Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyster-Yale Materials Handling Q3 2018 Conference Call. [Operator Instructions] Thank you. Ms. Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2018 third 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 third 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 For anyone who is not able to listen to today’s entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q. Also certain amounts discussed during 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 third quarter results and activities. I will discuss the highlights first and then get into the details. In the third quarter the global lift truck market remains strong and in this strong market we had a solid increase in our third quarter lift truck shipments and our ending backlog increased 20.5%…

[Operator Instructions] Your first question comes from Joseph Mondillo of Sidoti & Company. Your line is open.

Hi everyone. Good morning.

Good morning Joe.

I wanted to ask about sort of the two I think most significant headwinds that you're sort of facing and being challenging which is the tariffs dealing with the higher costs and price and then also the supply chain constraints which seem to be a little more of a headwind than previous in the year. You can comment on that if you want but I'm just sort of curious on both of them sort of how do you see them playing out, as we go through the first half of 2019? Does it sort of start to subside or just walk through sort of both of those and I'm sure they're both different but how they're – how you sort of see them playing out on the tariff side we think you're catching up at some point in time with price but supply chain seems like it's sort of a new type of thing. If you can comment on both of those that would be helpful.

I mean on the price side Joe, this is Colin Wilson, we are basically recovering in the prices that we are selling at now the material inflation that we've seen, significant material inflation that we've seen in 2018 but clearly what we're putting in the backlog is not going to get shipped until 2019. We get a lot better in the fourth quarter and we progressively get better as we move through 2019 but specifically in the Americas where we've had the biggest amount of, the largest amount of inflation where we're recovering general material inflation as well as the impact of 232 and 301 at tariffs, so the situation will ease as we go into 2000, it will ease in the fourth quarter and will ease more significantly in 2019 unless we see another round of bad tariffs. As far as the supply shortages are concerned they are been growing for some time, they particularly affect our plant in Nijmegen on the big truck side and the [indiscernible] growing I would say for about a year but we've been able to get by but we've sought to reach at tipping point and undertake some units out of our schedules in order to catch up on customer commitments. So lead times are sort of in the 22 to 30 week range right now. We have diverted some resources into our supply chain group to work with the suppliers, our key suppliers that were missing parts as well as to do some expediting. We do see that situation we are projecting it will ease as we go through the first half, I think we'll still see some challenges in the first quarter and then we're projecting that those pressures will abate as we move into the second quarter of 2019 but and it's not that they're not providing us with the volumes that they committed originally. It's just that inability to ramp up their volumes to meet our ramp up and schedules.

Yes, I would just like to emphasize that point because it's not that we are constrained at the volume levels that we've had as Colin indicated we kind of worked our way through that and was the normal expediting processes as we were able to get the components. The problem is that volumes are going up in many markets around the world in many different industries, and in the heavy industry area we have common suppliers with other people and we're competing for their machine time and so it's made the ramp up to respond more difficult. I suppose if there's any attractive element to it or compensating element to it is that we don't really see this affecting our ability to book trucks in any significant degree. At least we haven't seen that at this point, so it means that the backlog will be increasing and the lead times extending out and at such time as the market does weaken it means we have a more protective backlog to continue with our levels of production. So to some degree it would be our expectation this is a timing matter rather than a fundamental matter for us. On the other hand it is even at current levels that we have now causing disruption in the plants as Colin indicated. That leads to some manufacturing variances due to productivity difficulties.

All right. So to follow up on that the orders in dollars that you put in the press release the year-over-year growth rates seem to have slowed compared to the last couple of quarters in terms of the rates that you see –

I don't think you can compare quarters to quarters. The third quarter to – I think what you really need to do is to compare the third quarter this year to the third quarter last year. The third quarter particularly in Europe is slow quarter. People have vacations. The activity levels just aren't there. So I don't think it's realistic to compare the third quarter to the second quarter. I think it's realistic to compare the third quarter this year to the third quarter of last year.

Yes. Actually what I meant was the year-over-year growth compared to last year you saw 8% growth this year or this quarter that growth has sequentially slowed compared to the last few quarters. So I am comparing a year-over-year I understand the seasonality.

I'd be a little careful though, we have enough bookings of very large orders that it can distort those numbers and I guess my point of view would be that 8% growth is very, very healthy. So in the second quarter I don't remember specifically but we had some large orders from big customers in there and it kind of distorts the numbers a little bit. We're more inclined to look at it in terms of kind of a run rate over the course of the year.

Okay. Could you talk maybe in general just in terms of the overall markets then? It seems like you sort of pointed out that you anticipate the global lift truck market as a whole to sort of be comparable to 2018 after 2018 was up over 2017. So it seems like regardless you're still suggesting that the market is potentially will slow even though you're anticipating growth still in 2019. Could you just talk about sort of just the overall market and what you're seeing?

Well, I guess I'd say it's my fervent hope that the markets will not grow more rapidly than we expect because the last thing we want and in our kind of industry is to have overheating as you point out properly the growth rates have exceeded our expectations and we worry that the levels are more frothy than we would like. So stabilizing at these levels we would consider a pretty positive development in that sense because we think that that gives a greater chance of extending the duration of the upturn than if they continued to grow rapidly. The other side of your question is when Colin can comment more on this but we certainly expect over the course of 2019 and 2020 to have an increasing impact from the significant investments we are making in the combination of sales act, sales manpower additions and product development activity increases in the form of increased market share coming from some combination of new products and greater ability to meet the needs of our customers, the industry by industry and customer by customer, as we deploy the field capabilities in combination with the new products, it's kind of the way I'd summarize it. Colin, you want to add anything to that?

Just I mean the third quarter global markets were up. What we started to do Joe is really look at the market in two ways. The total market in it and then the market class 3 because of the significant growth in the very low value Chinese class 3 products that have really been growing at a rate higher than the total market but if you look at the total market in the third quarter was up about 9% and if you exclude Class 3 it was about 4%. The Americas is broadly flat in a third quarter. I mean we do see the markets continuing to grow but at a slower rate as we go out of 2018 into 2019. Just for reference the growth, that 4% growth excluding Class 3 in the third quarter form crossover the 12% growth that we saw through the first half of the year. So all regions -- nearly all regions are growing as a few spotty patches around the world just like the Middle East but overall we just see a continued healthy market environment.

Okay. Also I had a couple of questions just on your EMEA segment. First two things, are you seeing any sort of you just commented that you're anticipating a little bit of a slowing but that's also I think partially due to just tougher comps but in terms of Europe specifically, more specifically are you seeing any slowing because of economic slowdown we are starting to hear some pockets of potential slowing within the European economy. I'm wondering if you're seeing any of that and then also could you give us an idea of what the segment profits would look like on a year-over-year perspective ex currency because I know currency is baked into there and I know it can move that quite a bit and I know currency probably did play a role this quarter compared to the last couple of quarters.

The markets again in Europe for lift trucks continue to be strong. I mean we saw an overall 13% growth in the third quarter if you exclude the Class 3 about a 6% growth so that again did has slowed compared to what we saw in the first half of the year. Certain markets are doing better than others. Russia is still struggling a little bit. Turkey is certainly weak at this moment in time but we've seen growth in most of the Western European markets including surprisingly the UK with all of the uncertainty that's going on. So I think our prognosis on Europe would be going into 2018 and 2019 would be slowing growth. Ken, do want to answer the second part?

Yes, it was up. Currency I think Joe we were pretty clear that in our results for the third quarter currency was favorable to us and of course that's kind of a snapshot of the trends what we said today. So I would expect that for the European division currency would continue to be favorable at the currency rates we're seeing at the end of the third quarter coming into the fourth. So just based upon year-over-year comparisons that would be helpful to us at the out profit line. I think that was your question on currency with regarding Europeans.

Yes. Is there any way you can sort of maybe address the magnitude of that benefit at all, just I am trying to get an idea of what the core business looks like ex sort of currency headwind…

Yes. We didn't call out a number specific either in the earnings release or in the queue from that perspective you can use a materiality threshold and consider what you might think that might be below our materiality disclosure threshold because we haven't disclosed it.

Okay. All right. I have a few more questions but I'll let someone if anyone else has a chance.

Please go ahead Mr. Mondillo.

Okay. So I wanted to also ask about the JAPIC segment. I'm just curious on how the investments and how everything's going with Maximal is going and then in terms of magnitude thinking about in the next couple of quarters I think you may have mentioned that that's going to sort of be a dilution to operating income by $5 million to $10 million for the first year, I'm just sort of wondering how that sort of plays out in these first couple of quarters? Is it more heavier spend in the first couple of quarters and then that starts to wind down or just if you can address all that that'd be helpful.

I think you said it I mean I think we're going to see heavier expenditures early on. We are pleased with the acquisition of Maximal. We rolled it since June. There are a lot of things we're doing there to improve even though I think by Chinese standards it was already certainly better than most of the Chinese companies we’ve seen. We’re pleased with what we’ve bought and investing to improve some of the manufacturing processes, improve the business systems. We've got some integration work that we've got to get done. So I think we'll see fairly heavy or heavier expenditures as we go through the first half of the year and then those should start to -- start to ease off as we get into the second half.

Yes Joe, I think if you look at obviously JAPIC results were pushed unfavorable by the adjustments we were required to book under purchase accounting and the amortization of purchase accounting adjustments for depreciation and amortization but once you strip all that out Maximal as we disclosed in the earnings release was $1.1 million operating profit favorable. So we are excited to see that they're coming into the fold or continue to be operating at a profitable level. We did talk about mixed shift that there's less domestic sales and more export sales as we go forward which is expected.

Let me add one thing to that for the purpose of clarity and have Ken confirm this, we referred at the beginning of the press release to post acquisition expenses. I think we want to be very clear that what we're talking about are expenses that are triggered by the acquisitions that will be expended in future times. These are not expenses that we have been incurring after the fact that are simply the part of our integration activities. These are really part of the purchase price structure one way or another. So they're part of the impact of the agreement itself and so when we say post acquisition expenses it could be interpreted as the expenses of integration but that's not what is in there. This is accounting treatment for the way the acquisition was structured, correct Ken?

That is correct in this quarter and then as we go forward I will have those integration programs – Joe you'll remember our Investor Day presentation we had a chart that showed how Maximal's contribution would be diluted and I think you're quoting some of the numbers from that slide and of course we are going to go through that dip as we put those integration programs in place and then of course the increased volumes on the broader production throughout our network from Maximal will add more profitability to the business but we need to incur the expenses to get the right systems and manufacturing production lines in that facility to be able to reach the acquisition plan that we had for that transaction.

Right. Okay and now that you're sort of in the thick of things is that sort of $5 million to $10 million dilution for the first year? Is that sort of still seem on track?

Yes, we haven't provided an update to that number so you should assume that.

Okay. I also had a couple questions on Nuvera. I just wanted to clarify in terms of your comments you made them in the press release and then in the prepared commentary related to this sort of the breakeven, sort of goal or target, I understand that that's sort of you're sort of maybe taking that off the table or that could be potentially changed in the future as you go through potential opportunities in China. Do I interpret that as potentially because of additional costs investments that you may have to make to go after this opportunity that potentially that breakeven target maybe have to be pushed out a little bit but in the end that's hopefully a positive because those investments will be going towards a pretty big market in China. Is that sort of the way to sort of interpret that?

Yes.

Okay. And would you just maybe provide a little more color on, so you've talked about how revenue you anticipate sort of ramped up through 2018 or in the back half of 2018 we haven't seen a whole lot, just you've reiterated that you do anticipate a ramp up in the fourth quarter and throughout 2019. Is there any way you can talk about sort of magnitude or I mean are we talking double or triple we've seen on the quarterly run rate over the last few quarters and we haven't seen a whole lot yet and then in terms of –

You are talking about Nuvera right?

It's all Nuvera, yes.

Okay. Yes I think in Nuvera essentially we have had in our history two products we sold power taps and battery box replacements. The comparison that we showed, we described was really we had some power tap sales that were incremental to last year's third quarter that did not reoccur in this year's third quarter. But that business is not a focus of our direction forward. Our focus really is this fuel cell engine and fuel cell stack development business and that's where we're going to see revenue being generated in the future. We also called out the status of battery box replacements and today we are deferring the revenue on battery box replacements as we described until we're able to get a calibration of the product in the market to be able to estimate all the cost of sales and we continue to review that Joe.

And Joe in the 10-Q we have disclosed the revenue that has been deferred. It's at $6 million right now.

Okay. And in terms of the timing of the Billerica facility closing or the movement of the production when is that sort of mid-year kind of a thing and when that happens does that dramatically or does that shift profitability at all dramatically if and when that happens?

Just to be clear. Billerica is not closing. We're taking the production of BBRs out of Billerica and moving them to Greenville. That timing was meant to originally intended to coincide with the launch of a sort of a new generation of products but we are looking right now at accelerating the movement by moving existing BBRs in the Greenville and we're just working out the timing of that now but it will be in 2019. It's just whether we can get it started before the, in the first half or whether it'll be a second half event but it will and when we talk about – and that’s a very small part of the population that we have at the campus at Billerica, it's a lot of the manual labor, assembling the BBRs a couple of supply chain people but those activities will move to Greenville in 2019 but we will be actually increasing other headcount in Billerica associated with some of these other programs that we've just been talking about.

Yes, the fuel cell stacks and engines that we assemble there as part of the first operation to be able to then build BBRs that'll stay in Billerica of course we are noting that we have quite a bit of demand for those product lines which will provide the anchor for the Billerica activities.

Okay. Understood. And then lastly I wanted to ask if there is anything additionally that you can provide regarding this Chinese agreement with the Chinese customer? How does this ramp up the magnitude of size of an agreement, how profitable this could be? How you see that playing out?

I think we are going to be taking this step by step. And as it is appropriate and prudent we will give more information. I think at this point as Christi’s overview remarks indicated we had a proof of concept program that went well. It reinforced our continuing belief that our technology is highly competitive in the industry and kind of sets the standard and it seems to be being viewed that way in China as well in the U.S. So we have a very positive view. On the other hand we will monitor it step by step and we don't want to get out ahead of where we are. So there are various triggers in all these agreements and we need to continue to perform which we have aggregated expectations that we will do. They need to continue to perform which we have every expectations that they will do and if all that comes to pass it could be very beneficial situation. One thing I would like to add just an overview is that we tend to look at our company in general far more than three to five year point of view than we do from this year or this year and next year perspective. Our programs are setup to be multi-year programs with the long term impact that we are prepared to invest up front. And we really look for the benefits whether they are Nuvera, Bolzoni or the forklift truck business as being a very significant as we look out period of time. So what we try to do is to keep our programs on pace. We still have the same outcome expectations that we have had. It takes a period of time for them to ramp up. We have new product introductions of very great…

All right. Appreciate the color there. Just two more quick questions if you don't mind. I am just wondering the Bolzoni business it seems like you sort of called out the opportunities and maybe the progress that you are making with North America a little bit more in this press release, in the commentary than you have in the past because you just talk about the progress that you are making there in terms of tacking the North America markets and then last question would be the $2.5 million unfavorable mark-to-market adjustments in the Americas segment. Could you just describe what exactly --

Let me comment on Bolzoni, one for a minute and Colin can chime in as well. I think we do have considerable confidence with regard to the Americas and you are right it probably is increased but it is probably less because of the nature of the opportunity which we have always felt was there. And more reflective of the fact that we have a clear and high probability setup plans now for how to accomplish that than we did even a year ago. And so I think that's what gives us the confidence that programs are going to begin to mature in a way that they haven't in the past and it is – it's really a matter of getting that business in the U.S. to the same kind of scale and delivery and availability position that we have in Europe, scale and the sense of being able to produce effectively in a quality way and a timely way, with a [indiscernible] cost structure. So we’ve got a lot more clarity about that. Part of it is related to the overall set of capabilities that we have in our forklift truck business. It can be brought to bare on helping the Bolzoni team in the U.S. to become as professionalized in their business in the U.S. as the forklift truck business that Hyster-Yale will sell. So you are probably, I think you are right that we see enhanced performance and I would just say that if you look at the results in the third quarter, the sales volume increased only moderately. We have got pretty good gross profit on those enhanced sales part. But we expect more growth as we look out into future quarters. We did increase our SG&A in the third quarter and that reflects some additions of people to strengthen our ability to meet our customers' needs, increasingly in a way that's similar to what we are doing in the forklift truck business which is industry-by-industry specialization and as you can imagine attachments are used differently in different industries and different attachments are used in different industries. And they address different kinds of problems and pin points in those industry. So we are kind of enhancing our specialization and focus on working with customers to bring those benefits to them and there was some investment in that in the third quarter. Colin do you want to add anything to it?

No, you have said it very well, I mean we've more aggressive plans and we're resourcing accordingly. Ken do you want to talk about the mark-to-market?

Yes. On the mark-to-market Joe, we have an ownership interest in a strategic partner that is publicly traded. Since we own less than 50% we don't consolidate, the fact we don't substantially less than that but since their shares are publicly traded we have to mark-to-market the value of that investment in that strategic partner based upon the closing market price of the shares and the math is just simply the number of shares times the market price at the end of the period compared to what we had carried on the books of the prior quarter.

And let me just add to that that I believe these are different accounting treatment than might have been the case several years ago.

Yes.

This mark-to-market you should understand in our view doesn't reflect anything fundamental. We think that the investment is worth far more than when we made the investment in the first place but it's thinly traded, enthusiasm waxes and wanes and thinly traded technology company and the accounting treatment is now sort of an argue somewhat draconian but it is what it is and I don't think that it's not a cash expense. It's strictly a book entry and you shouldn't count it much more on the downside then when the price goes up which we think it will in due course and you shouldn't think a whole lot about it then either. So it just the way the accountant works.

This is related to the Maximal asset or?

No. This is a different --

This is a business which is in the automation business and it is a part of our strategy for enhancing our capabilities in the automation business insofar as it affects lift trucks the kinds of things that we do to have less manpower or no manpower associated with moving goods in a warehouse or with some sorts of picking and it's very much related to that whole effort. You may remember from our presentations that if you look at the cost of ownership, the lift truck driver is the single biggest cost of ownership. So this is a program that's very topical now in industry and we think we can be a leader.

Okay. It sounds, I understand now.

It's not a huge number by the way in terms of the investment that we're talking about.

It's going up, and it's going down. This quarter went down.

Right. Okay. Makes sense. Thanks a lot.

Joe, I think when you take that into account and those one-time numbers for Maximal you get a little different view at a quarter perhaps than the bottom line numbers reflect.

Yes definitely. Thank you.

Joe, the follow up on your FX question there is information in the MD&A section of our current 10-Q that gives you the impact of foreign currency on EMEA.

Okay. Appreciate that.

[Operator Instructions] There are no further questions. I will now return the call to our presenters.

Okay. Thank you very much. Does anybody have any closing comments?

No my real closing comments I made earlier which have to deal with taking, really trying to focus in on three to five years look at the business as the investor timeframe. If I were an investor which I am, that's a time frame that I tend to look at in terms of thinking about whether it's a good investment or not.

Okay. Thank you for joining us today. We do appreciate your interest and if there are any additional questions you are welcome to call me after we're done. Thanks and have a great day.

To listen to a replay of this conference dial 1800-585-8367 or 1800-859-2056. This concludes today's conference call. You may now disconnect.