Hyster-Yale Inc (HY) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-three 2014 Hyster-Yale Materials Handling, Incorporated earnings conference call. My name is Mark and I will be your operator for today. At this time, all participants are in a listen-only mode. And we will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I now would like to hand the call over to Christina Kmetko. Go ahead, please.

Thank you. Good morning, everyone, and welcome to our 2014 third-quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at Hyster-Yale. I will be providing a brief overview of our quarterly results and business outlook, and then I will open up the call for your questions.

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 NACCO Materials Handling Group; Ken Schilling, our Senior Vice President and Chief Financial Officer; and Jon Taylor, Vice President of Financial Planning.

Yesterday, we published our third-quarter 2014 results and filed our third-quarter 10-Q for the three and nine months ended September 30, 2014. Copies of our earnings release and 10-Q are available on our website at hysteryale.com. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

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 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 earnings 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 2014 third-quarter earnings release available on our website.

Now let's discuss the quarterly results. For the third quarter, revenues were up 8% to $695.8 million from $643.9 million in 2013. While revenues were up moderately, operating profit increased 16% to $36.3 million for the 2014 third quarter from $31.3 million last year, and net income and earnings per share rose 21% to $28.4 million or $1.70 per share, up from $23.5 million or $1.40 per share in 2013. These increases are primarily the result of substantially lower selling, general and administrative expenses, partially offset by lower gross profit, the reasons for which I will explain in further detail in a moment.

Overall, as we expected last quarter, a shift in sales to higher priced lift trucks, higher parts revenues, and an increase in unit shipments, drove the increase in our third-quarter revenues. However, the unit shipment increase was affected by a number of puts and takes. North America and Europe drove the overall improvement, but volume shortfalls in Brazil, resulting from reduced production largely because of the significant market downturn in that country, partially offset the improvement.

We continue to believe our five strategic initiatives are gaining traction, as evidenced by the increase in unit and parts volumes, and we continue to focus on what we can control. However, currency which favorably affected our revenues only as a result of how sales and foreign currencies are translated into US dollars for consolidated reporting purposes, was actually a headwind to us during the quarter, and one of the drivers for our reduced gross profit. Gross profit was also lower because of reduced earnings on remarketing of used trucks and increased warranty expense.

Even though gross profit declined slightly, operating profit improved significantly as a result of the substantial decrease in selling, general and administrative expenses. You may recall that in the third quarter of 2013, we recognized significantly higher incentive compensation expense from a rapid rise in our stock price. In the third quarter of 2014, we realized the opposite effect.

Our selling, general and administrative expenses declined mainly due to lower incentive compensation estimates of which $4.5 million was related to non-cash equity compensation. Also, the absence of a non-cash charge of $1.2 million related to pension settlement accounting recorded in 2013 contributed to the decrease in selling, general and administrative expenses.

We believe growth rates for the global forklift truck market are expected to decelerate during the remainder of this year and in 2015, resulting in only modest growth comparable to comparable prior-year periods. Growth in the remainder of 2014 and in 2015 is expected to be driven by the Western Europe, Middle East, and Africa markets, with smaller growth in Asia-Pacific due to softening in the Japanese and Chinese market growth rates.

We expect the Americas market growth to slow in the fourth quarter of 2014, and have only modest growth in 2015, as growth rates decelerate in North America and the Brazil market shows only a partial recovery. Other areas in Latin America are expected to strengthen moderately in 2015.

Despite these mixed market conditions, we anticipate an overall modest increase in unit shipments and parts volumes, and as a result, increased sales over the remainder of 2014 and in 2015 compared with prior-year periods. The majority of the 2014 unit shipment increase is expected to come from North America with smaller increases in Asia-Pacific, partially offset by the weakness in Latin America, including volume shortfalls in Brazil, and in certain European markets, particularly Russia.

We expect the increase in unit shipments in 2015 will be driven by Europe and North America, with smaller increases in Asia-Pacific. Unit shipments in Brazil and Russia are expected to increase slightly in 2015 from very low 2014 levels.

A moderate increase in operating profit is expected during the fourth quarter of 2014. Significantly lower estimated incentive compensation in addition to anticipated increased unit volume, a shift in sales mix to higher-margin units and product enhancement, are all expected to contribute to this improvement. However, these favorable items are expected to be substantially offset by anticipated pricing pressures, higher manufacturing costs, and continued investments in our strategic initiatives.

We also expect net income in the fourth quarter of 2014 to improve. The effect of increased operating profit as well as lower interest expense from lower debt outstanding and lower interest rates, and the absence of a $2.8 million pretax write-off of deferred financing fees taken in 2013, are expected to be partially offset by a higher effective income tax rate.

Looking at our various segments, fourth-quarter 2014 operating profit results are expected to improve in the Americas segment, with anticipated lower employee-related expenses, and increases in unit and parts margins, partially offset by unit pricing pressure, higher manufacturing costs and unfavorable currency movements. We expect operating profit in the Europe segment to decline in the fourth quarter of 2014, resulting from lower unit volumes and pricing pressures.

Finally, Asia-Pacific results are expected to be higher in the fourth quarter of 2014 from an anticipated increase in unit volumes.

Now let me say a few words about 2015. During 2014, we recognized a gain on the sale of our Brazil plant for $17.7 million. If you exclude the effect of this gain on 2014 results, we expect operating profit in 2015 to be similar to that of 2014. Anticipated increases in unit shipments and parts sales, expected favorable foreign currency movements, largely from the strengthening of the US dollar, and an anticipated shift in sales mix to lift trucks with higher average profit margins, are expected to be offset by increases in employee-related expenses, and higher marketing expenses associated with the execution of our strategic initiatives, as well as costs associated with the transition to a new plant in Brazil and the rollout of a global manufacturing information technology system in 2015.

An increase in material costs is also anticipated. However, we do expect these costs will be mostly offset by price increases. These factors, combined with higher interest expense, are expected to result in a moderate decline in net income from 2014 levels.

Finally, we expect cash flow before financing activities for 2014 to decrease significantly from last year, primarily due to an increase in capital expenditures, largely driven by the construction of our new plant in Brazil, which is not anticipated to be fully complete until early 2015. We also expect full-year working capital to increase.

Cash flow before financing activities in 2015 is forecasted to improve compared with this year, as working capital requirements are expected to moderate, and we incur fewer capital expenditures, since the bulk of the Brazil plant construction is expected to be done this year.

We are hopeful that economic growth will improve in 2015 but are mindful of the uncertainties and risks in certain markets. We will continue to execute our key strategic initiatives, and if we see more positive economic momentum than we discussed here, we believe we are well-positioned to respond and deliver better results for our customers and our stockholders.

One last item worth noting, before I open up the call for questions, is that since the start of our $50 million stock repurchase program in December 2012, we have purchased approximately -- purchased almost 535,000 shares for an aggregate purchase price of $38.5 million, including approximately 431,000 shares in 2014, most of this in the third quarter, for an aggregate purchase price of $33.3 million.

That concludes my prepared remarks. I will now open up the call for your questions.

(Operator Instructions) Mig Dobre, R.W. Baird.

This is Joe Grabowski for Mig this morning. It seems like the quarter pretty much came out as you guys expected. But maybe kind of going through each segment, if we start with the Americas, unit shipments were down 2%, but average selling price per unit was up 9%. I was hoping maybe you could walk us through a little bit of the dynamics around lower shipments but higher ASP?

Ken or Jon, do you want to comment on that?

Al, I think I'd be happy to respond. In the second quarter, we talked you through the story that we sold a number of our lower-end walkie trucks in large numbers. And we said that our average sales price per truck in the second quarter was down because of that mix shift. And what's happened in the third quarter is we have had our mix shift restored back to a more healthy, higher-price, higher-margin product line (multiple speakers)

Back to a more normal level.

Yes, restored to a more normal level.

Okay, all right. And do you expect that normal level to continue into the fourth quarter?

This is Colin Wilson. Yes. I mean, that's the -- that's what's in our projection.

Okay, great. And then on Europe, unit shipments increased 10% in the third quarter, and year-to-date operating profit is up more than 40%. Yet you're expecting lower unit shipments and pricing pressure in the fourth quarter and into 2015. So, maybe talk a little bit about the outlook considering the strength that we've had year-to-date.

Again -- I -- go ahead, Al.

(multiple speakers) No particularly, I mean, a good starting point is some of the countries where we have headwinds.

Okay. And those headwinds are going to be more than you've had year-to-date? (multiple speakers)

Let me ask Colin Wilson to comment for you.

Yes, I mean, two of those strong markets in Europe are Turkey where we've just gone through a dealer changeover. That's impacted our bookings which would impact those shipments into the fourth quarter. And then Russia is a very big market for us and we've seen significant headwind in that territory.

Okay. All right. Thank you. And then finally on Asia, third quarter in a row of very strong unit shipments but the ASP's have been trending lower all year. When do you think the year-over-year ASP's kind of normalize there?

We've been doing well in Asia and our bookings have been very strong there. In Australia, our mix has been -- our mix has shifted towards Asia because we had a dealer, a big dealer down in Australia that was -- had too many trucks in inventory. And so they have been bleeding trucks out into the market. So, maintaining the retail sales level, but the number of bookings have been -- placing on us has been reduced, while the inventory correction, which is now behind them, was completed.

In addition, just to put -- I mean, we don't think a lot about average selling price. It's a little hard to react directly to that. We did talk about mix. And I think that you should keep in mind that in Asia, we have a very significant big truck business. And those trucks can sell for over 250,000 a piece. And our more normal trucks might sell in the $25,000 range -- $20,000 -- $25,000 range.

So, on the other hand -- and to add to that, in our big truck business, as you can imagine, it's a business of small numbers and very large selling prices. So, it can influence that particular number you are talking about. And my -- I believe that our big truck shipments have been -- we had some very high big truck shipments for a period of time and they've been less high recently.

Okay. No, that makes perfect sense. Thank you. And then just a couple more questions. Maybe an update on the progress of the Brazil plant. When will that sort of be up and running? And then with the weakening in demand we've seen in Brazil as the year has progressed, what do you think the impact of the new plant will be on Brazilian shipments?

Colin?

Yes, I mean the plant is substantially built. We will be commissioning it and starting production -- we expect to do that in the first quarter of 2015. Meanwhile we're still in full production in our existing plant in Brazil. So, we'll be building a little bit ahead in the existing plant, and then we'll have a down period for a short period of time, and then starting to produce in the new plant in the first quarter of 2015.

Clearly the demand in Brazil is lower this moment in time. There's been a lot of uncertainty leading up to the election and just generally, a concern about the -- when the recovery will come. I think generally people expect 2015 to be a fairly soft year. Maybe it's a little bit stronger than 2014 with the expectation that we'll see a much stronger recovery beyond that.

So, we've been in Brazil for a long time. We've been in there I think it's about 50 years -- close to 50 years. We are used to managing through peaks and troughs. This is no different; in fact, milder than many of the peaks and troughs we've managed through in the past. We adjust our production accordingly. We work very closely with our dealers to make sure our dealers are not over-inventoried. And as we build a new plant, we will be looking to expand the range of products built there to allow us to build a stronger position still in the Brazilian market.

But make no mistake about it, you know if you go, look backwards to 2013, which was a pretty good year, the business really did quite well. And in 2014, in Brazil, the volumes have decreased significantly that are being sold at retail.

We try to operate in a very disciplined way with our dealers so that they don't end up with more inventory than they should have. And we want to keep them as healthy as possible. So we cut back very hard on our own manufacturing as our dealers bring down their inventories to the levels that are appropriate for a lower level of market.

And what we think is, that that process, basically by the end of this year, will be pretty much washed through. And we'll begin to see some increase in volume, because our dealers will be buying more again. And we are going to begin to climb back and we'll have a better year in Brazil. But we are going to still be operating at a very low profitability level in Brazil in 2015 unless things get a lot more healthy than we think they are likely to get. And then, we are really looking for 2016 and 2017 for the markets to come back, and for the business profitability to reach the levels that we envision in this new plant structure that Colin outlined to you.

Okay, thank you. That's very helpful. And then I just wanted to touch upon your growth rate outlook for deceleration for the remainder of 2014 into 2015. That seems more cautious -- a more cautious outlook (technical difficulty) --

Hello? No, it's not coming through. Try it again. Not coming through here in Cleveland.

I can hear you now.

We can hear you now.

Okay, yes. It was sort of garbled but it's clear now. I'm not sure if it was on my end or your end.

Okay, I think -- is everybody still connected? Let me just ask Colin and your gang still there?

Yes, we are, Al.

Okay. We were -- I think the question was about the markets, and I was just commenting that -- or about to comment that we had some real headwinds. Colin described Europe with Russia and Turkey. But as you can imagine, Eastern Europe in general is a bit unsettled. If you turn to Brazil, we've describe the situation in Brazil.

And then, if you look at the more developed markets, North America, Western Europe, well, we are not yet near the peak; we think that's probably 2017, 2018. I think, Jon, that's our assumption, is it not?

Yes, that's correct.

You know I think what we typically see is that as we begin to move past the midpoint, that the rate of growth comes down. And that's particularly appropriate given the severity of the downturn that we had in 2008, 2009. So I think those are the major influences that we are talking about here.

But I'd also add that we are being pretty conservative with regard to Europe at this point. We feel reasonably good about North America. But Europe is still a question as to just how energetic the economy is going to be. And as you know, Germany has been struggling from a GDP perspective in the last quarter or so. So, those are the reasons that we make that comment.

Yes, and particularly China, I mean what I was saying the market is going to slow down -- not going to reduce but we are just saying the rate of increase that we've seen over the last few years, we've seen that rate of increase moderating. So the market is still very strong, but we don't see the same level of increase going forward, at least not for the next few years.

So that's I think our perspective on your question.

Perfect. Okay. Final question for me, and thank you very much for taking all my questions. Perhaps tell us a little bit more about the new global manufacturing IT system. How much -- maybe how much it's going to cost? When the benefits will begin? And if sort of how major of a new system is this? Are there any implementation risks or anything like that?

Colin, do you want to comment on that?

Yes. I mean this is putting SAP basically into all of our facilities globally. We are doing it in a progressive way. We have it in all of our finance at the moment but we have it in our Italian operations, we've implemented in Brazil. In 2015, we'll be implementing it into two of our North American plants. And then basically accelerating beyond that, so it will be substantially complete in 2016, 2017.

Now, obviously, putting an SAP system in allows you to do all sorts of analyses and interrogation of your business that your existing systems don't allow us to do. So we are getting the benefits in the plants in which we've implemented SAP. I think we'll see the majority of the benefits when we've completed the implementation of it throughout all of our locations worldwide.

And I'd just say I think you can tell from Colin's comments that obviously any IT program of this magnitude has to be managed very, very carefully. On the other hand, the core of these capabilities has already been implemented in Italy and Brazil. And so it's really more of a rollout than starting from scratch. And the more plants we've done, the more experience we have to bring to bear on the additional plants that are being brought on the system.

And I might just add that the systems that they are replacing are quite old. And so it's really necessary for us to move to bring on new systems that can be properly serviced and kept up-to-date.

Yes, and one of the other things we're doing is, we are putting a dedicated team that will basically move from location to location. So we're not treating each new implementation as a new instance. We're basically moving to a single instance of SAP globally, and the global transferable -- we are calling it the global transferable model. And we have a team that -- very, very seasoned people that basically allow us to develop expertise internally to make sure that we migrate best practices. And as we learn and go forward, back flush all of those -- any improvements into our existing installations.

Okay. Well, thank you, everyone, and good luck in the fourth quarter.

Joe Mondillo, Sidoti & Company.

So my first question has to do with sort of your outlook in terms of the cost structure. There's a bunch of different costs that you highlighted that are going to weigh on earnings in 2015. So I just wanted to hash out a few of them.

First off, the higher interest expense. Why is interest expense going up? And how much do you anticipate it to go up?

Well, Joe, I don't think we gave a specific number, but with the Brazil plant, there are portions of it that it makes sense for us to finance locally. So we are going to layer on some debt with Funami financing, which is advantageous to us locally. And that's really the source of -- the primary source of the increase.

And is that going to be sort of a temporary type thing, where by the end of the year or by first quarter of 2016, that's sort of paid off? Or just given your (multiple speakers) balance sheet --

(multiple speakers) No, no, but we're not talking -- I think our guidance is that we expect to have very comparable numbers, Joe. So small changes in numbers are material against a relatively zero change. And I think we're really talking about something that's relatively small. But in comparison, it's something we thought was appropriate to call out.

But let me add to your comment that at this point, we have not made longer-term decisions on the financing structure that we want to have in Brazil. It's a very volatile currency. And if we -- and we have more capital -- we will have more capital deployed there. So there is a need for more financial support.

And how much is debt, how much is equity, and where the equity comes from -- to some extent, is a question that lies ahead for us. But we don't want to -- our approach at the moment is to assume that we finance locally. But there may be other financing approaches that makes sense as we look further at the situation, and have a better perspective on our working capital needs, as well as the costs of the new plant.

So, it's too early for us, especially -- I would just say overall that this is very early in our 2015 planning cycle. We have not completed detailed reviews of our bottoms-up plan (technical difficulty) --

Operator, could you please help us figure out what's going on?

I can hear you now.

Okay, thank you, Joe.

You just came clear. I couldn't hear any of the half of -- the last half of your statement. But you started to go off into the fact that you were in the early stages of 2015 having finalized that. I understand that.

Right. Okay. So we are in the early stages in 2015. And what I was saying, just to make sure that everybody heard it, was that we have decisions to make about the permanent financing structure in Brazil. And given the volatility of the currency and the early days of implementing the new plan, in terms of working capital needs, and the level of the market, we just haven't made those decisions at this point. So there are going to be more to combat at the moment; that's our planning assumption.

Okay. And the whole strategy with the new manufacturing plant in Brazil was that that facility -- you sold the facility in sort of downtown Sao Paulo. Is that right?

Correct.

And then you were building a facility outside of Sao Paulo. And so that would actually save you money. And then maybe there is a small offset with the financing. But overall, net-net, you should actually be benefiting from this project.

Well, we expect to be benefiting in many ways but we will not -- you will not see those benefits when we are operating at the very moderate shipment levels that currently exists in Brazil. So that lies ahead of us.

I mean we are also building a substantially bigger plant.

Okay. So maybe the benefits that we are looking for, we won't see until 2016 or beyond?

Right. I think that's a fair assumption.

Okay. And then knowing that you probably haven't determined this fully, but how significant to sort of your comments that net income is going to be sort of flattish to down next year -- how significant are the costs associated with the transition of that plant? I don't know if you can quantify it, but in terms of sort of that guidance, how significant is that type of the piece of the puzzle? And is that sort of going to be sort of a one-time type thing, so in 2016, you won't see those costs recur?

Oh, certainly, in the first half, there will be some one-time costs. We have a process of building up inventory which absorbs in the old plant. And then a period when we have the inventory to service our dealers, and -- or they've taken it early. And then we ramp up in the new plant.

So that whole process will be going on in the first six months of the year. I don't think we've quantified that for public purposes, but it is not insubstantial, a phase-in -- phase-out, phase-in process.

Okay, but there will be some costs that won't recur that will be (multiple speakers) temporary?

Well, think of it this way. There is a period of no production, which means no absorption of the fixed costs in Brazil in the manufacturing plant. And so, it's kind of automatic that those costs are building up for a period of time and you're not selling anything. Now, some of it will go into inventory but not all of it.

Okay. (multiple speakers) And when is -- what's the timeframe of that sort of temporary downtime?

Colin?

Well, I think a couple of things. One, the actual costs of moving are probably in the low-single digits. I mean we're not talking huge numbers. As far as the timing -- we'll be in full production in the second half of 2015. So there will be a ramp-up during the first quarter. But our results will be -- our results out of Brazil will be impacted during the first half of next year. And I think we'll be at normal levels in the -- broadly at normal levels in the second half of next year.

Joe, under the accounting rules, we can accrue certain expenses that relate to the transition costs, but moving costs in particular are items that we cannot accrue ahead of time, and we can only expense them as incurred. And obviously, we'll only move once.

But the biggest impact, Ken, I think is going to come from the -- we're not going to be absorbing any (multiple speakers) --

Any absorption, yes.

-- having any absorption in the first couple of months of the year.

Okay. Understood. How big is Brazil of the Americas segment?

Well, Brazil, it depends which year you're looking at. I mean, the North American markets are about -- close to 200,000 units. The Brazil market right now is under 20,000. But our share -- we've always had historically a very high share. Brazil has been an important market to us in terms of global footprint.

So, roughly speaking as a percent of total sales in the Americas segment, how -- just ballpark --?

I don't think we've ever given that number out.

Do you want to maybe give it this time just given the headwinds that we are anticipating?

Joe, there is an easy way to do that, that I can walk you through after the call. But if you look at our segment footnote to the geographic segments, we specifically say how much is US. And you can back out US from total Americas sales and get an idea of what non-US sales are.

Okay, that's good enough, thanks.

(multiple speakers) It's just Latin America and Brazil as well.

And if you look at the GDP of Brazil and GDP of all Latin America, it's about half. And if you look at population, it's about half and it's not too much different in lift trucks.

Okay. And then so sort of my last part of this whole sort of cost question, the sales and marketing, this year you started really investing in sales and marketing, trying to leverage the new products and gain market share through that. It sounds like, through what I've read in the press release and what you've said, is that you are anticipating even another bump-up in sales and marketing in 2015? Is that correct or --?

Well, let me comment on that because I think it's a very important point. I mean, if you go back to guidance we gave a while ago, several quarters ago, we said that our GS&A in late 2013 and 2014 would run -- sort of the running rate was going to be in the low 80s -- $80 million. And if you -- per quarter. And if you look at the GS&A in the third quarter, it was substantially below that.

There are really two reasons for that. One is that the incentive compensation is below the norm levels. So setting aside the issue of how, compared with 2013, which was abnormally high in 2014, it's abnormally low. And -- so that's one factor.

But the other factor is that I think it's fair to say that the ramp-up of costs to support these strategic initiatives has come more slowly than we anticipated. And that particularly true a bit in Europe where some of the pieces weren't implemented until later than they were implemented in the US.

And so, as we look to 2015, we're at least assuming for the time being that we really are going to get up to the levels that we think we need to sustain the strategic initiatives that we have. And that -- and then of course you have the added impact that there's been some inflation in there that will move up the numbers from the sort of low 80s numbers that we gave you before.

So, those are some of the things that are going on in GS&A overall. But let me add that the other factor that is, I think, very important here is that some -- in some of the areas where we are adding capabilities that are being expensed in GS&A, it's going to take some time for those capabilities to reach their -- the appropriate level of performance, number one.

And number two, it's going to take some time for them to achieve their full potential in the marketplace. So, from our vantage point, anyway, we think this is -- these are long-term almost investment-like. And I think we've said historically that we expect them to pay off over the next three to five years.

So if you go back to the beginning of this year, I think those are -- that's the terminology we use. And I -- just to reiterate that that as we expect them to pay off increasingly as we move forward. But it isn't going to happen necessarily quickly. So you really do have an investment process going on, even though from an accounting point of view, it's expensed.

Okay. That's helpful. Thank you. That sort of brings me into my next question, which is this five-point growth strategy, long-term growth strategy, includes sort of the investments that you're making in the sales and marketing, as well as all the product introductions and attacking warehouse customers and such. Is there any statistics? Or can you address how the industry has been performing versus -- or how you have been performing versus the industry?

Well, I think, you know, first of all, there are many sort of short-term ups and downs. And given our position of high share in Brazil, given our position in Russia, given our position in Turkey, we have short-term fluctuations that affect some of these things. But if your question is really focused on do we feel comfortable that these programs are going to pay off over the next few years, the answer is that we do. And to me, that's the most important thing to keep a focus on. We feel that we've been very disciplined in 2014 (technical difficulty) --

Can you hear us, Christie?

I can hear you, Colin.

Okay, because we were talking before and you were saying you thought it was the -- you thought it was Joe.

I can hear you guys now. Just came in.

Okay.

I don't know when -- just ask --

I think I got --

Did you get my answer? We apologize.

I don't think -- I got the very end of it, but I think you were sort of saying that you are comfortable with the long-term growth strategy and I guess (multiple speakers) --

And the short-term has a lot of ups and downs. And we've been very, very disciplined in trying to keep our dealer inventories down, which detracts from our current shipments.

Okay. And so I guess heading into this year, one of the biggest things was this investment in the sales and marketing, and maybe this was more of a transition year because what you're going to see is a little bit higher costs. I guess you didn't see as much higher cost as you did, but I guess this whole sales and marketing, trying to leverage the new products with that investment is going to occur over sort of a longer period than just 2014. In that case, does that sort of push out to the right sort of the market share gains that you were maybe hoping to get coming into this year?

No, I think the way I did put it is it's consistent with when we sort of expected to get gains, but whether the investment communities thought they would come more quickly is another issue. We think it takes time. And we would urge everyone to think about it and put it in the context of our objective of reaching 7% operating profit at the peak of this cycle. And that's, let's say, notionally, we think that's 2017, 2018.

Okay, all right. Thanks. I'll jump back in queue. Thanks.

Mark?

Mark, are you there?

He just said he would jump back in queue.

No. We're trying to reach Mark, our operator.

Okay.

Mike Shlisky, Global Hunter.

I'm sorry if some of these questions were already asked. I kind of missed a big chunk of this with some of those technical difficulties, and I also got kicked off the call briefly as well. So if anything has been answered, I'll just definitely pass here.

I guess my first question is on the current pricing in the overall market. Has a cheaper yen affected how some competitors have priced their products in recent months? Can you just maybe kind of comment on how that looks currently? And then how that might go into 2015? Not just on market rates but just how was the current market kind of shaping up on pricing?

I'll just start and then maybe Colin can comment. First of all, with regard to the yen, remember a couple of years ago, it was terribly overvalued. And so, the -- it was a very difficult proposition to produce and ship from Japan. And we have a very substantial factory there, so that affected us.

Now, the yen we would say is undervalued. But I'm not sure that that is the biggest driver of short-term pricing. I really think we have some very -- particularly with Toyota -- very disciplined and a very significant competitor. And it's always tough competition with them. But -- and there is always pressure from that point of view. So I think that's probably the best way to put it at this point, rather than relate it directly to the yen.

Certainly, our cost structure is being helped by the yen level today. We buy substantial amount of the yen -- we have a significant amount of yen content in our products, and we have many currencies in our products that we have yen in them as well. So those have improved our cost structure perhaps not as much as some of the domestic -- some of the large Japanese corporations, but that would be my perspective.

Anything you want to add, Colin?

No. I mean as you look, obviously, it varies by market and where people are sourcing their product from for the various markets. If you look at the North American market, which is our biggest market, Toyota, Unocal, which is the old Nissan, have higher yen content than we do. And as I've said, I think Toyota, who is a very large player, are very disciplined, but clearly the yen is giving them more flexibility in certain situations to become aggressive in the marketplace. But so can we.

And so I think we basically each pick our fates, and we win some, we lose some. But I don't think it's affecting the competitive balance in the marketplace materially at this moment.

Okay. Okay, got it. And I think you touched on this other question earlier, but I could've missed part of it. It sounds like you had mentioned that some of your investments you're making today are kind of more for the long-term, as you kind of hopefully ramp to that 7% margin at the current single peak. But have you given any thought or are there any opportunities in 2015 to get any leaner than you currently are? And what's going on today, or have you pretty much taken out all the costs that you are hoping to kind of take out over the last couple of years?

I think you can assume that -- you know we -- the way I would put it is we are always in a mode of continuous improvement. That relates to our plants. That relates to the approach we take in all of the non-plant expense areas and indeed with our supply base as well. On the other hand, we are not in the area where big costs are coming out. And in a sense, you have to have continuous improvement to keep yourself in a position of having constant profits. Because prices don't rise to cover -- you've got labor cost increases and you have to offset those.

So, I think you should not think about this from the point of view of latent cost reduction opportunities. The real issue here is putting in place the capabilities we need to accomplish our programs by the 2017, 2018 period, and having some kind of a ramp-up between now and then as those programs begin to gain momentum and really start to perform for us.

One thing I didn't mention or that didn't come out in the last call is that we do still have some additional product initiatives that we are continuing to expand our product line. We have a fairly complete utility line. We have a very complete premium line. But we have some expansion of our line in the area of standard products, and those products really won't be in the marketplace until 2016, I believe.

Colin, is that correct?

Yes.

So, I think there are new things happening. And then, of course, we have always continuous improvement programs in our product development activities; that's certainly true broadly of our warehouse product line. It's true of our premium product line. So, as you look further down the track, we continue to invest heavily in new products. And those will make a difference as we reach this period of 2017/2018 in terms of the maturities of not only the special efforts, particularly in sales and marketing that we are putting in place, but also the product capabilities that will be in the hands of those people to accomplish our objectives.

Okay. If I could just sneak in one more here before the close of the hour. You've got an outlook for improved cash flow before financings, some of it's obviously due to less CapEx next year. Can you maybe kind of go over with us in that environment what you -- if you might be changing or at all planning some [dilutions] of your access capital going forward?

Well, as you know, we have a dividend that is in place that is returning cash to shareholders. We've had a share repurchase program that is outstanding. There is some to be completed in that program at the right time. And, I think as far as anything further, that we haven't addressed those questions. We discuss them with our Board, but they haven't been paramount in our thinking at the current time, and probably won't be for a while.

We are always looking for opportunities to invest our capital wisely. That would be our preference. But it's not easy to do in a way that we think really would work for us. So I'd kind of leave it at that.

Okay, well, thanks so much.

Mark?

There are no further questions in the queue.

Okay. I think -- we thank you all very much. And if you have further questions, I think Christie is available.

And, Christie, do you want to comment?

Yes. You can reach me if you have any follow-up questions at 440-229-5168. And again, we apologize for the technical difficulties we had today. So, if you did not get an opportunity to ask a question or did not hear some of the answers here, please feel free to give me a call.

Thank you very much.

Thank you, ladies and gentlemen, for your participating -- participation in today's conference. A replay of today's call will be available, which can be accessed by dialing 888-286-8010 and entering the replay code 53268480. That's 53268480. This concludes today's presentation and you may now disconnect. Enjoy the rest of your day.