Hyster-Yale Inc (HY) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2014 Hyster-Yale Materials Handling Earnings Conference Call. My name is Matthew and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to Ms. Christina Kmetko. Please go ahead.

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 first quarter ended March 31, 2014. Copies of our earnings release and 10-Q are available on our 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, Vice Chairman 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 was set forth in our earnings release and in our 10-Q.

In addition, certain amounts discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliations of these amounts are included in our 2014 first quarter earnings release, available on the website.

I will now turn the call over to Al Rankin. Al?

Good morning. Hyster-Yale Materials Handling had revenues of $676 million and net income of $22.1 million, or $1.31 a share, for the first quarter of 2014. That compared with revenues of $645 million and net income of $24.6 million, or $1.47 per share, for the first quarter of 2013.

Operating profit was $31.6 million for the first quarter, and that compared with $32.1 million for the first quarter a year ago.

Income before income taxes was $31.6 million in 2014 and $30.7 million in 2013.

The Company's cash position was $107 million on March 31. That compared with $175 million at December 31 and debt, at March 31, was decreased to $33 million from $69.5 million at December 31 of 2013.

Our revenues increased in the first quarter of 2014 compared with the first quarter of 2013, primarily due to an increase in sales of higher-priced lift trucks in all market segments. The favorable effect of unit price increases implemented in 2013, primarily in the Americas, mainly to offset the impact of weakness in the Brazilian real and increase in fleet services and parts volume in the Americas. The revenue increase was partially offset by a slight decrease in unit volume and unfavorable currency movements. Fewer unit shipments in Europe more than offset unit shipment increases in the Americas and Asia-Pacific. Unfavorable currency movements in the first quarter of 2014 compared with a year ago resulted from the weakening of the Brazilian real and the Australian dollar, which was partially mitigated by the strengthening of the euro against the US dollar.

In the first quarter of 2014, worldwide new unit shipments were approximately 20,600 units, compared with shipments of approximately 20,800 units in the year-ago first quarter and 22,700 units in the fourth quarter of 2013.

Worldwide backlog was 28,900 units, or approximately $715 million at March 31, 2014, compared with approximately 27,500, or approximately $684 million, at March 31 of 2013, and approximately 28,200, or $717 million, at December 31 of 2013.

Gross profit improved by $2.5 million from the first quarter a year ago. This increase includes a $6.6 million pre-tax improvement, mainly due to the favorable effect of price increases, an increase in parts volume and lower materials costs, all primarily in the Americas, which was partially offset by significant unfavorable foreign currency movements of $4.1 million pre-tax and a shift in sales mix to lower-margin units, also primarily in the Americas.

However, despite the improvement in gross profit and reduced interest expense as a result of lower debt levels and lower interest rates during the first quarter of 2014 compared with 2013, only a slight increase in income before income taxes compared with the prior year was realized as these benefits were largely offset by higher employee-related expenses, mainly attributable to increased headcount and marketing and engineering to support the Company's five strategic initiatives.

Higher income tax expense in 2014 resulting from a higher effective income tax rate and the absence of favorable tax adjustments from changes in certain US and foreign tax laws recognized in the prior year resulted in a reduction in net income.

Looking forward, the global outlook for forklift trucks is expected to grow moderately in all major global regions for the remainder of 2014 compared with a year earlier, although strength in certain developed Western markets is expected to be partially offset by some weakening in the developing markets.

As a result of this anticipated market growth, combined with expected increases in market share and a strong ending backlog, the Company anticipates an overall increase in unit shipments and parts volumes in 2014 compared with 2013. The majority of this increase is expected to come from the Americas, with smaller increases in Asia-Pacific unit shipments.

Due to current political and economic uncertainties in Eastern Europe and new dealer transitions, an increase in 2014 European shipments appears less likely than had previously been anticipated.

While sales are expected to increase moderately in 2014 compared with 2013, the Company expects to generate an increase in operating profit, excluding the anticipated gain on the sale of the Company's current Brazil plant, in excess of the rate of sales increase with a decrease in the first half of 2014 compared with 2013 that is expected to be more than offset by improvements in the second half of 2014. The favorable effect of anticipated increased unit volumes resulting from the Company's strategic initiatives, increased parts volumes, and product enhancements are all expected to contribute to this improvement.

In addition, because it is not anticipated that the market price of the Company's stock will increase at the rate experienced in 2013, lower estimated equity incentive compensation is expected to contribute to the improved operating profit.

These favorable items are expected to be partially offset by the full-year impact of marketing and employee costs associated with the investments in strategic initiatives that were made over the course of 2013 and by unfavorable foreign currency movements in the Americas and in Asia-Pacific.

After excluding the estimated pre-tax gain from the sale of the Company's Brazil plant in 2014, and after excluding the $12.8 million valuation allowance release taken in 2013, net income is expected to improve moderately compared with 2013. The effect of improved operating profit, as well as lower interest expense due to lower debt outstanding and lower interest rates under its new revolving credit agreement, are expected to be partially offset by a higher expected effective income tax rate. The higher effective income tax rate in 2014 is expected to result primarily from the effect of higher United Kingdom income taxes due to the 2013 valuation allowance release combined with an anticipated increase in income from the Americas operations, which have a higher tax rate.

Full-year 2014 operating profit results, excluding the anticipated gain on the sale of the Brazil plant, are expected to improve minimally in the Americas segment, which includes the North America, Latin America, and Brazil markets, with anticipated increases in units and parts margins largely offset by unfavorable foreign currency movements from an expected strong euro and slight material cost increases.

Higher operating profit in the Europe segment, which includes the Middle East and Africa markets, is expected to increase in 2014 compared with 2013 due to anticipated benefits of the current strength of the euro and slightly lower material costs. These improvements are expected to be partially offset by the full-year effect of marketing and employee costs, which gradually increased throughout 2013.

Asia-Pacific results for 2014 are expected to be lower, partially due to the weakness of the Australian dollar and weaker industry demand in Australia despite the favorable effect of expected increased volume.

Cash flow before financing activities for 2014 is expected to decrease from 2013, primarily due to an increase in capital expenditures, largely driven by the construction of a new plant in Brazil. These capital expenditures will be partially offset by the final cash payment, which is expected to be received in mid-2014 when the sale of the current facility is expected to be finalized.

The Company remains focused on gaining market share over time as well as on improving its margins in its internal combustion engine business through the execution of its five strategic initiatives, all of which are outlined in overview in our earnings release.

To meet the specific application needs of its customers, the Company is focusing on developing utility, standard, and premium products. To this end, development programs are underway for its electric rider, warehouse, and internal combustion engine and big truck product lines.

The Company's in the process of launching a new premium spark-ignited engine for the 2 to 3.5 ton cushion and pneumatic internal combustion engine trucks as part of its 2014 model year program. This new 2.5 liter engine is expected to improve productivity and fuel economy together with using new software controls to better match the truck's performance to a given customer application.

The 2014 model year program is also expected to include the introduction of dual-hydraulic tanks on the 4 to 4.5 ton internal combustion engine cushion trucks. It is anticipated that this feature will significantly reduce the working temperature of the hydraulic system, leading to improved reliability and lower cost of ownership for customers.

The Company has started production of a 4,500-pound heavy duty pedestrian pallet truck at its Greenville, North Carolina, plant. Over time, this platform is also expected to be produced in other regions to maximize design and component commonality.

In the second half of 2014, the Company will continue with its model year updates for the electric rider platform and expects to introduce its Tier 4 final diesel emissions solutions for big truck models.

As stated previously, the model year programs will keep the Company's platforms soundly positioned in the market over time. Further, new platforms are expected to be developed and launched over the next few years based on longer-term segment needs or technological change opportunities.

In mid-2011, the Company introduced into certain Latin American markets a UTILEV-branded 1 to 3.5 ton internal combustion engine pneumatic tire lift truck model to meet the needs of lower-intensity users. This UTILEV-branded utility truck was gradually introduced into global markets during 2012. During 2013, the Company expanded the UTILEV-branded series of lift trucks by introducing a 1 to 3-ton ICE cushion tire truck in North America and a 3-wheel electric rider truck globally. The UTILEV-branded series of lift trucks is expected to continue to gain market position in 2014.

The Company offers one model of standard internal combustion engine lift truck for medium-duty applications in both pneumatic and cushion tires for both Hyster and Yale. The Company expects to launch additional trucks in the standard ICE model series in future years.

All of these new products and upgraded products, including the new reach truck and new big truck models introduced in late 2013 are expected to help increase market share, to improve revenues, and to enhance operating margins. 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 launched, and expects to continue to launch, a lift truck series over time that will meet these new emission requirements.

That completes my first quarter update and I'd be happy to answer any questions that you may have.

Thank you. (Operator Instructions) Mig Dobre, Robert W. Baird.

Good morning.

Morning.

Good morning.

Let's see -- several questions for me. I guess maybe the place to start is your Europe outlook. Can you give us maybe a little more color as far as what sort of led to the slowdown, maybe, in the quarter versus your expectations? At least to my knowledge, your exposure to Eastern Europe is fairly limited, but perhaps I'm mistaken there.

Well, we actually have some significant volume in Eastern Europe, Russia in particular. Conditions are certainly unsettled there, both in terms of currency, availability of credit, and the unpredictability, at this point, of the market, market size, to a significant degree. And I think probably in some other countries in Eastern Europe there's some slowing down because of the turmoil associated with the other countries that are threatened, perhaps, by Russia's actions and internal discontent.

Can you maybe parse out -- I mean, $700 million worth of revenue; how much of that revenue in EMEA is related to Eastern Europe directly versus Western or other area?

We really don't get into that level of detail. I think perhaps the important thing is that as we look forward, we do see unit volumes improving in the rest of the year compared to the previous year. Although there's some adverse product mix, in all likelihood, later in the year as well because we had a good product mix in Europe. But we do see modestly improved volumes in total for Europe for the year.

I appreciate that, Al, but I'm trying to figure out exactly why it is that you see that, because if the issue is Eastern Europe, who knows when the situation is going to be solved, and it might get worse over there. That's why I'm asking about the exposure.

And I don't think we're prepared to provide any more detail than what I've really outlined at this point.

Sure; okay. I'm also looking at inventory. Your finished goods inventory has picked up. My understanding is that's probably helped with some cost absorption in the quarter. But apparently this is all driven by Europe. How should we be thinking about this finished goods inventory through the year and maybe the impact that's going to have on margins?

Well, if you look at our inventory in terms of day sales outstanding, it's actually better in the first quarter than it was a year ago. So the absolute numbers increased, and certainly I think that over the course of the year, we see them coming down. We have put in place some strategic inventory buys, particularly in the engine area. But we expect inventory requirements to moderate as we go through the rest of the year.

But looking forward in terms of the production cycle, this is a heavy period in terms of the inventory required to service the future volume. And so really, what we watch particularly carefully is in the day sales outstanding, and our cash conversion cycle is actually a little better in the first quarter.

All right. Then if we can switch to the Americas. Can you provide any more color on your comment as far as a shift in sales mix to lower-margin units in the Americas?

Well, we had some pretty good -- I'd really have to do a little more checking, but my recollection is we had some pretty good big truck volumes and some of the areas where we expect to be improving our position are much lower priced units than those trucks. But we do see volume picking up over all, in terms of units, nicely in the Americas just as it did in the first quarter.

I see. So here's what I'm wondering here. When you're talking about some of the share gains, and you're talking about maybe some of the electrical products, I've always sort of wondered exactly what the impact on margin over all would be -- are you guys building share in that part of the market? I'm wondering if that's what happened here in the quarter and that's what you're highlighting (inaudible) gaining share.

No, I don't think so. I think the biggest change for us, as we called out in the comments, is currency in terms of margin. It's not -- we actually had, even in the first quarter, pretty good improvement performance in margins, and a good portion of that was stripped away by adverse currency movement. So no, I don't think it has -- it's really not related to the factor that you're talking about.

Okay, I see. And as far as developing world demand, I'm wondering -- we know about Eastern Europe; that's clear. But what are you sort of seeing demand-wise in other emerging markets?

Well, so far China continues to be a very large market, but our view is that the growth has moderated significantly in China. Our share as a share of the total market is low, although our share of the foreign brand market in China is quite respectable. But I think we don't see the explosive growth in China that has characterized the last few years.

In Asia, I think we see a year that is up a little bit, but Pacific is likely to be down a little bit. We see demand falling off in Australia. So the whole Asia-Pacific area in total is probably pretty flat, excluding China and Japan, which are up a little bit.

Western Europe, I think went through a very difficult period in parts of last year. The market is turning up in Western Europe as we see it. On the other hand, as I suggested earlier, Eastern Europe is turning down. Middle East and Africa we think is going to be up as well, so that the total market for the Europe, Middle East, and Africa is up.

And we see the US market up moderately. Latin America is probably down a little bit. Brazil is down a little bit. So in total for the Americas, we see it just modestly up because you've got some pluses and some minuses. I think that gives you some flavor.

No, I appreciate that. It certainly does. I guess my last question, really, is kind of a competitive dynamic question. One of your bigger competitors, Kion, as a public company has been vocal about laying out a strategy to get a little more involved with utility-type products. They're also looking to gain share in the Americas and they've been vocal about that.

I'm wondering, sort of your thoughts about that. Are you seeing any change in competitive dynamics that you can highlight?

Well, the other two big companies in the world, Toyota and Kion, are both very good competitors. They're tough and they're tenacious and determined. With regards specifically to your comment about utility trucks for Kion, they do have a Chinese source and they are introducing those trucks in various parts of the world to complement their other offerings, just as we are. But I haven't seen anything major on the horizon that changes things.

And with regard to your comment about the Americas, I would simply say that Kion's had its eye on the Americas for a very long period of time; there's nothing particularly new there. The question is, how do they do it? I think that's the complex question that they have to sort out, and at this point their distribution position and others is not really designed to give them a position that they'd really probably like to have in the Americas. I'm sure they try to work all kinds of things to change that, but at this point I don't see major changes that have occurred as of now.

Sure. And I'm presuming that you're still sort of seeing all the players behave quite rationally at this point in the cycle still; there's no changes from that, right?

No change in the competitive dynamics that I think we've seen for some period of time. We have some competitors that are pretty aggressive on price and others that are a little more disciplined. But has anything fundamentally changed? I don't think we feel behaviors have changed dramatically at this point.

All right; that's great. Thank you, Al.

Yes.

(Operator Instructions)

Okay, thank you all very much. We appreciate your joining in on this first quarter conference call. Christy?

Thanks for joining us today. We do appreciate your interest. If you do have any follow-up questions, please give me a call. My number is 440-229-5168.

Thank you, Christina. And a reminder, ladies and gentlemen, if you wish to listen to the replay of this call, you may do so by calling number 617-801-6888, and the access code is 932-320-06. Thank you very much indeed for participating in today's conference. This concludes the presentation; you may now disconnect. Good day.