Hyster-Yale Materials Handling, Inc. (HY) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Rod and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyster-Yale Materials Handling Second Quarter Earnings Analyst Call. [Operator Instructions] Thank you. Ms. Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2018 second quarter earnings call. I’m 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. Yesterday evening, we published our second quarter 2018 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 For anyone who is not able to listen to today’s entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 everyone that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q. Also certain amounts discussed during 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 second quarter results and activities. I will discuss the highlights first and then get into the details. In the second quarter the global lift truck market remains strong and in this strong market we had a solid increase in our second quarter lift truck shipments and bookings and our ending backlog increased 18% over the prior year. We also experienced a large increase in our average unit backlog value as a result of the mix of products within the backlog. We booked more higher priced units and fewer lower priced Class 3 trucks. On a consolidated basis, our revenues increased over 11% to $765.6 million up from $685.5 million last year driven by a 25% increase in Bolzoni’s revenues and an 11% increase in the lift truck business revenues. It should be noted that a significant portion of these increases were attributable to the translation of EMEA and Bolzoni sales in the U.S. dollars. Despite this revenue growth our consolidated operating profit which was broadly in line with our expectations decreased 38% to $10.8 million from $17.5 million last year. This decline was solely the result of a decrease in our lift truck business operating profit. Our consolidated results also include an unplanned $2.6 million unfavorable mark-to-market adjustment on an equity investment and a $700,000 unfavorable pension settlement adjustment both of which were recorded in our Americas segment. We reported net income of $5.6 million this quarter or $0.34 per share compared with $16.4 million and $0.99 per share in the prior year second quarter. I should also highlight that we completed the Maximal transaction on June 1, 2018. As a result, the JAPIC segment second quarter results include revenues of $7.2 million and the net loss of $200,000 for the one month we own the Maximal. In addition, our second quarter consolidated net income in both 2018 and 2017 includes pre-tax amounts of $1.9 million and $500,000 respectively for Maximal acquisition related costs which were also reported in our Americas segment as well as higher 2018 tax expense of $1.1 million related to accumulated non-deductible acquisition cost. In our lift truck business, second quarter 2018 revenues went up 11% to $720.1 million from $647.7 million in the prior year. Our gross profit was generally comparable to the prior year quarter but operating profit decreased 37.8% to $17.3 million compared with $27.8 million in the last year. Overall benefits from higher shipments and parts revenues in all geographic segments, as well as favorable foreign currency movements in EMEA were more than offset by higher material and marketing - higher material and manufacturing costs and other price increases, and higher operating expenses incurred to support our strategic initiative. Those are the significant factors affecting our lift truck operating results. Now let me turn to the outlook for the consolidated lift truck business. We continue to be focused on increasing our unit volumes and market share over the remainder of 2018, and in future years through the continued implementation of our key strategic initiative. We have realigned our sales and marketing teams and increased our sales and marketing resources to execute our specific industry strategies more effectively as it means to target sustainable share gain. This is one of the main reasons our operating expenses have increased in the first half of the year. The overall global lift truck market remains strong in the first half of the year but we expect it to grow only modestly in the second half compared with both the second half of 2017 and the first half of 2018. We expect unit shipments and unit and parts revenues to increase during the second half and full year 2018 compared with the same prior year period. We also anticipate the lift truck operating profit to increase in the second half of the year with a modest decrease in the third quarter expected to be more than offset by improvements in the fourth quarter. However, the improvements in the second half of the year are not expected to offset the reduced operating profit during the first half and as such, we expect this will result in an overall moderate decrease in full year 2018 operating profit compared with last year. Nevertheless the net income in the second half of 2018 is expected to increase substantially over last year's second half as a result of the absence of the tax adjustments made in 2017 for U.S. Tax Reform Legislation. We anticipate a decrease in our third quarter is driven primarily by shipments and backlog orders that were booked at prices in effect prior the price increases being implemented. The expected fourth quarter improvements are the result of an anticipated increase in product pricing as trucks booked at the new higher prices are shipped. These improvements are expected to be partially offset by material cost inflation and by the higher operating expenses I mentioned previously. We implemented price increases to help to recover anticipated material cost inflation including the impacts of section 232 tariff and we expect to continue to implement pricing actions as needed. We are still working to interpret the full likely impact of the most recent Section 301 tariffs on our future operating results. And at the same time we are reviewing a number of strategies to minimize their affect. Moving to Bolzoni, Bolzoni reported net income of $2.1 million in revenues of $52.5 million for the second quarter of 2018 compared with a net loss of $100,000 in revenues of $41.9 million in last year second quarter. Bolzoni’s revenue increase was driven primarily by higher sales volumes in EMEA. In addition due to favorable currency movements revenues increased $4.7 million as a result of the translation of Bolzoni sales in the U.S. dollars. Bolzoni’s operating profit and net income increased as a result of an increase in gross profit including the absence of unfavorable currency movements in the prior year of $1.6 million. This improvement was partially offset by higher operating expenses. Looking forward as a result of anticipated growth in the EMEA Americas market and the continued implementation of sales enhancement program, we expect Bolzoni’s revenues in the second half to increase compared with the second half of 2017 primarily in the third quarter. However, the improvement in revenues in the second half of the year is expected to be at a lower level than in the first half of the year. In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growth, we anticipate the continued implementation of several key strategic programs to generate substantial growth in Bolzoni’s operating profit and net income for the remainder of the year as well as for the 2018 full year compared with the respective 2017 period. Finally, in our Nuvera segment, Nuvera reported an operating loss of $9.5 million and a net loss of $6.9 million in the second quarter compared with an operating loss of $10.5 million and a net loss of $6.3 million a year ago. Nuvera ago. Nuvera shipped 91 battery box replacement units this quarter compared with 31 in the prior year. But revenue on these units has been deferred until later period. Nuvera’s operating loss decreased in the second quarter compared with both the prior year second quarter and the 2018 first quarter loss of $10 million mainly as a result of lower product development costs. Nuvera’s net loss increased primarily as a result of Nuvera realizing a smaller tax benefit on its pre-tax losses due to a lower effective income tax rate as a result of the U.S. Tax Reform Legislation. Shipments of Nuvera’s battery box replacements increased in the first half of 2018 and we expect shipments to continue to increase in the second half of the year. The unit backlog was just over 250 battery box replacements at the end of the year – at the end of the quarter. Nuvera expects demand to increase throughout the remainder of 2018 and expects its cost base to continue to decrease due to substantial cost reductions on future purchases of core components. Nuvera expects to continue to leverage improved designs and higher volume through its supply chain to generate further cost reductions in 2019 although recently implemented tariffs on imported components will partially offset these reductions. We are working closely with suppliers to find alternative sourcing for affected components. Production of battery box replacements at Nuvera’s Billerica facility is expected to be phased out down and transferred to the lift truck business. With the phase out of battery box replacement production in Billerica, Nuvera will focus on the design, manufacture and sales and marketing of fuel cell stacks and engine. In addition to growing demand for engines, they used in battery box replacements, reinforced by recently extended federal fuel call tax credit. Nuvera is experiencing significant interest in its stacks and fuel cell engines for applications outside of lift truck market particularly in China and we believe this could be a significant and profitable growth opportunity. Early in the third quarter of 2018, we were finalizing agreement to manufacture and assemble fuel cell engines designed by Nuvera for use in the Chinese new energy vehicle market. This said - this agreement provides the product license for the exclusive manufacture of 45 kilowatt fuel cell engines, based on Nuvera's Orion Gen1 fuel cell stack, for sale in China over the next three years. The units are expected to be integrated in transit buses, delivery vehicles and other motive platforms. In addition to the fuel cell engine manufacturing license, the agreement also provides royalty and technology services revenue to Nuvera. The agreement incorporates a minimum initial purchase volume of 500 fuel cell stacks after successful testing of the engines with annual minimum purchases increasing significantly throughout the three-year term of the contract. The fuel cell stacks used in these engines will be manufactured exclusively by Nuvera, initially at its facility in Billerica with localized manufacturing in China anticipated in the 2019-2020 timeframe. We’re current target Nuvera to achieve break-even by late 2019, although this target could be achieved earlier or later depending on sales volumes for fuel cell-powered lift trucks, as well as engine sales for other markets. The operating loss in the second half of 2018 is expected to decrease compared with the second half of last year, especially in the fourth quarter, and moderate more substantially over 2019. While the 2018 full-year operating loss is expected to be lower than last as a result of improvements in the second half of the year, the 2018 full year net loss is expected to be comparable to 2017 because a smaller tax benefit is expected to be realized on Nuvera's losses due to a lower effective income tax rate. So to summarize our consolidated outlook for 2018 full year, we expect our consolidated operating profit to increase due to a lower operating loss in Nuvera principally in the fourth quarter and expected improvement in Bolzoni and its operating profit. These improvements are expected to be partially offset by a modest decrease in full year operating profit at the lift truck business due to the lower operating profit in the first half of 2018, combined with a modest decline in the third quarter, mostly offset by a substantial increase in the lift truck operating profit in the fourth quarter. Our consolidated net income is expected to increase substantially due to the absence of net tax adjustments of $18.4 million made in 2017 as a result of the U.S. tax reform legislation. Before we open up the call for questions, I wanted to make a comment about our cash position and cash flow expectation. Our cash position at June 30, was $152.4 million compared with $220.1 million at the end of 2017. Our debt balance was $273.1 million down from $290.7 million at year end. As a result of an unplanned acceleration of payments in December of 2016 we experienced higher than normal cash benefits from the restoration of accounts payable levels in the first quarter of last year, excluding the favorable effect these payments had on 2017 and excluding the cash paid for HY Maximal in June we expect our consolidated cash flow before financing activities to decrease significantly in both the second half and 2018 full year compared to 2017, primarily due to anticipated increased working capital, and higher capital expenditures. That concludes our prepared remarks. I will now open up the call for your questions.

[Operator Instructions] And your first question comes from the line of Mike Shlisky from Seaport Global. Your line is open.

So I want to start up with a very broad overview here, I know you mentioned you've got a - when you look at all the three segments combined there should be an improvement in operating profit from last year, but I wanted to get the basically Hyster, do you feel better about the full year this quarter than last quarter or if things ticked down slightly because of some of the pricing in the backlog in the lift trucks?

That's a hard question to answer it's a very subjective point of view. The only comment I'd make is that there is more uncertainty now about the impact of tariffs than perhaps was the case three months ago. It's a very difficult period from that point of view nobody is quite sure what's really going to happen or they're negotiating or is this a permanent environment, there is a –and the challenge of balancing price increases with cost increases including the tariffs is a difficult one. So that's the only comment I would add.

And then perhaps as a follow-up to that question on Maximal, if things don't change from a tariff perspective, is there anything we should be worried about as to how effective you can be with what your original plans were for the Maximal brand going forward?

Maximal is really not affected by the tariff issue, Maximal produces products that are appropriate for utility markets particularly in China, Asia and segments of other markets around the world but there's very little that affects the U.S. So the tariffs really don't come into play.

And then perhaps more broadly on Maximal and actually on the controlling share of it, what are your first impressions now as you've been there and you're allowed to go kind of behind the curtain and see the books, et cetera. If you own it now, do you think differently now than you did that you just kind of looking at it from a distance?

Let me tell you, we've been behind the curtain for 18 months. This is extraordinarily detailed due diligence period. We have learned nothing new since the acquisition. We had complete disclosure on their part. We had the teams of people involved in our due diligence professional, outsiders including accountants, advisors, lawyers and as well as our own teams in product development, supply chain, manufacturing, information technology, sales and marketing. We've been crawling all over this for a very substantial period of time and in fact that whole effort was in some ways complete some time ago and then it came down to hammering out all the details in the very complex set of documents that we have and we'll have to see you know and so those documents are you know now signed and that was really the focus at the most recent months efforts. I would say in addition don't forget that the owners of the Maximal business still own 25%. They have a huge stake in the success of this joint business and there they have interests that are very much aligned with ours. So it's not a situation where the former owners and the managers are gone. They're integral to this entire transaction and very important from our point of view.

Just squeezing one last one I guess it’s for Ken here. The backlog being up 18%, could you tell us what percent is due to currency?

Mike let me get back on that one. I don't have that handy in the backlog analysis, but I would say that you know the backlog is predominantly in the U.S. So I would say only about 30% to 35%.

I wouldn't look at it from the point of view of revenue. I'd look at the units and the unit backlogs are up very substantially and that's really the key way to do that. I think to have a perspective on that I think the currency approach is to give you a flavor for the value of it and the mix has been changing generally in our favor. That is from smaller Class 3 type trucks to larger Class 5 trucks including big trucks and I think that’s the way I would call it out and we say in the earnings release that the world-wide backlog was approximately 41,700 units compared with the 35,300 at during a year ago and 36,100 at March 31. So I think it’s an indication of robust bookings, a moderate perspective in terms of the shipment cycles that we can manage our shipments and any changes in volume in our plans and in an orderly way tied in with our suppliers and have it not be disruptive at all to our manufacturing productivity and I think it gives us a very healthy backlog in units as we look forward.

And maybe coming back to the earlier question about how do we feel about this forecast compared to three months ago, certainly the outlook is more solid because we're booking well into the fourth quarter and you know we've been booking at higher prices for some time now. So as we look at the third quarter and into the fourth quarter we have pretty good visibility as to what we expect the results to be.

And as I said Mike plus have an precise of our units are in the Americas, where our currency is the U.S. dollar. So only 30% really would have that effect.

And your next question comes from the line of Joseph Mondillo from Sidoti & Company. Your line is open.

And my first question, I'm just trying to get a sense or try to understand better, you said you have pretty good visibility into the business over the next couple of quarters. So, I'm just trying to get a sense of the margin at the Americas segment, a couple of years ago we were in the 7% range of the Op margins. And you know just given the headwinds of material inflation in the first half of this year you know we're looking at you know op margins in the 4%, but if you sort of fully make up that with you know the price increases that you're instating and the mix sounds you know the best that it's been in a very long time. Could you help me understand where you think op margins can get at the Americas segment?

We really don't make those kinds of forecasts, but dimensionally I think your understanding of the situation is reasonable. The important thing to understand is that the tariff situation has emerged and over time, and as it has emerged we've taken action to increase prices of trucks that are being booked. But those trucks that are being booked don't get produced for several months and especially with backlogs at levels where they are now. So you're getting a mismatch between the assumptions for our pricing when we book trucks some months ago and the material cost levels that are resulting from the tariffs. So we have to work our way through that And I think as Christy suggested the biggest impact comes in the fourth quarter not in the third quarter when we're still working through some of the bookings that earlier numbers but dealing with the inflationary impact of the tariff increases. So this is why I made my comment earlier that these are very uncertain times. And you’ve read in the newspaper in this morning, the Trump Administration is even thinking about another round of tariffs and instead of 10% tariffs, 25% tariffs if that happens that'll change the outlook very considerably out of with regard to the ability of the price increases to cover the tariff impact on those circumstances. Now on the other hand, if somehow the two countries get together and started negotiating it could be less impact than we think it all depends on the politics of the tariff discussions and what happens. I don't think anyone expected that the U.S. would agree to sit down and try to reach resolution on all these issues. With regard to the EU and U.S. differences of point of view and so they held off on tariffs and they're negotiating. So I wish I could say what was likely to happen with regard to China. I think that from our point of view, would – this is an environment that that we have to deal with it’s not closely related, these tariffs are not closely related to the issues that are most on the table. In China particularly, the protection of intellectual property and the – and other issues that sort of affect steel capacity and things like that that are affecting global markets. But we're dealing with an environment that we have and there is – we can just try to respond to it as effectively as we possibly can. One of the things we wonder is if this goes on for a long enough period time companies are going to have to look very carefully at having add-on charges for tariffs because of the unpredictability of this and its impact in terms of magnitude on the business. So uncertain times.

Mike, as you think about the – I’m sorry, Joe, as you think about Al's comments we have our third quarter and our fourth quarter, our third quarter we're forecasting obviously our seasonal shutdowns that we normally have. But also that lag period that Al described predominantly from the steel and aluminum tariffs is still taking a bite out of us. When we move into the fourth quarter we start to get price thing that helps us out to somewhat balance that. And of course, fourth quarter is a strong volume quarter for us traditionally. So that's kind of how you can put those pieces into play. When you think about the component side, Chinese components that's the piece that has the uncertainty that Al’s describing here, that's harder to calibrate.

You know there is so many factors as you probably noted, the Chinese currency has devalued by a significant amount in the last couple of months that’s something of an offset. Assuming that the prices are negotiated in dollars and so they are in local currency, so there are a number of things. I think the other thing that we’d say is that we are looking at a variety of measures to try to moderate the impact of tariffs on the assumption that they will be with us for a period of time. So we're actively looking at mitigating the impact of those through other means than price increases.

Can I try asking it another way. So I'm obviously trying to focus on the spread between input prices and output prices as well as product, I mean so in terms of…

I don't think we can give you any more visibility than what we've just said. It's – we're not going to get into a detailed forecast. I think we've given you the drivers and that's about where we're going to kind of pause in our comments.

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

I wanted to touch a little bit on Nuvera now. I guess first great looking news on that China deal to get some of your products into some non-lift truck applications on the road. I guess I’m kind of curious if you give us any kind of sense as to what the potential market sizing is over the next couple of years. And I'm also curious, can you tell us kind of why you haven't seen Hyster pursue this much in the U.S. or in Europe, whether – where apparently also needs for potential alternative fuel solutions for on-highway applications.

I think, the answer to your last question first, that the pace at which different new energy sources are adopted, can vary from country to country. In China, there are serious traditional pollution problems and a tremendous need to address that both in terms of the types of power plants that are used. And in terms of the types of sources of energy for mobile vehicles that are used. You couple that with our commitment from China, our desire on China’s part to be a technology leader in the world and to the centralization to drive change, quickly and you have an environment in China, where companies are responding to the expectations of the government and the market opportunity is expanding at a very rapid rate, particularly in vehicles like buses and automobiles and others. I would say that as far as the United States and Europe are concerned that the adoption in buses and other vehicles is simply going at a significantly slower and more measured pace, because you don't have the impact of the government's driving the change as quickly and they – so we expect that the Chinese market is going to change, it’s going to grow very rapidly in these non-forklift truck applications and provide significant opportunity for us in it. I particularly know that type of engine that we expect to use in some of these heavy vehicle markets is very similar to the type of engine that we will be using in our larger forklift trucks and that will be used in the demonstration project in California for equipment and other efforts that we're making in our larger vehicles. So and then I just note that our focus in the forklift truck business is quite different in the sense that it's not comprehensive across all forklift truck applications. It's focused on heavy duty applications where the use of fuel cells can improve productivity and help in those applications, the users of the forklift trucks achieve the lowest cost of ownership. So it's a selective market driven opportunity as opposed to what's emerging and in China which is very much a responsive to government objectives and those kinds of pressures.

And just to kind of broaden that exposure, that question a little bit further, you know there are some other major global engine makers that are also pursuing fuel cell power engines, they are most likely well behind where you are of course. But is there any concern I guess one, whether anyone from China is there any kind of risk to technology transfer if your stuff is on the road there? And then secondly, could some of the larger global engine players will step in take and take a big push if they already have capacity in China to kind of serve that market?

I think the answer to your first question is that in all of our work in China we - with a variety of different customers and potential customers. We are being extremely focused on ensuring that our intellectual property is protected. We believe that we're in a good position to do that and the approaches we're using are appropriate and protective. Secondly and perhaps even more importantly the technology we have is broadly of interest because of some of the features that our particular technology has. And so in addition to the heavier vehicle market we also have extensive efforts going on in other markets including the automobile market that we think may bear fruit for us over time.

I should say I mean this agreement we've signed also as you know it will be our engine and our designed engine but we will be providing the stock which is why really the most significant IP is, so we're protecting the IP by really keeping control of the manufacture of the core component.

And the engine stack will be exempt from the tariffs going into China, once you have your own facility there?

Excuse me, what was your question?

Exempt from tariffs going in - because there are no tariffs.

There are no tariffs. In addition, we would expect particularly in the light of our Maximal acquisition, we have the ability now to have access to facilities that can add and a critical mass of people including our own emerging market development, product development group that in the Hangzhou area that will allow us to control any manufacturing activities that we do in China. And in the end, we will have manufacturing in China to be the best possible supplier to customers in that market. But we'll do it off the back of our lift truck operations which are now significantly enhanced by Maximal.

And just kind of one last one for me on Nuvera. I’m sorry I had to add that as it's kind of important. There was a big accident in the quarter at a major multinational, someone who was offering a fuel cell power lift truck, not one of yours, of course. But in the end that was somewhat – there was a fatal accident and I was kind of wondering if you've got any sense if the attitude’s changed from some of the big multinationals over the last month or two toward the purchase of the fuel cell, power lift truck just over some safety reasons and stuff like that.

I’ll ask Colin to comment on that, but with the introductory comment that we are very knowledgeable about or at least we are highly aware of the accident and it has our expectation is it has some characteristics which will not raise concerns in the minds of the customers that we’ve been working most closely with. Colin?

As Al said, I mean we have awareness of the conditions we don't want to comment on them because obviously the investigation is still ongoing, but our analysis is that the conditions that caused the accident are not prevalent in our trucks. So we have different design characteristics. As far as the reaction in the marketplace is concerned, we did lose a few prospects that we were working on, but the bulk of the prospect bank is still active and alive and discussions are ongoing.

And there are no further questions at this time. I will turn the call back over to our presenters for some closing remarks.

Thank you, everybody. Do you have any closing comments?

No closing comments, no.

All right. Thank you very much for joining us today.

And to listen to a playback of today's conference, you may call 800-585-8367 and enter your conference ID number 4672709. It will be available until August 8, 2018 at 11:59 PM Eastern Time. This concludes today's conference call. You may now disconnect.