that battery box both in the engine and the stack, which is Nuvera's responsibility and the balance of the product which is the responsibility of forklift truck side of the business. And to put a set of numbers around those in a way that I think gives us as I said much more confidence.

I appreciate it. Thank you. Good luck.

Your next question comes from Mike Shlisky from Seaport Global. Your line is open.

I wanted to check quickly first on your [indiscernible] margins in the third quarter it looks like they kind of stepped down a bit. The operating pull through it was very solid first half of the year, of course so it might be net-net okay but the time the year is through. But how I'm going to sense into 2018 in the past you've talking about things [indiscernible] margins on good volume, is that where you're looking at in 2018 or do you feel like you've got something there that can make you go a little bit higher than that, given the mix next year.

I think we're confident overall and again a lot of it dependent upon the mix of products we sell in the markets in which we sell. I think we've done the adding [ph] up in terms of overall performance for 2018 based upon again the type of trucks we think we're going to sell in what markets, we're seeing quite a bit of material inflation coming through, but our plans will have enough pricing in to cover the material inflation. So I think if you look at a steady state. Truck we don't see a material change in individual truck margins in 2018.

Mike I think we ended at about I think it is about 3.7% in the lift truck business in the third quarter. Based upon the guidance we gave at the beginning of the quarter. That's an improvement of what we expected. So the trend is there that we've seen kind of quarter-on-quarter improvement after. In 2016 we took a step back primarily related to that deal specific discounting and the currency headwind that we saw for now. Currency is been easing off a bit, but it still isn't in the same position, the same favorable position that we were before the 2016 period.

And we get the leverage of extra volume.

Absolutely and that's showing in our numbers.

Okay I may have follow you guys on that offline. I also wanted to ask secondly about your kind of long-term plan, we haven't mentioned this in a long time. Are you still targeting about 115,000 units? I think it's by 2019, maybe 2020 is there a still good path to that given where you are today. Just kind of your thoughts around your long-term goal.

We still believe that we can reach a target of 115,000 units I would clarify that's trucks that we produce as oppose to trucks that we source from others. And that we think we can do it in this cycle. The timing is harder to forecast, but we think as we approach the end of 2019, 2020 we would hope to be in that kind of position.

All right. In the industry every category is different. But I have been hearing elsewhere on heavy equipment. There's been a big dealer inventory build in the third quarter. I'm kind of wondering if your mix to dealers shipments in the third quarter had anything to do with. Maybe the dealer's trying to have more in stock or they might be seeing as a coming retail sales uptick in Q4, Q1.

No I mean. Maybe on individual dealer basis there maybe stray ones here and there, but I wouldn't say there was any significant build up in dealer inventory.

Okay and then I saw in your release that you're testing a pretty big 52-ton big truck that has a lithium-ion battery in it. I was kind of wondering if you could give us a little bit more - kind of detail on that product, what are you targeting there as far as penetration. What kind of engines? So size of the displace and are there any market differences compared to the ICE engine and are there other competitors out there making similar products to this big truck here?

Clearly we're the - if you look at what happens in ports. Ports is a quite large polluters, so there is a significant interest in clean energy for ports. We see a big market for our fuel cells in port applications but we're not one trick ponies we do an initiative where we're using not traditional battery, but battery electric product lithium-ion type solutions that we're doing some work on and we'll continue to work on all those fronts. I think you will see an significant electrification going on in the ports over the next several years.

All right, perhaps one more for me. Just want to get a sense on interest cost in the quarter. Book elevated I imagined there was some kind of onetime fee you were charging there, but I just want to make sure I got the right number that's kind of ongoing run rates for 4Q and 2018 there as well.

This is our first full quarter of the term loan B facility. I think our - if you look at our detail I think we're talking about close to about 5% in a quarter all in, so it's predominantly the term loan B interest coming into the picture. Obviously the cash we're holding on our balance sheet isn't generating the interest income to offset that interest expense on a net interest basis either.

So the $6 million is the appropriate run rate going forward or close to.

Yes. There may be items quarter-in, quarter out we had a couple an item that had some incremental interest in this quarter that I wouldn't expect to see in future quarters, but from a run rate Mike, it wouldn't change the magnitude of the change caused by the term loan B coming into the picture.

Interesting okay, thanks very much you guys.

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

My question is on Nuvera. Number one, I'm wondering if you could talk about your sort of external costs that you really have much say upon and also if you could address what do you mean supply chain matures, the wording that you used in the press release regarding your supply chain.

Well I think that you're talking two questions are really one question. The cost that are external are our supply chain cost and by that we mean, the payments that we make to the suppliers of our components that go into the stacks, engines and the balance of the product. Those when you're operating at very low levels of volume typically the suppliers are charging you a developmental price and then after your sale [indiscernible] that the components really do what they're expected to do, you can get into a negotiation which is often dependent on volume as to what the prices would be a supplier ramps up its volume and determines how to produce the product, the components in the lowest cost possibly way. So when we talk about the supply chain maturity that's the process we're talking about. It's getting from their point of view to full commercial productivity in the components that we need for our battery box replacements.

Are you there Joe?

[Operator Instructions] your next question comes from Philippe Lorrain from Berenberg. Your line is open.

Philippe Lorrain here from Berenberg. I've got actually couple of questions, but perhaps we can start with the first one, which is on your long-term targets of reaching 115,000 units. And you said that towards 2019, 2020 you're quite confident that you could be within that range. I mean according to my calculations it implies something like around 7% growth on the yearly basis between 2017 and 2020. So now the question is, how confident are you that this cycle, this current cycle that we see in the fork lift market is actually providing you with good conditions for reaching the target. I mean I'm more interested in your view already on the cycle itself. And how it could play out in the next couple of years? Thank you.

I think we continue to feel pretty comfortable that the cycle is still in expanding position and what we hope this is a very strong hope on our part, is if the market doesn't expand too fast, too quickly. That's what really led to some of the severe downturn and certainly in the last cycle and at this point, slow and regular growth not only in the United States but generally around the globe. I think is creating a set of conditions that are not overly expansive than leading to a sharp downturn anytime soon. So what we are expecting is, moderate growth in the markets over the next few years combined with increasing maturity of the programs that we have in place to gain share industry-by-industry, customer-by-customer and it's really the combination of those that we expect to lead us to the volume levels that we have outlined.

Okay, so if I understand correctly. You're guiding for probably something like let's say a global fork lift truck market growing at a single-digit pace for the next couple of years on the - with macroeconomic background. I'm just interested do you see good conditions still apparently in the US. You must have seen a bit about Europe as well. In Europe if we take a look back at the previous peaks, previous cycle. We're going to exit these volumes quite considerably in the next couple of years. So do you feel that here perhaps the market has been over hitting a little bit.

The way we tend to look at it, is that if the upper bound of the cycle we would exceed the median growth rates. And so one of the things we do is look at the sort of pattern if you will around long-term trend growth rate, which suggest the level at which peak should occur and the level at which downturns should occur and so we track all the markets. And if you look at the US market, the North American market. At the current time it isn't up at the level of the trend line that you would expect for the peak at this point in the cycle and but I just emphasized my point, that what we hope is, that the economies for both Europe and the Americas will grow at a moderate rate not an explosive rate because we think that then sets in motion a longer cycle with less susceptibility to a sharp downturn.

Okay, thank you very much that was very clear.

[Operator Instructions] your next question comes from Joe Mondillo from Sidoti & Company. Your line is open.

Hi guys, I ended up getting cut off there. Sorry about that. But I had a couple of follow ups on Nuvera. So regarding the supply chain and sort of the issues that seems to me and correct me if I'm wrong I'm really trying to understand because the last several quarters we've been talking about this, that you need volume to try to lower your cost basis of your parts and your supply chain and so at this point in time. It seems like the big challenges maybe volume and then also, is that correct and if that is correct, is there more of a challenge that you're seeing within the market, adoptions and then also how big of a deal is the development of the production of streamlining just fuel cell stacks into actual trucks as oppose to the battery box replacement aspect.

Well there are several different questions embedded in that. First we do see an evolving market for fuel cell engines outside of battery box replacements. It's early days, but there is quite a bit of interest in that area and it plays very much to the strengths of our product design and capabilities that we have with our fuel cell engine. With regard to volume for battery box replacements I guess what I'd say is, that it is somewhat sensitive to price at which you chose to sell the product. Our choice is to sell the product into applications where the superior characteristics of our fuel cell can bring benefits to the customer in terms of productivity and therefore pay a price for the fuel cells that is, in our mind more appropriate price given the early stages of our cost structure. So there is an interplay of choosing your customers, of getting a good price and the timing of the building up of the business around the engineering, cost reductions as well as the supply chain enhanced productivity and lower costs. So that's a tricky process to look at all of the factors. There are a lot of moving parts, that's why we emphasize in the release that we felt that in the third quarter for the first time we were really in the sort of position that would allow us to look in detail at the evolving cost structure component-by-component of our fuel cell engines and our balance of the BBR to make much better cost forecast than we previously been able to make. But taking to account further engineering changes and simplification and consolidation of different components and products and all the things that you would expect in the early days of a new highly technical product. So we're trying to manage the increase in volume, very carefully over the course of 2018 and 2019. And then into 2020, so that we can bring all those factors together in a way which gives us attractive gross margin to cover the rather stable cost of development that we have in the business and so that's kind of the way I would characterize it for you.

So in terms of the market adoption of fuel cell, how would you sort of rate based on your expectations a year ago or whatnot? In terms of adoption has it been slower than expected or as expected or how would you describe that?

I think it's pretty much where we expected it to be but I emphasize that if you cut the price to really low levels you can generate a lot of volume and because and I'm not trying to be at all humorous about that comment. I really mean it because fuel cells like any other mode of power system is competing against alternatives and those alternatives can be lead acid batteries, they can be lithium-ion products, they can be internal combustion engine products. And in each certain conditions in order to make the economics of a new power system like a fuel cell economically attractive both the customer and to us and so you phase it in, focusing on highest productivity applications where the benefits of our fuel cells have the biggest impact on the customers cost. These products are not appropriate at this point in their development for low productivity applications, lighter duty applications. We want to pick the customers very carefully and the adoption is there. They want the product. There's no question in our minds about that but we want to give to them at a price which will allow us to make an attractive profit and that's the equation we have to balance between the maturity of the product development cycle and production cycle and the stimulation of demand on our part. To put another way, if our cost where we want them to be in 2020 today, we could generate a great deal of volume today.

Okay. Also I wanted to understand how much cost is being moved from the ones facilities from the Billerica facility to the Greenville facility. How much cost is moving from Nuvera to the Americas segment?

Well I'm not sure that we can answer the question quite the way you phrased it. All aspects of the fuel cell engine business are going to remaining in Billerica. And the fuel cell engines will be priced in appropriate price for fuel cell engines. All other aspects of the product are moving to into the fork lift truck business. But it isn't quite the way it seems because when we put a new internal combustion engine into one our trucks there is an enormous cost associated with the development of that engine and that capability and so this is not similar to everyday life and the as far as the development process is concerned. If you shipped over to the sales and marketing activities. There are some increases in people are occurring in the sense that we have dedicated service capabilities or service training capabilities and some dedicated sales and activities. Maybe a dozen people or so, as we flush that out its less moving them over then it is building that capability in the fork lift truck business. Now let me give you some examples it's not particularly unusual about this in the fork lift truck business. We have a developing automation business of significance. We have people who are dedicated to selling our automation products. We are building very rapidly our telemetry business and we have dedicated people involved in our telemetry business. And the important thing here is to recognize that we - our objective is to leverage our entire distribution system and that means for parts, it means for service, technicians in the field who are trained to do all of the basic maintenance on these products. Doing that on a standalone basis would be very difficult and very expensive. For us, we can put it on top of our existing dealer network and so and those are in addition to the dedicated sales capabilities. Although in general we expect it to evolve so that our sales people and our dealer sales people are simply selling these products into the right applications and then they may need some support in doing that, but that's the concept we're pursuing. I hope that's helpful to you.

Yes, so I mean I'm just wondering how much cost related to the sales and marketing related to the BBR manufacturing and product is being moved from Nuvera to the Americas segment.

It wasn't really in Nuvera because we haven't reached that point. Certainly there will be cost associated with assembling the product, when we manufacture it there. But we expect those cost to be lower in Greenville then they would ever have been in Billerica.

Okay I guess I'm a little confused. The point I'm getting [indiscernible] because your qualitative guidance is describing that the Americas segment operating profit is expected to be comparable to 2017 with your backlog, with the mix, with the volume, mix. It seems like Americas should be a lot better but you're saying it's going to be terrible because of the sales and marketing. So I'm just curious how much the sales and marketing is going to cost in 2018 that's going to offset all the positives with the core business.

We don't expect that to be particularly large number. That's not going to be the driver of the results in 2018.

All right then I guess that would leave me to ask, why would you say in your guidance that operating profit at the Americas segment is going to be comparable to 2017 and 2018?

Well you know that just whole series of assumptions that on prices, costs so on and.

I mean the two big ones is currency. Currency is a headwind and then material cost. We've seen material cost continue to increases as we gone through 2017 and we're projecting that to continue into more modestly into 2018, but all that cost is going into our standards, our plants are performing well but - those are the two big headwinds.

I think there are other things we're doing to pursue our share gain program that do add costs in a material way. We are strengthening our industry strategy capabilities, we will be providing more direct support to our dealer network industry-by-industry and for the leading customers in each industry. And in fact, that kind of commitment is probably more important than the one that you're inquiring about.

I think Joe, in terms of the earnings release including those specific words in the outlook. We were just trying to do is to flag it to you that, we know that sales activity for directly selling the battery box are now moved over to the lift truck business. But to Al's point. The initiatives on automation, on telematics, on sales, ID and sales processes are significant as well.

We'll be getting more detailed guidance on 2018. I would prefer to have you come back and ask some of those questions in more detail after we have our profit plan reviews completed. To be honest, this is design to give you sort of heads up perspective, we'll be refining it as we go into next year making sure that our cost price assumptions are sensible in relationships to our target economics. That any special pricing activity is properly targeted and carefully thought through that, the SG&A levels are in line with levels that we really want them to be at. All of those things will be refined and I would take this as kind of perspective at this point in time.

Yes, I mean we do very detailed [indiscernible] reviews with all the locations that hasn't happened for 2018 that will be happening basically through the month of November.

All right, appreciated. Thanks for taking my questions.

[Operator Instructions] your next question comes from the Mircea Dobre from Baird. Your line is open.

Al, I got this in your comment. I think it's really interesting there is more discussion here. You talked about investments in automation and telemetry. Let's talk about that. What exactly are they? What's the opportunity here? What are you pursuing?

You want to talk about, Colin.

Well we did make a small investment in a French company called Ballio [ph] did an IPO recently. We're working with some other automation third parties and we've also got an internal team looking at some automation solutions. We firmly believe that over the next several years there will be a significant increase in demand for driverless lift trucks. And our automated lift trucks and the architecture within our truck lends ourselves very nicely to being automated which gives customers the benefit of two things. One the ability to hop on and hop off when the trucks needed to be operated at full blast. But also a much lower cost automation solution and a lot of the speciality pieces of automated equipment that are out there because you're taking units at a high volume, low cost product and basically putting automation solution on them. We see the cost of automation technology and architecture coming down overtime. We're watching very carefully what's happening in the automotive space and looking to leverages as much as possible about what's happening automotive and to our equipment. But it certainly is, as we looked to the future, we believe for demand for automated equipment will increase significantly and we aim to be a major player.

In a fact we are significant player in the early stages in the sense that we have a number of existing contracts that we are using both to meet customers' needs and to develop our own internal capabilities at the same time so that the we're kind of engineering some of the details as we go in areas where we have a good understanding of what can be done. It's done in a way as add ons to the core sale of lift truck and so, that's how we're getting our feet wet in that business and Colin, why don't you comment on the telemetry business which is been growing very rapidly.

Yes I mean we've made the acquisition of the distribution organization of [indiscernible] last year and we've seen almost well I was going to say explosion but a very rapid increase in demand for those solutions, we do have a dedicated team. Actually what we're doing in the Americas is combining leadership of our telematics business with the responsibility of selling the BBR solutions and expanding that team. And we're going to get a little bit of leverage there.

In addition, the device itself that sends information from a truck to a central location in many ways is not the key to all this. The long-term key is the ability to use the information that can be sent directly from a truck. There is some obvious aspects of that, the ability to monitor performance and hours on a truck so the scheduled maintenance is done in an appropriate time or if anomalies occur in certain areas, [indiscernible] and the truck is attended to immediately because through notification. So there's a whole set of things that are related to that. There are ways to monitor productivity. There are ways to monitor the damage to a truck and to an operator performance and to meet OSHA obligations more effectively and monitor more effectively, what drivers are doing. All of that is sort of moving toward our own little framework of big data in terms of the analytical capabilities that are going to needed.

And the technology is evolving overtime again we're working on it. I mean I think in the not too distant future we'll be repairing trucks, flushing trucks remotely. When we need to. We have a dedicated team managing this both in Europe and in the Americas and sales are increasing significantly.

And we're really seeing the maturation of really the adoption of the technology. When we bought the business it really was majority of the insols [ph] were in the field retrofits of existing equipment. Today it's that ratio has changed and the majority of the units going out in the field are actually telemetry units that are built in our plants that are hardwired and leave the plant with the telemetry unit on it. So that's really been the swing of - you're seeing the customer order it directly now with that capability rather than. I want to change this facility and I'll retrofit this location. We're still retrofitting but the driver has been - the shift has been over to factory installed telemetry.

We got a number of [indiscernible] that's going on in the technical area. It's not just the fuel cells, we're doing similar kinds of things at Bolzoni and in terms of more sophisticated handling of attachments. The ability to sense the pressure that's put on curtains in order to make sure that there is a limit, you limit the damage to the product from the way it's handled. We're doing a lot with electronics in the areas that we've just described. So it's very broad based of concepts that [indiscernible] rolled.

And lithium-ion.

And lithium-ion batteries as well. So fuel cells and lithium-ion batteries all energy solutions we're trying to position ourselves as leaders in all these areas. And from a competitive point of view. The larger companies are going to be doing the same kinds of things. We think we have some proprietary capabilities particularly in fuel cells, but it's going to be very difficult for some of the smaller companies to really handle this as effectively. So from a competitive point of view, we think this is a positive trend for our company.

I see. So I'm looking to clarify this. You're saying that now new volume coming through the gate in terms of lift truck, that is telemetry enabled new product going to the customers to all of it or some of it, most of it. How would you characterize it?

I would say the vast majority is telemetry enabled. I mean we have the cam system which basically view link telemetry into the cam system. In the future what we call the smart antenna will be built into the truck. I mean right now we're still putting a box. But future architecture won't have a box, it will basically be integrated.

The mix shift Mircea, it wasn't that. The majority of our trucks are coming out of the plant with the telemetry modules installed when they leave the plants. They all could have them installed at any point in time after they leave the plant as well, but the mix shift change to. The majority of telemetry units, new telemetry units being put in the field are really coming out of the plant rather than being retrofitted in the field.

No I understand I'm just trying to figure out, how the product is evolving here. If now essentially the product that you're putting out there is telemetry enabled and related to this. I'm trying to understand if there is a revenue stream that's coming to the company because this option is been implemented.

There is, we provide there are monthly fees for the services that we provide in analyzing the data. And the connection fees and so on and so forth.

That's reported in our aftermarket parts I believe.

Right it's about aftermarket segment. Yes.

Can you help us understand what the opportunity is considering your installed base and the kind of volumes that you're talking about here?

I'm not sure that we want to get into any more detail on that, at this point. It's getting down to pretty detailed level. Things are always evolving in these businesses and it's just one example. Christy, we're going to run out of time here. We can follow-up some more offline with you, if you want to have some further discussion on it.

[Operator Instructions] we do not have any questions on the phone line at this time. I will turn the call over to the presenters.

Okay. I don't believe we have any wrap up comments. But if we do have any follow-up questions you can reach me at 440-229-5168. Thanks so much everybody and have a great day.

This call will be available for replay beginning at 2 o' clock Eastern Time today November 3, 2017 through 11:59 PM Eastern Time on November 11, 2017. The conference ID number for the replay is 5598-339. Again the conference ID number for the replay is 5598-339. The number to dial for the replay is 1800-585-8367 or 416-621-4642. This concludes today's conference call. You may now disconnect.