Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Hyster-Yale's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Thank you.Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone and welcome to our 2019 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 2019 second quarter results and filed our 10-Q. Copies of the earnings release in 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 For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 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. On a consolidated basis, our revenues increased almost 12% to $856.2 million, up from $765.9 million in last year's second quarter. Each of our three businesses contributed to this increase with our core lift truck…

[Operator Instructions]. Your first question comes from the line of Joe Mondillo from Sidoti & Company.

I wanted to ask first about sort of the price cost situation and I understand since the second half of last year when you started implementing price increases that starting to improve, but specifically, I wanted to ask what's steel prices coming down so much? And I'm just curious, when we sort of hit an inflection of sort of back to normal and then at that point going forward, do we actually see sort of a tailwind and a benefit with actually steel prices being down compared to where they were a year ago?

This is Colin. I mean, yes, I mean, we are seeing steel prices falling, so that's a little bit of a headwind, sorry a tailwind on our results in 2019. As far as pricing goes, I think we've done a very good job of improving pricing, particularly in our National Account channel. We have pushed out the time when, [indiscernible] low priced deals will lead out of the system, that's not because we've done more because of the length and lead time that there were the supplier issues. So we're just not able to ship them quite as quick as we were expecting, but we still expect all of those to be behind us by the fourth quarter, but -- time to come out of the fourth quarter. So I think the prospect going into 2020 is if the current supply situation holds with steel, that it will be a tailwind pushing us and again, I think we're through the low single-digit large deals that we did at very low pricing and that should be a positive for us as we look at 2020.

Yes, I just would add that we saw some moderate -- a very moderate amount of tariffs improvement on a run rate, but the headwind that we do have in cost is freight and that somewhat offsets the benefit that we've received for material cost deflation.

Some of that was one time, as there was a shift in our 3PL carrier and some of it is just higher rates to do with the regulations surrounding on the vehicles, which caused the shortage of trucks and spike in prices. We are not sure how long that will continue, but certainly, that is a headwind as we look at 2019.

Okay. So with price cost going to continue to be a tailwind through this year or become a maybe a bigger tailwind and I know the supply chain constraints sort of continue like you mentioned, but hopefully those continue to improve through this year. Addressing your comment on the margins, you stated in your prepared remarks that margins are going to return to pre-2018 levels. Are you referring to the fact that you think 2019 margins will return to say 2017 margins or that will finish the year sort of entering 2020 on a run rate at those levels?

I think the comments were sort of look-forward comment. We've got a declining trend. I mean it's not huge, but we do have a declining trend in cost, particularly in the US and we are seeing our margins improve. I think if you want to sort of the time when we get back to normal run rate fully, I would say it will be in 2020.

Okay. And then I wanted to ask about sort of related to the backlog, but more specifically what you're seeing in Class 4 and 5 order trends. I understand the backlog sort of the value per unit declining, but that doesn't necessarily tell the full picture, you could be seeing very strong demand on the low end. So I'm specifically curious to see what you've been sort of seeing in your Class 4 or 5 order trends over the last several months?

As I said fairly healthy. I mean there has been a pullback. You are talking about the North American market. North American market was down just into sort of double digits overall in the first half of the year, but we think that was a little bit of a reaction to what happened last year. As far as our Class 4 and 5 demand is concerned, it's holding up well. We have slightly longer lead times than we would like on some of our trucks. Some of that to do with the supplier issues, but particularly on the electrics and some of our Class 4 trucks and lead times have sort of back to normal on the bulk of our Class 5 range. So we don't see ourselves being in sort of any type of sort of deep market pull back. We see the period that we're in right now is a period of adjustment after what happened probably a little bit of overheating in terms of lift per demand in 2018, but we look at the ongoing next 6 months or so of being sort of, I wouldn't say returning to normal, but certainly better than it was in the first half of the year.

I think the other thing I'd add is that as you see from the investor perspective, over the next 2 or 3 years, we've got a lot of programs that are coming together in ways that significantly affect the counter balance business both ICE and electric. And so regardless of what the sort of within limits -- what the market situation is, we expect to continue to get -- have a very healthy backlog and a high level of sales. So that's an important perspective to have as you look out a bit on the volumes that we expect to book.

So just a sort of follow up. Looking at the backlog value per unit sort of declining, that's really just a case in point, where you're seeing stronger -- pretty strong or stronger demand on the lower class or the smaller, lower margin type products. And Class 4 and 5, you're still seeing -- it's still holding up, are you still seeing sort of modest low single-digit type of growth? Is that really sort of the story behind that backlog value per unit?

You've got a couple of extremes. I mean, on one hand, we were shipping more big trucks because the supply situation in Nijmegen has basically been resolved, and we're back to normal in Nijmegen. So we've been shipping more big trucks out of backlog than we had in prior quarters, but the order intake on the big trucks is still pretty healthy. So that's sort of normalized. And then you've got a -- we did a lot of...

[Technical Difficulty] backlog situation Nijmegen was really terrible, because of the supplier constraints. We had a lot of difficulties with customers that -- very properly expected trucks to be delivered at earlier times and we were able to do it. But we've now as Colin said gotten through that. So but I don't consider that really has much to do with -- with the flow of our bookings. We probably were reaching a point where people were irritated with our -- the length of our backlog and our promise dates, but hopefully we're through that period now and we cannot lose any orders because of lead times at this point.

Then the other thing is we run some initiatives and programs and so we actually booked a lot more. The lower value plus 3 product in the second quarter. So part of the mix shift is the number of big trucks that have come out of backlog and then the number of little trucks that have gone into backlog, but if you look at the middle, I would say that's been sort of steady flow of business and no significant change.

I wanted to sort of switch to sort of the cost structure and specifically related to the investments that you've been making over the last couple of years and it seems like your -- finally maybe by the early 2020 getting to a point where you feel pretty good, where those projects are and you're not going to need to invest incremental much more beyond that point. I'm just wondering, while you have all these projects going on and even with Maximal and what you're doing over there -- your facility over there, but with all these things going on, are there any sort of costs or maybe even more so maybe inefficiencies with the operations or anything whereas once we get through to the end of these projects that we actually see margins benefit going forward, not because of the top line, which obviously you're hoping that ends up being the case, but more so just because the cost that you're actually spending that may go away or inefficiencies related to everything that you're doing. Is there anything associated with that or not really?

I think the way, I'd be inclined to characterize that is that, we've got different types of programs. Certain of them are what I would call sales and marketing driven programs, particularly our focus on serving the needs of customers in specific industries with very tailored solutions for them and our efforts to assist our dealers with a direct -- a greatly expanded direct sales force, so that they are more successful with some of the larger customers than they were able to be before. But those are designed to just increase our volume over time and help us have a better market share position with those larger customers that are below our big national accounts in size.Then on the other hand, there are new products. Some of them are near -- very near term, particularly in the warehouse business that we expect to have a significant impact on our position in those. We've mentioned, I think both the end rider and also on the Reach Truck that are coming and to the marketplace. And then we have some major product introductions in our counterbalanced business that are coming, beginning in the middle part of 2020, and those 2 programs carry with them a significant cost reduction as well as a repositioning of the product line. So in total they should put us in a position as you move into 2021 and 2022 of having not only an improved market position, but also on improved margin position. So that comes a little later in the period, not immediately, but it certainly is going to be a factor as we look out a little bit further in this transformational period that we've been talking about in our investor perspective.

And I guess I'll switch to Nuvera. Just wondering if you could provide any more color regarding this, I guess in your press release you call that a customer-driven product validation, essentially the reason why the sort of your expectation of the breakeven point. Could you just provide exactly, if you have any more color regarding what that exactly means?

Well, apparently what happened was that one of the other competitors in the marketplace installed a significant number of fuel cells in buses in China, which is the most immediate large market opportunity there, and where we're positioned to do, we think quite well. And those competitors fuel cells failed and so the entire industry has apparently recalibrated its requirement in the context of government concern about that for proving out the durability and reliability of those fuel cells. And from our point of view, it's very frustrating that it's generating a delay, on the other hand, in many ways plays to our strengths, because we think we have a better more reliable fuel cell solution and our total engine package is more reliable. So it's kind of a combination of pluses and minuses, but certainly it's something that we just have to deal with, it's not anything that's within our control at this point, but it is specifically event-driven as we understand it.

Any idea at this point whether they're going to do a full 180 or do you think it's just a…

It's just they've got a very specific program and it's for the buses to go a bit with a set of test units, the test number of buses to go to 20,000 kilometers. I think it is, and demonstrate reliability. So instead of shipping during that period, we are going to be demonstrating the reliability with a smaller number. We're working with our customer to try to be in a position, where upon the completion of those tests, we can move forward as fast as possible, and that's still under discussion. Colin, do you want to add anything to that?

I mean, we have commitments on the volume, after we go through the product validation. So we know the volume is there and the volumes we're talking about really initial volumes that we have built into the forecast, but we expect real demand to be significantly higher.

And that's an important point. We have built our forecasts around this narrower debt of volume requirements to be cautious and to make sure that they're proven in the field and there aren't issues that have to be dealt with. Having said that, we are already finding that there is additional demand, it's being lined up behind those that are factored into our forward forecasts and that's very important, because we're looking to build this business in a significant way over very extended period of time. And so far we see the evidence of that happening.Let me remind you in addition that they're sort of three prongs to our fuel cell activity. One is in the fork lift truck business, which at the moment has been mainly through battery box replacement systems and we're developing new battery box replacement envelopes for, as Christie outlined for our Hyster-Yale Group with applications that we believe in particularly in America, but also in Europe and possibly in Asia. So that's the fork lift truck business at the lower levels. And there is a heavy-duty engine, which will go in both buses and in our large fork lift trucks. And we are testing those engines in our fork lift trucks particularly in California under some specific programs, and we have the bus business, they use basically the same engine and so there is this sort of heavy duty vehicle business. And then further down the track is the automotive side of the business and probably somewhere in between there is also an expansion of those heavier duty models into the delivery van business as well as the bus business.So we tend to think about it in 3 segments with applications really up and running in the fork lift truck side, but the need for market maturity with applications coming in and with contractual commitments behind it for these heavier duty fuel cells and fuel cell engines, and then finally, further down the track the contractual arrangements we have to develop applications in the automotive side of the market in China. So it's a sequence of different fuel cell engine capabilities and fuel cells for those engines that we're working on at this point.

However, we are also working on opportunities outside China. So it's not all China.

I'll ask one more question and see if anyone else wants a shot at it. But I just wanted to follow up on the battery box replacements. I know that second generation -- you guys have talked for a little while now, but you're fairly excited with that because it being better than the first generation. I'm just wondering since hearing about that maybe a year ago, if there is any update with that product development? I think you mentioned that it's supposed to be introduced in the first quarter of 2020. Any other color that you can provide in terms of how this is going to drive more demand or I guess maybe it's more of a better product on the cost side of things, but any other sort of color you can provide regarding that?

Let me kind of make a couple of comments first and maybe Colin would like to add. In the battery box replacement side of it, you really have to think about 2 elements. One is battery box replacement, which uses the second piece which is the fuel cell engines. Nuvera is supplying the fuel cell engine to Hyster-Yale Group, which is building the battery box replacement. The battery box replacements using the current generation of fuel cell engines are the ones that we were specifically referring to, that are coming out over the next few months and into 2020. Then we have a revise fuel cell engine, which has more efficiency and capability, and better energy density and that comes on a little bit later in 2020. So there really are two answers to your questions. Do you want to add anything Colin?

No, just other than, we will be producing the first of the next generation of BBRs starting in the first quarter. We are up and running with BBI manufacturer in Greenville now, that started in July. [indiscernible] the previous generation for which we have customer orders and then the additional BBRs will be brought on stream over the next couple of years. But the one that we're starting to build is our highest volume for current customers. The one that the new next-generation BBR that will start in the first quarter of next year.

[Operator Instructions].

I don't think if there are no more questions, I'd just close by saying that we encourage you to read the investor perspective in some detail. We think it lays out this 3 plus year time horizon that we think is critical for our business and it focuses on the -- what we've called set of transformational programs for our business. Generally, we feel our programs, that we've been outlining in this investor perspective for a couple of quarters now is on track. We've had no major deviations from -- in terms of timing and sequencing.You've heard about the slippage in the timing of Nuvera. We are working to adjust and bring our new line of counterbalanced -- smaller counterbalance trucks online in the most efficient way possible. And so there are minor adjustments in the timing of some of the models that are being brought to market after the mid part of -- beginning in the mid part of 2020. But generally speaking, we feel that the programs are going pretty much as we had anticipated and we will make any adjustments that are appropriate in the investor perspective in future quarters that seem appropriate and so our hope is that there will be a good guide to the prospects of the Company over the next few years.That's all I have at this point. Anybody have anything else Ken, Collin, Christie?

Your next question comes from Joe Mondillo.

I wasn't sure, if I was going to get that in. I just had a couple of other questions if you don't mind. I wanted to specifically ask, I guess on Bolzoni. When you say that their performance this year is going to be down year-over-year, if you exclude the restructuring, would do you think it will still be down year-over-year?

I mean bulk of Bolzoni's business is in Europe still, and the European market has softened particularly in the second quarter. And again when Bolzoni looks at this market, it looks to counterbalance market. Now we're not expecting the downturn to be long and protracted deep, but certainly it's come up the levels that was at last year. And so Bolzoni is picking up market share as best as they can measure it, but you look at the performance in [indiscernible] then that has seen a headwind. In the US, we're very bullish. Once we get out of 2019, I mean, the transfer of business from Homewood and the Sulligent is broadly complete. And we are producing attachments in Sulligent.We are increasing our investment in the US market and so we expect to be increasing business through 2019 into 2020 and then we have initiatives with Bolzoni in Asia and South America . We've got an increasing level of demand for the standard type of testament coming out of China, that's been used in global markets. But again, the big driver to the short-term results is the softening in the European economies. The other factor is, if you look their results in euro terms, they were up in the quarter and up in first 6 months. But of course, the strength of the dollar means, the dollar translation on their results, it means the results don't look as good as they actually are and their functional currency of euros.

If you exclude the restructuring costs, you end up in a positive territory and that's a fairly good euro-centric Company. So that really is more representative of their results.

But I don't want to leave of pessimistic view about their revenues in the remaining portion of the year. I think we don't see that they're going to be slipping off the kinds of levels that we saw last year that can be -- we would expect them to be a little bit better. The main impacts here are these special costs that are being incurred in the U.S. and they've had some currency headwinds and those are at currency levels -- currency rate levels. The headwinds are expected to continue.So I'd say it has a lot more to do with the currency than it does with the volume and that there is some softening, but then will bring the backlog back in and we've got a good healthy run rate. So we're not going to spike up in the business, but it's still going to be pretty healthy and the biggest issues are the currency headwind in the short term, but we expect to overcome that as we look forward. I mean bottom line is we're very pleased with the underlying drivers in the Bolzoni business.

So the additional one-time or additional restructuring costs that are going to hit in the second half of the year, if the transition from Homewood to Sulligent is pretty much complete, are all those costs related to in the month of July or what is -- what are those associated with?

Well, when I said it is substantially complete, I'm talking about the transfer. I mean, we've still got the facility that we need to deal with in the Homewood area and some of the transition cost of people and what [indiscernible] so those are the additional costs that we're talking about.

And we've got quite a bit going on in Sulligent facility that relates to a change in the activities that are being performed there toward obviously the Bolzoni components on the one hand, but equally away from certain of the fork lift truck components that they had been doing. That means there is a readjustment of the workforce involved in those activities, but part of our strategy was that the machine tools and that plan can do what is necessary to create the components in Sulligent. At the same time, we're getting the cost reduction on some of the components for the Hyster-Yale Group. So all of that is going on at the current time and will begin to moderate as we work through the rest of this year and next year. In terms of prospective extra costs that are being associated with...

And Joe with regard to just specifically the restructuring number because that would be, from an accounting perspective disclose this restructuring, we do have costs related to going from 2 facilities to one in the Illinois area, but the bigger set of cost is conforming their IT systems to work with Sulligent IT system and that's part of the restructuring activity as well.

I wanted to also ask about the sales and marketing program regarding positioning, I guess, your sales and marketing related to industry groups. This has been an area that you've been focusing on for a little bit, but on the press release you stated that US and Europe, they're all in place at this point and this is -- I think you've called out -- this is an area where you're trying to target 40% of the lift truck market, but you've sort of underperformed I guess in terms of market share. So it seems like a pretty big opportunity. Now that the sales and marketing teams are in place, what do you think about -- I guess the market share gains, now that they're all in place? How does that transpire over the next year or 2? Any color regarding?

Yes, it's an important point, because on the one hand we feel the capabilities are in place, that's step one. But then you win business account, by account, by account, and it doesn't happen overnight. You have to take your ideas on how to improve the productivity and the cost position of our customer base of these types of customers. And you have to persuade people that we have a better solution than our competitors' solution. And there are many accounts that where our competitors have been embedded in those accounts for many, many years, but we have a disciplined program. We've identified the accounts. We have a disciplined program of calling on those accounts and over time, we expect the impact of those efforts to gain momentum, a quarter-by-quarter, year-by-year and -- but it isn't going to happen overnight.The most important comment I'd make is that as recently as this last week in some of our operating updates, it was pretty clear that our people on the ground, who we're carrying out these programs feel that there are no roadblocks to their eventual ability to get a fair share of that business. So we have a very optimistic point of view, but I don't think anyone should think that you snap your fingers, now that you've got those capabilities in place and that the customers are all going to buy immediately. That's not the process, it's underway.

We are winning business for our new sales teams. We're also getting a lot of quoting opportunities. We're getting opportunities of putting demo units in. We're getting opportunities of selling small number of units as some customers to allow them to really test us out. I mean it's really like a flywheel and the flywheel is definitely moving. We're getting some good momentum, but we believe that the real payoff of this activity will happen in 2020 and beyond.

And then I just wanted to address the sort of the modular and scalable production sort of program that you're investing in. I wanted to get a more of a clear timeline on what percentage of the business you'll have this sort of set and complete -- I know 2020 has been a period of time for one part of the business, but then other parts are going to be '21, '22. So could you just walk me through sort of the timeline of expectations on getting that all in place?

So in the first part of the program will take place as you say starting in 2020. And then as far as a real heart of the line, that will probably be complete over the subsequent 2 years. Then it migrates to other series. So ultimately we see the modular and scalable approach applying. I wouldn't say right across the range, but across a very large part of our range. It's not going to take longer than they -- the put up will be completed, it will take longer than they -- the current planning horizon. But as far as the applying the [indiscernible] rule in terms of our volume and what have you -- I think it would be substantially complete within the time frame that we put in the investor perspective. Maybe it's a little bit longer than that, but not much longer.

So if you think about 80:20 -- what timing do you have 20% of your units that produce 80% of your profits? At what point in time, will that be complete for that the 80-20, I guess if you want to talk about like that?

The first wave as our smaller counterbalance trucks, and that sort of begins in the mid part of 2020 and carries through, certainly the first half of 2021 and begins, and then in the second half as well. And -- but it's all out by the end of 2021 and that's the product line, I would concentrate on thinking about at this time. And if you think about it, you've got something on the order of 60% of the business globally.It's in the counterbalanced side and the smaller trucks, probably 60% of that, I don't really know exactly what that number is off the top of my head, but I think, Colin, it's something like that. And so you're talking about a substantial portion of the business, where we should be fully out and competing with these capabilities by the -- certainly the end of 2021. But increasingly beginning -- around the world beginning at the middle part of 2020. And that's probably the best way to think about it. So you got 30% to 35% of the business and it's partly in business for us. So it's very important in terms of keeping us in a leadership role and gaining position in areas where we know a very large position of the customer base.Going back to your earlier comment or question about the effect of the industry strategies in the direct coverage, I think it kind of goes without saying that if you add to their capabilities, not just knowledge of the industries and the ability to communicate solutions to customers, but you add on what we think will be a significantly improved product as well, that increasingly over this period beginning in the mid part of 2020, we should be gaining momentum in that very important portion of the marketplace as the sales force with these capabilities is delivering even better solutions than they have today.

So thank you very much everyone for asking your questions. If we did not get to you or you did not have -- you had a follow-up question please feel free to give me a call. You can reach me my number, which is available on the earnings release. Thanks and have a good day.

This concludes today's conference call. You may now disconnect.