Hyster-Yale Inc (HY) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth-quarter 2012 Hyster-Yale Materials Handling Incorporated earnings conference call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator instructions) We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to your host for today's call, Christina Kmetko. Please proceed.

Thank you. Good morning, everyone, and thank you for joining us today. Yesterday, a press release was distributed outlining Hyster-Yale's results for the fourth quarter and year ended December 31, 2012. If you have not received a copy of the earnings release or would like a copy of the 10-K, you may obtain copies of these items at the website at www.hyster-yale.com.

Our conference call today will be hosted by Al Rankin, Chairman, President, and Chief Executive Officer of Hyster-Yale Materials Handling. Also in attendance are Michael Brogan, President and Chief Executive Officer of NACCO Materials Handling Group; and Ken Schilling, Vice President and Chief Financial Officer. Al will provide an overview of the quarter and then open up the call to your questions.

Before we begin, 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. Additional information regarding these risks and uncertainties were set forth in our earnings release and in our 10-K.

In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2012 fourth-quarter earnings release, which is available on our website.

I will now turn the call over to Al. Thank you.

Good morning to all of you.

Hyster-Yale Materials Handling had net income of $32.4 million or $1.93 per diluted share for the fourth quarter of 2012, and revenues of $652 million compared with $23.6 million or $1.40 per share and revenues of $677 million for the fourth quarter of 2011. Operating profit increased to $29 million for the fourth quarter from $28 million a year ago. Operating margins increased to 4.4% from 4.1%.

Net income for the full year was $98 million. That's $5.83 per share. And revenues were just a little bit under $2.5 billion that compared with net income of $82.6 million or $4.91 per share and revenues of a little over $2.5 billion for the year 2011. Operating profit increased to $111.7 million for the full year 2012 from $110 million in 2011. And operating margins for the full year were 4.5%, up from 4.3%.

Importantly, fourth-quarter net income includes a tax benefit of $10 million or $0.59 per share primarily for the release of previously recorded valuation allowances related to the Company's US, state, and Australian deferred tax assets. The full year 2012 effect of the valuation allowance release was $10.7 million or $0.64 per share. Operating profits, as I indicated, did increase on the other hand in the tax line. This change in valuation allowance was very significant. We will discuss that in more detail later on in my comments.

EBITDA for the fourth quarter and the full year 2012 was $37.5 million and $144 million respectively. For the full year 2012, the Company's cash flow before financing activities was $109.2 million. That compared to $38.7 million a year earlier. The Company's cash position was $151.3 million at the end of 2012, and that's after paying down debt and paying a special dividend of $2 per share on December 27 and a new regular quarterly dividend of $0.25 a share on December 14. Debt as of December 31 decreased to $142.2 million from $226 million a year ago.

Looking in more detail at the fourth quarter, revenues decreased compared with the year earlier primarily as a result of a decrease in unit volume and unfavorable foreign currency movements. Unit volume declines in Europe and the Americas were partially offset by higher shipments in Asia-Pacific during the quarter. Unfavorable foreign currency movements were primarily caused by a weakening of the euro and the Brazilian real against the US dollar.

In the fourth quarter worldwide, new unit shipments were approximately 20,100 units compared with shipments of 20,700 units in the year-ago fourth quarter and shipments of approximately 18,000 units in the third quarter. Worldwide backlog was 27,300 units at the end of the year. That compared with 24,700 units a year ago and approximately 25,600 units at September 30.

During the fourth quarter, the Company gained market share based on bookings in the Americas and Asia-Pacific, and generally maintained share in Europe compared with the prior-year fourth quarter and the prior full year. Momentum generated during the fourth quarter helped the Company attain full-year market share improvements in the Americas and Asia-Pacific compared with 2011, but fourth quarter improvements in Europe did not offset share weakness earlier in 2012.

The significant improvement in fourth-quarter 2012 net income compared with the previous year's fourth quarter was driven by the $10 million tax benefit. Operating profit for the fourth quarter of 2012 improved modestly $1 million compared with the year earlier primarily due to an improvement in gross profit and favorable foreign currency movement, partially offset by higher selling general and administrative expenses.

The gross profit increased mainly as a result of lower material costs, a favorable shift in sales mix in Europe and the Americas to higher-margin products, and the favorable effect of price increases primarily in Europe and the Americas partially offset by lower unit volumes. These improvements were partially offset by higher selling general and administrative expenses mainly as a result of higher employee-related expenses in the fourth quarter of 2012 primarily due to increased headcount in marketing and engineering to support the Company's five strategic initiatives -- I will discuss those later -- and higher bad debt expense and product liability expense as favorable adjustments in 2011 did not recur in 2012.

As we look forward, the overall global market is expected to grow moderately in 2013 compared with 2012, driven primarily by increased volumes in the Americas, principally as a result of moderate growth in Brazil and Latin America and moderate growth in the Asia-Pacific and Middle East and Africa markets. Europe is expected to continue to decline mainly as a result of Western-Europe macro-economic conditions. In the context of these market conditions and expected increases in market share, the Company anticipates an overall increase in shipments and parts volumes in all markets in 2013 compared with 2012, with the majority of this increase being driven by the Americas.

The Company anticipates moderate increases in material costs in 2013. And price increases implemented in 2012 and proposed for 2013 are expected generally to offset these anticipated higher material costs. Although commodity costs stabilized in 2012, these markets are highly volatile and remain sensitive to changes in the global economy. And clearly, the Company will continue to monitor economic conditions and resulting effects on costs to determine the need for future price increases.

The Company expects a moderate decline in operating profit in 2013 compared with 2012. With lower operating profit in the first half of 2013, particularly in the first quarter compared with the prior year, somewhat offset by slight improvements in the second half of the year. An increase in operating expenses, as a result of increases in marketing and employee-related costs put in place over the course of 2012 to support the Company's five strategic initiatives, and the full-year effect of incremental public Company costs the Company will occur as a standalone public entity, is expected to more than offset an expected increase in gross profit as a result of increased sales volumes.

Net income in 2013 is expected to decline compared with 2012 as a result of the absence of the $10.7 million valuation allowance release taken in 2012, but also as a result of an expected higher effective income tax rate, primarily because the Company will record the effect of US, state, and Australian income taxes in 2013 and future years and a shift in income from Europe to the Americas and a moderate decline in operating profit.

The full-year 2013 geographic segment results are expected to improve in the Americas segment, which includes North America, Latin America, and Brazil markets, but decrease significantly in Europe's segment, which includes the Middle East and Africa markets. Within Europe, the anticipated decline in the Western-European market, and the absence in 2013 of the significant benefit gained in 2012 from currency hedging are expected to contribute to the decline in the Europe segment results. Cash flow before financing activities is expected to decline moderately compared with 2012 as the Company anticipates an increase in capital expenditures in 2013.

Over time, the Company has focused on gaining market share, as well as improving margins in new lift truck units, especially in its Internal Combustion Engine business through the execution of five strategic initiatives. The first one is understanding customer needs at the product and after-market levels in order to create and provide a differentiated full range of product and service solutions for specific industry applications. Secondly, offering the lowest cost of ownership by utilizing the Company's understanding of customer's major cost drivers and developing solutions that consistently lower cost of ownership and create a differentiated competitive position.

Thirdly, improving the Company's warehouse market position through enhancing dealer and customer support, adding products, increasing incentives, and implementing programs to increase focus on key customers. Fourth, enhancing independent distribution by implementing programs aimed at broadening account coverage of the market, expanding the Company's new line, ownership strategy, and ensuring dealer excellence in all areas of the world. And finally, expanding in Asian markets by offering products geared to the needs of these markets, enhancing distribution excellence, and focusing on strategic alliances with local partners in China, India, and Japan.

In order to meet specific application needs of its customer, the Company is focusing on developing utility standard and premium products. To this end, the Company has development programs underway for its Electric Rider warehouse, internal combustion engine, and big truck product lines. The Electric Rider lift truck program is designed to bring a full line of newly-designed products to market. The Company launched the four- to five-ton Electric Rider truck in Europe in July 2012, and expects to launch the final model in the Electric Rider lift truck program, the four- to five-cushion tire Electric Rider truck in the Americas in the first quarter of this year. The Company also expects to introduce a new European reach truck for the warehouse industry in the fourth quarter of 2013.

In mid-2011, the Company introduced into certain Latin American markets a new range of UTILEV-branded lift trucks which meet the needs of lower-intensity users. This new UTILEV-branded series of internal combustion engine utility trucks was gradually introduced into global markets during 2012, and is expected to continue to gain market position in 2013. The Company currently offers only one- to three-ton internal combustion engine UTILEV lift truck models, and one model for both Hyster and Yale of the standard internal combustion engine lift truck for medium-duty applications. In 2013, the Company expects to begin expanding the UTILEV truck series. The Company also expects to add more trucks to the standard model series in the future years.

All of these new products are expected to improve net revenues and enhance operating margins, as well as help increase customer satisfaction. In addition, stricter diesel emission regulations for new trucks began to go into effect in 2011, and will be fully in effect by 2015 in certain global markets. The Company has begun to launch and expects to continue to launch lift truck series over this period that will meet these new emission requirements.

That completes my overview comments. I would be happy to take any questions at this point, if there are any.

(Operator instructions)

Our first question comes from the line of Jon Braatz with Kansas City Capital.

Good morning, Al. A couple questions. As we look out a year, in terms of your cash flow, if you can give me a couple data points. You mentioned the tax rate would probably be going up, and your CapEx would be going up. Anything more specific you can give me on those two items?

On the CapEx -- Ken, what does our K have in it with regard to next year?

In our K on page 24, we list our capital expenditures. And we have $60 million in the disclosure, but that also includes, in the sources to fund those capital expenditures, proceeds from the sale of our current Brazilian facility. We are required to disclose the capital expenditure number, gross.

So, the gross amount is the $60 million. And did we indicate generally the range that we think -- I think we're going to say more about that next quarter. It's our current plan.

I think that's right. As we --

In fact, just as a general matter, I would note that we have an existing plant, which is in the inner-city of Sao Paulo. And it's very valuable land. And certainly, our expectation at this point is that will be sold, and it will be sold in a way that timely fits our transition to the new plant. And it will be a net offset, some of it occurring in the course of 2013 to that gross capital expenditure number.

Okay, so from a gross standpoint -- well, let's say a gross standpoint. Your CapEx this year was about $20 million, and you're going to $60 million this year, correct? On a gross scale?

Gross scale was the $20 million netted against anything there in terms of capital sales?

No, we did not have any offsets.

That's correct. And a very significant portion of that is related to the Brazilian plant. But coupled with the plant are some IT implementation programs that are actually going forward right now that will use similar systems to the ones that we put in, in Italy, and that are our basic systems or will be as we look forward in terms of our manufacturing operations. So, there's quite a bit of CapEx involved in the implementation of that program as well.

When you talk about the Brazilian move, when do you expect it to be completed? And what kind of impact can that have on your margins? And I guess from a very shorter-term standpoint, are there sort of relocation expenses and things like that you are incurring in the interim that you'll be expensing this year against income?

Let me try to put it in a broad perspective. First of all, we have implemented demand-flow technology, our version of lean manufacturing, in the existing plant. But in the new plant we will be adding some additional product lines. So, our margins, we anticipate, will improve, and our share position will improve as a result of adding those products.

But I would emphasize that a core reason for the move is the un-sustainability of a plant at the location that we have it today. From a regulatory point of view, we're in the middle of a residential area. And I don't look at this as a big driver of profit improvement. It will give us more capacity to serve the market. And we are committed to doing the kinds of things that I just described, in terms of adding some product. But this is simply something that we have to do to sustain our business in Brazil.

We have a leadership market position in Brazil. And as you know, it's a growing market, although there was some weakness, particularly in the first part of last year. But we believe that the long-term prospects for the forklift truck market are quite good. So, we will be on the outskirts of Sao Paulo in a much better location.

Now, as to your question as to expenses, there are some, but dimensionally they are not huge expenses in terms of annual expenses, is the way I would put it. And certainly, we are expecting the business down there to be considerably better this year than it was last year. So, there will be some additional expenses, but many of the expenses would be related to the IT implementations would be capitalized and so on.

Okay. And lastly, about the tax rate?

I think the best way to answer your question is -- on page 19 in our MD&A and our 10-K, we have a schedule. And it shows a reconciliation of our statutory and effective tax. What I would suggest is -- no one can really tell you when a discrete item is recorded. So, I think anyone who ever gives guidance on this point will say -- discrete items will come and go, and there's no way to really forecast them.

When you look at the permanent items, you will notice that there is $9 million of valuation allowance in 2012 in that number. You need to subtract that $9 million out of the $18 million, because now that we have released valuation allowances, we won't have them offsetting current income. That gives you $9 million of a reduction and statutory rates at 35%. That means that kind of our normal taxes in this year would've been about $27 million, $27.8 million if you do the math off the schedule. That gets you to about a 26% tax rate. That's kind of our normal tax rate, I would suggest.

To the extent we have income shift to North America and the US, that's our highest-rate jurisdiction, that rate will go up a little bit. To the extent it shifts to non-US jurisdictions, so our rates lower, it would go down. But that's the best way I can answer your question.

Okay. I appreciate that very much. I will take a look at that item. Thank you.

Sure.

(Operator instructions)

And we have no further questions.

I'd just conclude with one additional thought for you that I think I noted in more of an overview way in my comments on the release. I indicated that one of the reasons, or a key reason that our operating profit's improvement is moderated this year is that we are spending more on the five strategic initiatives. And I also commented that the first quarter would be the weakest quarter in terms of comparisons. And to sort of emphasize that point, I would simply note that the first quarter in '12 had the least amount of expenses associated with the five strategic initiatives. And by the time you got to the fourth quarter of '12, we were spending at a rate that is not far off the rate that we are going to be spending in the course of 2013. So, you would expect that the biggest gap, as a result of those programs, would occur in that quarter.

You would also expect that the costs of being an independent public company were incurred largely in the fourth quarter of 2012, although there were some preparatory costs in the third quarter. And the result is that the first two quarters really do not have the public company costs -- the net additional public company costs that we have described quite fully, I think, in earlier earnings releases. So, that's just a little bit of additional color on the timing.

In terms of the increase in total expenditure, I would estimate it at, in the course of 2013, that somewhere on the order of $5 million or so greater than our 2012 expenditure. So, that, in a sense, is a headwind in terms of earnings for 2013. On the other hand, we feel very comfortable that these are investments in the future earning power and capability of Hyster-Yale. And we are going to be pursuing the five strategic initiatives in a very vigorous fashion.

I would also note that -- and I have Michael Brogan on the line. But I think, Michael, we feel that over the early course of early 2013 that we will be at the level that we expect should be sustainable and adequate to meet the needs of these strategic initiatives.

Michael, you might just comment on that.

Al, I think that we, during 2012, manned up in the appropriate areas to support the five strategic initiatives. But the run rate by the end of the year was very close to what we've seen in 2013. So, with a little bit more, as you've indicated, full-year costs for the costs we took on in 2012 would be reflected in it, plus or minus the $5 million you referred to.

So, that gives you some additional perspective on 2013. We will continue to watch very carefully how individual markets evolve over the course of 2013. And certainly, the biggest question in our minds is Western Europe. But to some degree, Eastern Europe is very dependent on Western Europe, since there's a great deal of export from Eastern Europe to Western Europe. So, as things weaken in Western Europe, they can weaken in Eastern Europe.

So, we are going to be watching those very carefully. But what I have given you earlier is simply our best calibration of what we see at this time. But I did want to emphasize that the degree of certainty we have about that is not as high as it might be, and less fluid in economically-challenged times as it is in Western Europe at this point.

If there are any further questions, I would be happy to take them now. Otherwise, I think we will sign off.

Robert Sassoon, RF Lafferty.

Good morning. I have a question about your free cash flow. You're talking about a moderate decrease in free cash flow in the coming year. Based on last year's $109 million, it seems like it's equivalent to around $6.50 per share. Is there any prospects of paying [another special] dividend during the course of the year? Or are you going to keep your powder dry, or wait and see?

Well, obviously, it would not be appropriate for me to comment in detail or the kind of specificity that you ask for in your question. I would say this -- that we are thoughtful about our shareholders, and we did reach the conclusion that having a special dividend last year made sense. But I would draw your attention to the fact, this year, that we have an enhanced level of capital expenditures. Secondly, we do have a share buyback program that has been authorized by the Board of Directors.

Ken, maybe you'd say a word about that.

Yes.

That's noted in the K there somewhere.

It is. We have a program that has authorized up to $50 million worth of shares. On page 11 of our filing, we noted that we bought 47,000 shares in the fourth quarter, in December. And that program is ongoing, obviously.

And so, in what time frame? Can we put a time frame on that $50 million?

Yes. I think it's through the end of '14.

So, that's over the next two years. So, we have a program underway already and authorized, but not carried out. And of course, the number that I gave you was free cash flow before financing. So, the share buyback goes in the financing section. So, that's an additional piece to keep in mind.

Just another couple of quick questions. You're talking about a moderate decrease overall for this year in operating profit. Are we expecting also a adapting of operating margin for the current year? Or is that going to be offset by the potential decline in revenue, particularly from Western Europe.

Well, I guess the way I would put it is that certainly it is our hope that revenues will increase and that our gross margin will increase. And as I've indicated, SG&A will be an area where we will be showing increases on a year-to-year basis. It's a very slight change in operating profits and some increase in revenues.

At least, as we're looking at it now, the operating percentage might decline a bit. But I would suggest that currency fluctuations are driving that. It is really not any fundamental change. And what we really look to is over the next few years to have the five strategic initiatives pay off. And that's what will drive us toward our long-term average operating profit objective of 7%.

[That's still targeted though] sort of three to five years?

Yes. I think that's generally what we said, is exactly that. And then the follow-on after that is -- if we are able to achieve the three- to five-year objective, is that if the share goes up, as we certainly hope and expect that it will, then that means that the population increases. And in the follow-on period of time, say five years after that, you would expect that the parts profit stream would increase as well, which is a very profitable part of our Business.

So, that's really the cycle -- is to drive volume, to get us up toward capacity. It's important to emphasize that the five strategic initiatives are designed to, if you will, re-balance our share among the products, so that the right products are being sold into the right application, which will allow us to enhance our margins in certain products, particularly by providing utility and standard products, and not providing premium products for utility and standard applications. Obviously, a premium product is more expensive, and the margins get squeezed when you do that.

But the main driver is the leverage from volume that comes from increased share and increased markets, which is also what we see over the next period of time. And we would expect that, that increased volume would cause more manufacturing variances to be absorbed. And secondly, a greater absorption of fixed cost, which we expect to be much more stable. And so, we drive leverage there as well. So, it is volume leverage, not cost reduction and sort of traditional types of things. It would drive the improvements in the operating margin over time.

Just one final question. You are bumping up the gross CapEx, I think, to $60 million, presumably for building a Brazilian plant. Does that CapEx number return to the normal level that you've seen over the last few years, in 2014? Or is that sort of the CapEx --

I would have to check on all of the precise timing with respect to the Brazilian plant, but I think that a great deal of that CapEx gets spent over the course of this year. Some of it may drift into 2014. But I think the better answer to your question perhaps is that, at this point, we don't see another Brazil-type investment. This completes, really, the refurbishment of our plants around the world. And we are back to maintenance of our existing plants. That maintenance might, I would expect, would be somewhat more robust than the 2012 numbers, where we really, in the end, didn't spent it quite as much as we had anticipated that we would. But dimensionally, it will come down significantly from those numbers.

Okay. Thanks very much.

Yes.

There are no further questions in the queue.

Okay. Thank you all very much.

Thank you for joining us. We do appreciate your interest. And if you do have any additional questions, please feel free to give me a call. You can reach me at 440-229-5168, which is a new number than in the past. Thanks, and have a great day.

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We thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.