Ladies and gentlemen, thank you for standing by and welcome to the Hyster-Yale Materials Handling 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your speaker today, Christina Kmetko. Thank you. Please go ahead, ma'am.

Thank you. Good morning, everyone and welcome to our 2019 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. Yesterday evening, we published our third quarter 2019 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 For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 was set forth in our earnings release and in our 10-Q. Also certain amounts discussed during this call may be 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. Our 2019 third quarter consolidated revenues decreased modestly to $766 million from $783.9 million in last year's third quarter. Despite this decrease in revenues, our consolidated operating profit increased significantly…

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

Good morning, everyone.

Good morning, Joe.

Just one quick housekeeping question to start, the retroactive tariff exclusion income, what line did that hit, is that on the gross profit line or SG&A or where does that hit exactly?

That's going to hit gross profit Joe. It's essentially -- those tariffs were included in the cost of goods sold when we incurred them, so we reverse it through the same line.

Okay. And then I guess, starting with the supply chain constraints, where do you see the timing of when we get back to sort of a normalized levels? It sounds like the fourth quarter, you'll start to see some improvements, but when do you sort of anticipate, given what you're seeing that to sort of normalize?

This is Colin. Basically, now, round about now, certainly as we go through November and to December, really is centered around one key supplier. We had some minor issues with the other suppliers, but it was one key supplier that supplies many of our castings, which run into a basically a capacity demand caused by some of the customers in the Class 8 [ph] truck business. That business has softened. We are sort of getting back on track with them fully. Right at this time, we have some clean up to do, but generally we see all of that being behind us as we go through the fourth quarter and we should be basically out of that issue completely by the end of the year.

So looking at sort of, I guess the third quarter, which certainly I guess largely hits the Americas, and then I think the Europe has some issues as well. But the gross margins, if you exclude that tariff exclusion, retroactive income, gross margins right around 16% at the Americas segment. Is there any way you can, I don't know if you can quantify it, but how significantly did the supply chain constraints weigh on the third quarter of gross margins?

Well, I mean it impacted in many ways. I mean, it impacted in terms of our working capital, because we had a lot of semi built trucks, a lot of components that we couldn't build trucks into, and it affected our revenue because it was a significant number of trucks we couldn't get out of the door and some of these trucks really are higher margin trucks. So certainly, it impacted our margin. I mean, we had our shifts down at our factories during the third quarter. And then as the components became available, we had to work over time. So it had a very significant impact on our operational performance.

And has this affected at all, demand? I assume most of your competitors are dealing with similar challenges. Do you feel like it has affected demand at all given the extended lead times and certainly the larger trucks?

We did have some cancellations. I mean, I wouldn't say major, 100 -- in the 100-200 range during the third quarter. As far as the lead times now, the sort of -- out of the line product, we're back to normal the 14 weeks. We do have some of the models that are impacted by the component shortage, out about five weeks, beyond that, but it's something we can manage. We also have been, we do have inventory in the field through our dealers that can help to dampen the peaks and troughs of demand. So we are not concerned as we -- in the fourth quarter about the impact of lead times, certainly did impact our results in the third quarter.

However, to be absolutely clear, these extended lead times that were caused by the shortages as a practical matter probably didn't cause us to lose certain business or certain individual products, where the components were simply not available to produce within the time that people were willing to wait for the trucks. It was a very, very frustrating situation. And I would just add to what Colin said, that we not only solved the issues with this particular vendor, but given their reliance on the Class A truck market they are not a good fit with us in many ways from a long-term supply point of view and so some of that's being moderated, not completely. They are a very good supplier. We will continue to work with them, but I would say that we have other suppliers as well so that we are going to ensure that we never get into this problem again. And part of the [indiscernible] sort of we were getting dates of when we were expecting them to get back to normal then they would miss those dates, and so we were building our schedules around the promised dates and then we were having to re-promise trucks. So that did cause some frustration with the customers during the third quarter. But I will repeat what I've said. I mean, we're not going to allow it to happen again. So looking at sort of additional sources of the same components, but given the nature and given the number of components this supplier was supplying us with, it took us some time to get all that lined up, but we've secured against having the issue repeat as we move into 2020.

Colin's point is really good one, bringing new suppliers online to produce these components is a difficult task, and it has taken us quite a while to find suppliers that are acceptable to us and our quality and they're willing to take on this kind of business. So I think everybody would agree with that.

Okay. And then on the price cost side, I think you mentioned at least in the press release that you started to see a benefit from higher prices, so that price cost spread acted as a benefit in the third quarter. Do we continue to see positive trends in terms of price cost in the fourth quarter and into 2020 or was that sort of back to normal in the third quarter?

I'll let Colin elaborate a little bit, but I think it is back to where we want it to be in most cases. There is some additional benefit that will come through. But we feel that we accomplished some very important things. We took some business, as we said at the time at lower margins to build the confidence of customers that we have not done business with before. We feel that we have accomplished that. And at this point we're not willing to continue to go forward in many cases with those relationships until we get a recognition of the value for money that we're delivering in terms of the profit of the product. So I think we accomplished our purpose with some rather one time decisions that we made to build long-term value in the business, but I think that the process is pretty much behind us at this point. Do you want to add some more, Colin?

Well, I agree. Because of the extended lead time is why some of these lower margin trucks have bled into the fourth quarter. We were expecting them to be behind us in the third, but I'll summarize by saying, I think we've been very successful on the pricing front in 2019. We have had to be, because the cost situation has been very volatile and very arduous in -- first of all, we have the impact of the 232 tariffs. The economy was still going strong and suppliers were looking to cost price increases along. We're still incurring some impact. I would say about half the impact we were doing before from the 301 tariffs. But you know, as the economy has softened, we've seen some softening of steel prices have been coming down. Basically, hot rolled coil and flat plate are almost at the same price they were before the tariffs were imposed are still much higher than it were, when we saw the economy soften two or three years ago. So our margins have improved. I mean, we have reduced the surcharge that we were applying because we still are incurring some impact from the 301 tariffs, but I applaud the Americas team, because I think they've done a very good job managing through all this and passing on pricing into the market.

And in terms of just the overall economy in the market slowing a bit, how have your, how is the product mix in terms of orders pending? Are you seeing more of a slowdown in your larger higher margin type trucks? I'm just wondering amongst the different classes how the order trends has ended?

As you suggest, it does vary product category by product category. Again, Colin can elaborate a bit more. Some of the sharpest downturns have been in products which are not our strength and the warehouse type product areas. Some markets for Class II forklift trucks, but there is also, as you would guess from just reading about the general economy and the industrial activity, that some of the industrial customers who are in the heart of the line for us are no longer buying at the rates that they were. They are coming back to more normal rates. Another way to think about it is that coming off the downturn probably 2011, 2012, 2013, 2014 people replaced a lot of trucks that they had deferred replacing and by the time you got to 2019 most of that replacement activity that has, was pent-up, it has completed. So now we're back to a more normal cycle is a way, I would tend to think about it. When people, there are more normal replacement cycle, they have an extended out the way because times are terrible. And so, there is some downturn, but there are also some signs that the market is picking up in certain areas. So it's a very mixed set of signals out there at this point, we think there were some actions that was related to purchases in anticipation of the tariffs to try to purchase at more favorable prices before the inevitable price increases that came through. Anything else you want to add to that, Colin?

Key market versus North America, North America actually increased slightly in the third quarter over the comparable period of last year. First two quarters with -- first quarter was down significantly, second quarter down not so much, and third quarter actually showed a pickup, a small pickup. If you look at the European market, I mean that's down around about 7.5% all classes combined. Some markets are impacted more than others. Germany is a key market there and I think the last time I looked at the numbers, they were down sort of double digits. But overall we see, I concur with everything Al said. I think we had a surge because of the anticipated inflation, and tariffs, and things are more back to normal in the North -- in North America. We are watching very closely Joe, the market by segment. Big trucks are very important to us. So we're looking at that very carefully by segment. but we're really, and I think any of them trending down. I think customers are a little bit more cautious in some areas, like customers in other areas more bullish. I mean, steel is -- the steel market is still going strong. I think we're just, we're cautiously optimistic about the North American market, basically stabilizing at around about normalized to 2018 levels as we go through the balance of '19 into '20.

Hey Joe, if you look at our average sales price in our backlog and what we booked, we had about a $3,000 increase in the average unit value that we booked in the third quarter over the second quarter and we still have a relatively high value and backlog, primarily related to those trucks that we weren't able to build that were the premium trucks that have higher average sales prices. So that's still in the backlog and the backlog is at still at a level higher than our average sales price in the bookings. But I think the trend was a good trend in terms of average sales price in the third quarter compared to the second quarter.

And when you, in terms of that comment, are you referring to the orders booked or, because I understand the backlog because you weren't able to get some of those higher margin trucks out the door that those are still sort of propping up that value, the backlog value. What about in terms of the orders booked was that also pretty positive in terms of orders on a value basis?

Yes, just, I would say it was pretty normal. Yes, I was just trying to give you some numbers based upon the unit shipment booking and backlog table we have in the earnings release and we saw an increase in the average sales price in the trucks we booked in this quarter over the last quarter.

Okay. What about when you look at the market growth you're doing a lot of different things to try to drive share gains. When you look at the market growth relative to your growth, what does that say to your share gain strategy?

Well, share gain strategy is on very much by industry segment. And so we're looking at each individual segment, our strategies to address each we have teams dedicated teams aimed at the different market segments. I don't think there's anything materially changing at this moment in time, that would cause us to adjust our approach to the market. We're very strong in the counterbalanced products. We have more opportunity in the warehousing products. We have launched some new products. We have some new products getting ready to launch, but also the effort of our industry sales teams and industry support teams really focused on bundling together all of the activities necessary in order to sell these excellent products into the market and we're doing it with some success and we expect that success to increase as we fully launch on all of our initiatives.

And in terms of new products, I believe, Christie, at some point said something like new products are going to be make a significant impact on 2020, was that referring to primarily Maximal or is that a general comment of new products for the company in 2020?

I think it's multiple new products that may launch. Certainly we see global potential for the Maximal built Hyster and Yale UT and UX. These are very high reliable, good quality, very cost competitive trucks that really serve the low intensity markets. We have new Reach [ph] Truck coming out, which we think is the best in North America, which we believe will be the best product on the market. And then we have, as we go through 2020, we start launching our new modular and scalable counterbalance range IC engine and electric, that will be hitting the market as we go through 2020, which we think will be a real winner for us in the market. It's a huge product development program that's been in the making for several years now and we will be launching the first of those trucks around about mid-year 2020.

Okay. And then --

And then the trucks, we launched in 2019 that we expect to really gain momentum as we go through 2020.

Right. And then just going, moving to sort of expenses, I understand that you're continuing to invest for the long term and you're going to see some areas where expenses are rising to invest in these long-term initiatives. You also mentioned in the prepared commentary, I believe that you're trying to find other areas of the cost structure to offset some of that. How do we think about how much costs have been rising over the last year or two and at what rate does that compare in 2020, did some of these offsets below that increase in 2020 or I'm just trying to understand how much of a headwind of near term higher costs?

If you look at 2020, I think the level of general expenses that we have at this moment in time, if we're not at peak we're close to peak. We clearly, we've got sort of general inflation happening that will impact our cost structure, but we've just completed a series of reviews with the divisions and spending a lot of time talking about redeployment of resources. What can we do to -- how can we sort of change the structure to free up headcount to apply to the various initiatives? I mean one of the key initiatives is having a lot more front-line sales people and various leaders around the world. What do we have to do to find the offsets to fund that activity. So again, I'll repeat if we're not at peak levels, we're very, very close and then we expect that level to be sustained, but we expect a percentage SG&A to go down as our revenues rise.

Okay. And then --

We are getting close to that utilization point where we -- where we have, we've now annualized the changes in headcounts in and that will happen yet this year and then going into next, as Colin pointed out will be at a more steady state with just normal puts and takes that you'd expect in an SG&A line.

Okay. Specifically at the JAPIC segment, I understand that there is a lot of investments going on there, and you're still unprofitable levels there. Do you anticipate a pretty big improvement or when do you think you can sort of get to profitable levels at JAPIC?

Well, I mean we have to remember we only acquired Maximal middle of last year and we're going through a significant period of reengineering at that facility. We bought a very good company with very good people and a good location, but we're having to do a lot of work to bring it up to the standards of our factories around the world, introducing DFT, putting in place the right level of people in the right positions. We're putting in a new SAP system into the operation. We're transferring our production out of Shanghai into that facility. So we're still incurring a lot of costs associated with all of that, but in terms of the performance of the operation, the call operation, it's doing very well and comparing how we're performing against our business space, I would say we're ahead of schedule in terms of what we expected to happen. Once the Maximal facility gets fully up the deep [ph] which we expect to happen over the next 12 months or so, it will transform the profitability of the JAPIC region, because that will become, the major source for much of the trucks, much of the products that gets sold in that market.

Okay. And then a few questions on Nuvera, you briefly mentioned about the engine validation that you're still waiting on any more color in terms of timing on that or is it just uncertain given that it's sort of governmental based?

I think we said everything in the release. We've got a very good partner. We have to do some work to get the engines, so that they can be really sold in high volumes to multiple customers through that partner and beyond that I think everything is said in the release.

Okay. So looking at sort of the cadence or the sort of revenue, I'm just wondering, you have a couple of contracts there, it's not just the one where you're waiting on the engine validation. Do you anticipate, when do you anticipate revenue to start to ramp up, is this going to be more of a back half of '20 or do you think you can see improvement in the first half of '20?

Well, I mean yes, obviously as we started shipping the engines in quantity, the revenue will start ramping up. So the revenue is tied to the comments I just made.

And it does ramp up through the course of 2020.

Right. I mean that is the key determinant, the fact, the determining factor as we look at the fourth quarter and the revenue and margins from that contract, and again our obligations on behalf of the Chinese partner, so in as much as we can ship the number of units we have in the schedule would achieve the breakeven. If for any reason there is a delay, then that will push the breakeven out.

Okay. And then on the battery box replacement side, what is the update on production move to Greensboro, is that all situated at this point?

It is, I mean we're producing in Greenville, and I have to admit in relatively low numbers at this moment in time, as we're probably going through a ramp up period, and you know as we speak. [Indiscernible] all of the production for the Class I and Class II products have been moved to Greenville. The Class III products are still being produced in [indiscernible] at this time.

You know, one of the things I -- I think I'd say that perhaps isn’t outlined in much detail in the earnings release is that at Nuvera we have because we're commercializing a developmental product, as you would expect, there are a number of things that we run across that happen in the field as the units are deployed. We feel that we've addressed all of those issues from an engineering point of view, but we still have some work to do to get them all implemented in the field, and most importantly, bring down the cost, the warranty costs associated with those products and give, put our best foot forward with our customers by having products that are operating according to fully developed commercial standards. If we can do that, we'd be the only one in the industry and that's our objective. But we've got a task to do I would say over the next couple of quarters to get our all of our engineering fixes implemented in all the boxes in the field, and then be producing products, which incorporate all of those engineering improvements. So over the next couple of quarters, we've got some things to clean up that will benefit both the cost structure in the long term and customer satisfaction, which is probably the most important of the two in the long term.

Has battery box replacement accounting moved over to the Americas segment here or is it still baked into Nuvera?

Joe, we've got the Class I and Class II product, as well as the distribution of BBRs is handled by the Americas. The fuel cell engines and the assembly of the Class III BBRs is still in Billerica.

The financial reporting is in accordance with that division of responsibility.

Right. The new generation of -- I think you're introducing a second generation of battery box replacement that's supposed to be better designed has that's been introduced yet or what's the timing on that?

First quarter in 2020. So it is a new design, it is lower cost. We're very optimistic about the prospects.

The only caveat I would give you is the one that we would have for any product which is that as the new product comes in, we want to make sure that we have a thoughtful and sensible phase out phase-in program, so that we don't have excess inventory that we have to write off. So there may be some period we're looking at right now to make sure that we sold out all of the inventory of components and balance things out as best we're able before some of those new products come up to, what I would call, full production at this point. So that process will be going on in the first half of the year or so.

Okay. And then last question on Nuvera, potentially sort of related to your last answer there Al, the supply chain, trying to improve the supply chain and the economics of the supply chain. How is the progress been going with that?

Well, the intensity of the effort being put into that continues at the highest possible level. We certainly have in place the capabilities that we need through 2020, but we are continuing to work to with our current suppliers, develop additional suppliers, do all the things that would be normal to ensure that as the volume goes up, we come down the cost curve. And that process is actively underway. We have brought to bear, not only the purchasing capabilities of Nuvera, but we've supplemented them with some of the expertise we have in our Lift Truck business and supplier development, and quality control and I think Colin may want to add a couple of things to that.

We're also investing some of the capital expenditure, I think we might have called that out, is to do with the equipment to automate a lot of things that are done manually, which will significantly reduce the cost of assembling.

That process is underway as we speak in Billerica. I think it's basically in a position of proving out the machinery. Everything seems to work adequately in the suppliers plants and that's being debugged now, and when we are fully satisfied with those capabilities, we will also be having parallel production capabilities in China with the same automation. We want to do it -- want it sequentially, so that we build on. We have absolutely everything working the way we want it to, well, it's here in the United States, and we'll put it in place in China because we need to be close to our customers, and we need to have the lower costs that are associated with the Chinese production. So we're doing that in conjunction with rented space from our Maximal business that will give us overseeing control and mass in China and ensure the success of that program.

And we have an Investor Day coming up in New York in just a few weeks time and we will be going into all of this in a lot more detail and talking about our China plans in a significant amount of detail.

Okay. And then one question on Bolzoni, if you exclude the restructuring, the operating profits down year-over-year and, certainly the margin even excluding the restructuring costs are not close to your sort of long-term targets. How much has the -- what you're doing in terms of moving that production in North America, way down that, sort of just help me understand the operating margins there and what you're expecting in 2020?

If you look at the Bolzoni business in North America at this moment in time is a very small part of that business. So yes, we're incurring a lot of costs we expect it to be a much bigger part of our business as we move into the future and ramp up our production in Sulligent and really do a lot to increase our market penetration. Bolzoni's biggest market is in Europe. The Europe market is down with Class I, II and V is down, which is where most of the attachments get sold is down 7.5%. Having said that, they've been increasing their sort of penetration. What really hurts Bolzoni more than anything is the currency translation from euros into the dollars, and I think if you normalize all of that out and sort of take out a couple of sort of one-time things that happened we're not really concerned about the underlying performance.

Yes, but there is another facet of this which you have to, I think, make sure that you have got fully calibrated and that is that there is the core Bolzoni traditional business which is what Colin was just addressing, but Bolzoni has also taken over responsibility for certain other kinds of components and attachments that are used in the Forklift truck business and it's our objective to sell those more broadly to other competitors in the forklift truck industry. And so is there for example cylinders, but in the context of this transition that is a low margin business the way it's being handled financially. So you're not seeing a clean set of numbers, and we're doing a fair amount of outsourcing in conjunction with this program. So in totality, what we will see is a phased improvement in the margins in North America that comes from improvement in both the traditional business of Bolzoni and this -- that is the core business and this additional components supply business that is currently in place, some of which is associated with the phase-out of our current generation of lift truck products. So there is quite a bit of other activity that affects the North American margins in the short-term, and, but from an operational point of view, this is a much better way for us to be positioning the business. So that kind of clouds the understanding a little bit.

Okay. Great. And then last question just on cash flow. In terms of your inventory, how much -- how high are your inventories from sort of normalized levels? I'm just trying to understand over the course of the next 12 to 18 months, how much inventory could potentially be a positive for cash flow?

Hey, Joe, I think the way to look at that is, we typically target roughly around 15% of sales for total working capital. At times we end up with pockets of heavier inventory and maybe lighter receivables. That's somewhat the case today because of the supplier constraints issue. We expect as we work through the supplier constraints to get back to a more normalized levels of production and inventory levels that would match the volumes. But you've got to remember, we're a volume driven business from working capital. So as, we put more units into play in production schedules in the future, we're going to need working capital to fund those and as we see volumes come down we get it back out. We also have programs to enhance working capital generation that we're managing as well along with kind of the normal volume driven elements of working capital, but we do have this distortion right now from --

Ken, is really we're active really focused on the right thing we're actively focused on managing the working capital and bringing the numbers in the line. But I think it's fair to say that you know receivables are pretty much in line with where we would expect them to be, that inventory days outstanding have been higher, pretty much throughout the year because of the problems with Nina [ph] and I would expect that as we go into 2020 as opposed to being in the fourth quarter, that that would begin to come back into line that sort of 10% lower than the numbers that we're seeing now. And that is on the days outstanding basis. So, I'm not talking absolutes, I'm talking days outstanding. As at the same time, as probably won't surprise you, our payables are actually going down and we expect it to go down in the fourth quarter as the inventories are starting to right themselves and we're, then buying wash. So we're going to go through one of those odd periods where in the fourth quarter, as a part of the process that's right-sizing the -- and balancing all three components of working capital, we going to have a little decline in the payables. And then as Ken said, it pretty much comes into balance in our more traditional days outstanding in the -- by the time we get into 2020.

Okay, and then just lastly, related cash flow still is on the CapEx, what is your anticipation for this year? And I know because you moved some of the CapEx spend related to the modular production in the 2020, just trying to get an idea of what your CapEx will be like for 2020?

I think the guidance we give -- I guess the way to say this, Joe is we started out the year with $79.1 [ph] was going to be our CapEx for the full year -- sorry $76.5 for full year. We're now at an estimate of about $55.9 which is what's in our -- here we have a large chunk of that in the fourth quarter. So we've got a lot of activity to get that done and the spend and put in place, but the reduction you've seen in 2019 is forecasted CapEx will move over into 2020. And our guidance clearly is this 2020 CapEx will increase fairly significantly, and then we'll begin to drop down as we go forward in years.

Okay, Great. Thanks a lot. I Appreciate it. Thanks for taking my questions.

Thank you, Joe.

And this concludes today's question-and-answer session. I will now turn the call back to our presenters.

Right. Thank you very much for joining us today. Does anybody want to add anything to wrap up?

Yes, I'd just say that the overall perspective is that there have been a lot of cross currents between tariffs, and supply chain, and restructuring, and short-term market disruptions, and pre-buying and all variety of things. And you know, as we've indicated the fourth quarter is going to be a better quarter than last year, but we're not focused on the fourth quarter as a time that's going to be really robust. And what we are focused on is 2020, when we think that a lot of the pieces are coming back together and at least as we see the market and our market position and the impact of the new products, we have a very positive point of view about 2020. So that's kind of a summary perspective that I would have at this point. I'd just leave it at that then. Christie?

Great. Thank you very much. We don't have anything else here.

Thank you for participating in today's Hyster-Yale Materials Handling 2019 third quarter earnings conference call. This call will be available for replay beginning at 2:00 PM Eastern Time today through 11:59 PM Eastern Time on November 6, 2019. The conference ID number for the replay is 8366818. Again, the conference ID number for the replay is 8366818. The number to dial for the replay is 800-585-8367 or 855-859-2056 or internationally dial 404-537-3406. You may now disconnect.