Hyster-Yale Inc (HY) 2016 Q2 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2016 Hyster-Yale Materials Handling, Inc. earnings conference call.

(Operator Instructions)

Thank you. Ms. Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2016 second-quarter earnings call. I am Christina Kmetko, and I am 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, Senior Vice President and Chief Financial Officer.

Early this morning we published our second-quarter 2016 results and filed our 2016 second quarter 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 For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 made 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 call-in question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q.

Also, certain amounts discussed during this call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our earnings release and available on our web site.

Let me start by saying we completed the Bolzoni transaction. At the end of second quarter, we own approximately 94% of Bolzoni's outstanding shares. We acquired the remaining 6% in the first few days of July and Bolzoni was delisted on July 6.

Our total cash acquisition price was EUR108.9 million or approximately $123.1 million. With the addition of Bolzoni, we now have three business segments -- lift trucks, Bolzoni, and Nuvera. I will provide the consolidated results and then discuss each one of the segments separately.

Our consolidated second-quarter 2016 revenues were $645.6 million, down from $658.7 million in the prior year quarter. And our net income decreased to $8.3 million or $0.51 per diluted share from $22.7 million or $1.39 per diluted share. The 2016 results include approximately $39 million in revenues and approximately $100,000 of net income from Bolzoni.

The Bolzoni results were affected by post-acquisition expenses related to the purchase and amortization of intangibles. In addition, primarily as a result of the Bolzoni acquisition, second-quarter consolidated net income includes acquisition costs totaling $2.9 million pretax, as well as an additional tax expense of $1.6 million related to accumulated non-deductible acquisition costs. These acquisition costs have all been included in our Americas lift truck segment results.

Moving to our lift truck business, second-quarter 2016 revenues were down almost 8% to $606.5 million from $658.3 million in the prior-year quarter. We made solid gains in our warehouse strategic initiative but a 1,300-unit volume decrease, driven by weak Brazil market performance and a weakening big truck market, as well as the shift in mix of products to lower-price lift trucks, drove the decline in revenue.

Lift truck business's net income decreased to $13.1 million from $26.2 million. The 50% decline in net income was the result of a substantial decrease in operating profit due primarily to lower volumes, higher SG&A expenses, including the acquisition costs, and higher US healthcare costs which affected both gross profit and SG&A.

Despite the decline in our results, we are seeing benefits from the implementation of our strategic initiatives and we continue to make head way with certain target accounts. Our bookings were up 300 units from the prior-year quarter. And our backlog of 30,500 units at the end of this quarter is up from 29,900 units at the end of the first quarter of 2016.

Looking at the individual geographic segments, Americas was the driver of the unit shipment decrease declining 1,300 units from the prior year. We continue to see strong unit shipments in Latin America, but those were more than offset by a substantial decrease in shipments in Brazil driven by an over 30% decline in the market in the first half of 2016 from already low levels, and a decrease in North America shipments of classes 1, 2, and 5 trucks, including a decline in big trucks as a result of a weakening big truck market. This decline in units as well as a shift in mix to lower-priced trucks, and the unfavorable effect of deal-specific pricing in North America, were the main drivers of the decrease in the Americas revenue.

Operating profit also declined significantly in the Americas, with both lower gross profit and higher SG&A expenses contributing. We continued to see benefits from material cost deflation, and these benefits more than offset the impact of deal specific pricing. However, the effective adverse mix and lower unit volumes that led to higher manufacturing variances, as well as a $3.1 million increase in US healthcare costs during the 2016 second quarter, resulted in the overall decline in gross profit.

Selling, general and administrative expenses increased during the quarter, primarily from acquisition-related costs of $2.9 million, increased marketing related expenses and higher US healthcare costs, partially offset by a decrease in incentive compensation estimates.

Europe realized benefits from an increase in shipments of higher-margin products and lower SG&A costs in the second quarter, but these benefits were mostly offset by higher warranty-related expenses of $2.5 million and unfavorable currency movements of $2.2 million. In our JAPIC segment, second-quarter 2016 revenues declined on a 300 unit decrease, and a shift in mix to lower-priced lift trucks, while operating profit improved slightly on the absence of a bad debt write-off taken in the prior year.

We continue to expect currency and the slowdown in several key markets, including big trucks, to negatively affect our 2016 segment results in the second half of the year, along with an anticipated shift in sales to lower-priced, lower-margin units. We expect these market conditions to result in a decline in overall unit shipments, revenues and operating profit in the Americas in the second half of 2016 compared with the second half of 2015.

Expected benefits from favorable currency relationships based on current currency rates, and anticipated improvements in Brazil's operating results as the economy there starts to improve, and as our cost reduction and product introduction programs mature, are expected to be more than offset by unfavorable manufacturing variances, lower pricing of products, higher employee-related operating expenses, and increased professional fees. In addition, net income in the second half of 2015 included the unfavorable effects of a $7.5 million valuation allowance adjustment related to Brazil.

We expect the Europe, Middle East and Africa market to grow modestly in the second half of 2016 as increases in Eastern and Western Europe are expected to be partially offset by a decline in the Middle East and Africa market. Despite these anticipated market conditions, we expect unit and parts revenues to grow more favorably than the overall EMEA market in the second half of 2016, primarily in the fourth quarter, as a result of anticipated market share improvements.

Nevertheless we expect operating profit in this segment to decrease substantially in the second half of the year compared with 2015. As I've discussed before, EMEA had currency hedges in plus that mitigated the unfavorable effect of the strengthening US dollar during 2015. As these hedges expire, increased US dollar-based costs will be incurred.

As a result, the strong US dollar is expected to have a larger unfavorable impact on results in the second half of 2016. These unfavorable net currency movements and anticipated shift in sales mix to lower-margin products and lower pricing of product are expected to drive the decline in EMEA's operating profit.

Finally, we expect the JAPIC market to decline modestly in the second half of the year compared with second half of 2015 due to lower demand in China, mostly offset by modest growth in the other JAPIC Markets. However, as a result of the continued execution of our strategic initiatives, we expect shipments in the second half of 2016, as well as unit and parts revenues and operating profit, to increase compared with the second half of 2015 primarily in the fourth quarter.

To summarize our overall lift truck business outlook, we are expecting global markets in the second half to be comparable to the second half of 2015. Market growth in EMEA is expected to be offset by declines in the Americas market. Despite these market conditions and because of our success in winning new business at large customer accounts, we expect unit shipments and parts sales to increase in the remainder of 2016 compared to 2015, but a shift in mix to lower-priced products is expected to mostly offset this increase, resulting in revenue for the second half of 2016 to be comparable to the second half of 2015.

We also expect operating profit and net income in the second half of 2016, and in the third quarter in particular, to be lower than comparable periods in 2015 because we expect the increases in unit and parts volumes to be more than offset by an anticipated shift in sales mix to lift trucks with lower average profit margins, higher operating expenses and unfavorable manufacturing variances. I would also like to note that just last week, we received a favorable tax ruling which is expected to result in the release of an approximately $3 million to $3.5 million valuation allowance previously applied against the Company's Italian deferred tax assets. Finally, we expect cash flow before financing activities in the lift truck business to be positive but decline substantially in the second half of 2016 compared with the second half of 2015.

Turning to Bolzoni, as I explained earlier, Bolzoni had revenues of approximately $39 million and net income of approximately $100,000 in the second quarter. Included in net income was $1.9 million of post-acquisition expenses related to the purchase and amortization of intangibles.

With the Bolzoni acquisition now complete, we can focus on identifying additional opportunities for Bolzoni to increase revenue and profitability. Bolzoni will continue to operate as a standalone business with its own management team and Board of Directors to ensure that the integrity of OEM, dealer and customer information is maintained, but we will work to implement cost-reduction and sales-enhancement programs to continue to grow the business.

Bolzoni's primary market is attachments for class 1 and class 5 products. The majority of Bolzoni's revenues are generated in the EMEA market, primarily Eastern and Western Europe, with a solid secondary presence in North America. In this context, we expect Bolzoni's revenues in the second half of 2016 to be comparable to the revenues of EUR69.2 million reported by Bolzoni in the second half of 2015.

Excluding the immediate cost of the acquisition, estimated integration costs and non-recurring purchase accounting adjustments, the addition of Bolzoni is expected to continue to be accretive to consolidated earnings. The implementation of anticipated cost-reduction and sales-enhancement programs are expected to generate gradual growth in Bolzoni's operating profit and net income. Overall, we expect Bolzoni's net income to gradually increase in the third and fourth quarters of 2016 compared with the second quarter of 2016, as programs are implemented.

Finally, our Nuvera business continues to make progress towards the commercialization of its products. Nuvera reported revenues of $200,000, an operating loss of $8.3 million and net loss of $4.9 million for the second quarter of 2016, compared with revenues of $400,000 and operating loss of $5.9 million and a net loss of $3.5 million in the second quarter of 2015. Nuvera's operating and net losses increased in the 2016 second quarter primarily because of higher operating costs, largely due to an increase in headcount, for the start up of production, continued product development, and increased marketing costs as Nuvera began transitioning from product development to commercialization and production of its PowerEdge unit.

We continue to believe that the fuel cell market for lift trucks has significant growth potential and excellent prospects, and we continue to see strong interest from our customers, dealers and potential partners regarding Nuvera's products. Early stages of production of Nuvera's PowerEdge units began in late 2015, and shipments of the first class 1 and class 3 PowerEdge units began in early July 2016. We expect Nuvera to begin shipping class 2 products later in the third quarter of 2016.

This progress towards full commercialization is expected to continue throughout the remainder of 2016 and in 2017. Production is ramping up for sales of additional PowerEdge units, and negotiations for several large orders are nearing completion, and several successful customer demonstrations have been completed. As a result, we expect Nuvera to generate modest PowerEdge unit revenues in the second half of 2016, with new unit sales expected to grow gradually over the third and fourth quarters as production accelerates.

Nuvera expects to continue to focus on commercializing its fuel cell technology by expanding its product line and integrating its technology into the Hyster and Yale lift truck product ranges. As part of this process we expect Nuvera to increase its focus on reducing manufacturing costs per unit as production increases and greater economies of scale are achieved.

As part of the process of ramping up production and transitioning from product development to commercialization, engineering, employee-related and marketing expenses are expected to reach moderately higher levels in the second half of 2016 than in the second half of 2015. As a result, we expect Nuvera to generate an operating loss in the second half of 2016 of approximately $14 million to $16 million.

Nuvera's objective is to reach a quarterly breakeven operating profit by the end of 2017 or early 2018 on a run rate of approximately 700 PowerEdge and 10 PowerTap units per quarter at target margins. Nuvera is also exploring a number of partnership and OEM supply opportunities which will be complementary to its core operating plan that may result in higher short-term costs, but which could potentially accelerate achievement of breakeven results.

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

(Operator Instructions)

Your first question comes from Mig Dobre of Robert Baird.

Good afternoon, everyone. First question is maybe a clarification on guidance. If I look at your commentary from this quarter and compare it to last quarter, it seems like, at least on the revenue line, you're more or less unchanged. But where the change is occurring is on a margin side and operating income.

If I remember correctly, last quarter you were talking about improvements anticipated in the second half of the year as a result of pretty healthy backlog. Now we're expecting the second half of the year to be much more challenged, in the third quarter in particular. So, I'm wondering what changed here in the last three months to drive this wedge in current versus prior outlook?

I have to pause for a minute. I think the revenue we've seen now, in all likelihood, as we suggested, declining to some degree, and that really takes down the operating profit. And we, I think, said quite clearly that the mix of products that are being sold is significantly adverse to what we have had.

There are certain segments of the big truck market, particularly in the US and in Asia, that have slowed down very dramatically. Those trucks are large sales volumes and they generate a great deal of margin.

Some of the larger counter-balanced trucks that are not classified as big trucks are in industries that have become much slower as a result of a lot of the commodities industries, forces that are at work that you're well aware of, steel and many other industries. There's a lot of maturity out there at this point in the cycle in some of these heavier industries.

So, I think you've got a combination of sales volume and mix of significance that have changed. Colin, do you want to add anything to that?

I think if you look at the most significant change, it's really in the very large trucks that were produced, what we call our low-volume line out of [NMHG]. And that's the trucks above 16 tons in capacity. That market peak probably the end of 2014, and trickled down a little bit in 2015, but then we've seen significant drops in 2016.

The oil and gas fields, really not buying very much. Steel continues to be depressed. Ports, there's a lot of overcapacity. A lot of the terminal operators aren't doing as well financially, so they have really cut back on their buying. Mining, of course, remains down.

So, we really dialed back our projections on the big truck business, particularly in the Americas, because of these factors. We don't think it's permanent. We think that looking at, really, the balance of 2016, get the election behind us and we move into next year, we do see opportunities for that market to recover. But we're wanting to make sure that we make the appropriate adjustments now so we don't end up with too high inventories during this time.

The market slightly below that, the 8- to 16-ton market, that tends to be used in different industries. That segment of the market is also down at this moment in time. That market happens to be down pretty much across the board, including Europe. The European bigger truck market continues to be robust.

So, we have called down the bigger truck markets. If you look at the headline numbers for the market size, it's actually holding up pretty close to last year's level. But there's a definite mix shift towards the Class 3 lower-value product. And, again, we see that trend continuing at least for the balance of this year.

Yes, I appreciate the color and that makes sense. Sticking with that theme, when I'm looking at North American volumes -- and I think you and I have discussed this in the past -- it seems to me like we are basically at prior peak levels, or pretty close to that. My question to you is, as we look going forward, and you talked about demand potentially after the election, but is there a replacement demand factor here that has now been saturated and we are really going into potentially a more prolonged downturn? How do you think about that?

Let me say in response to that that I think there is some truth to the observation you make, but it really requires a little bit of expansion or elaboration. There are certainly customers that we have that have satisfied their needs for trucks over the last few years. So, I would say that some of the faster growth companies, even within industries that we have done very well in, have not been necessarily been our traditional customers.

Now, you may remember that we've focused a great deal in our strategic initiatives on programs that we believe can help generate share gain. That takes awhile, but we have been making really quite significant account improvements and penetration of new accounts, conquest accounts, if you will, where we've been able to demonstrate to those customers that we can bring more value than the competitor they're using today. We're working very hard on that.

So, to some extent, your comment is true about the market. But it's probably somewhat more true about the customer base. And a lot of those customers will use class 2 and 3 trucks and some class 4 and 5 trucks. And that whole combination of mix, of new customers with greater growth prospects than some of the more traditional customers, that's got to be a key focus for us, and it continues to be. That's probably helping to drive some of the situation that you're describing.

Coming out of the great recession, Mig, we did see some significant catch up buys by our traditional customer base. I would say those ended probably a couple of years ago, so we were in the 12 to 14 range. I think we got back to more normal booking patterns by our core customers.

But what's happened is our core customers continue to buy their normal way. A lot of the growth is coming from warehousing, logistics, internet-based economies, and shopping on line, and what have you. And that's the area we're making penetration, where a lot of our energies are going from a conquest account perspective. Again, we're making some significant inroads.

The average value of those trucks in those applications tend to be lower than, again, we get from our core business. But if that's the way the market is moving we've got to make sure that we're competing effectively in that segment.

And, again, if you look at the market numbers there is about a 1.5 point shift this year away from class 4 and 5, which is where we've been historically strong, towards the class 3 product, in particular, which is the lower-value segment. So, again, we want to make sure that we gain share in each of the classes, in each of the markets, but, really, with the shift, it's doubly important that we continue to drive forward with our warehouse conquest programs.

I see. Yes, thank you for that. Related to your comment as to what's going on with growth in warehousing and so on, one of your competitors announced a pretty big deal, the acquisition of Dematic. Obviously they're being very ambitious in trying to build product that addressed this market broadly. My question to you is, what do you think are going to be the competitive implications here longer term? And do you feel that your Company is well positioned to address the changing competitive landscape at this point?

I think the answer is we do feel we're well positioned but I think it requires some elaboration. Dematic business is really in a different marketplace in terms of the product offering that they're providing. It is a very large business on its own with different key factors for success and not highly related to the fork lift truck industry.

Our approach is much more focused on taking advantage of the capabilities we have in terms of distribution, service, parts capabilities, new unit sales. And we are investing significantly in lift truck automation in the United States, that is, individual lift trucks so they are more productive in terms of the manpower involved. But also in areas like telematics where we think we have a very good offering. Our approach is much more focused on the needs of the forklift truck business and the users of forklift trucks specifically.

Now, we have to be very careful that our automation systems are able to tie in with all of the factory control systems, so there's a significant software element to it. But we're much more focused on the intersection with the forklift truck business, so we feel pretty comfortable with where we are. The Dematic business is a very good business but it's, to a significant degree, simply a different business.

If you look at our distribution, clearly they are dealing with Dematic-type customers every day, but very few of our dealers have, what I'd call, systems businesses, which is really what you need in order to be successful selling to those customers. And those who do, really, the only way they can be successful is if they completely carve them out and have different management and different marketing strategies and approach to the market,

So, I think we maybe have a handful at best of dealers that are in that business and all of them that are successful have them as separate businesses. That really, I believe, is the only way that Kion will be successful with the strategy, is to keep it separate.

It's really a factory automation business much more than it is a forklift truck automation business.

Right. I appreciate the color and I agree with you on that point. The question that I had is whether or not this basically completely changes the value proposition in terms of a competitor being able to provide a full solution, if you would, for a factory or warehouse automation rather than just one component, like lift trucks, for instance.

Full solutions have been offered for years and years, and the history of full solutions is that the customers don't buy it. The customers want the best value proposition for each of the segments and that's what they buy.

It's a good concept. It reminds me of the old days when I was working for Eaton Corporation. We had something called the materials handling business. It included hoists, it included construction equipment, it included forklift trucks. And, believe me, that total solution concept in certain cases didn't bring a total solution. There were some pieces that helped but didn't make a lot of difference.

Now, that's a little different situation, but we generally feel the same way. I think that Kion is going to be consumed in making that business successful.

I think if it had made sense, Mig, Dematic would have tied up with manufactures and [thoroughly integrated]. So, would [Hytall] and companies like that. They've chose to be independent. Basically when they're working with the Amazons of the world with solutions, Amazon really wants to make sure that they're getting the best lift trucks for their applications. Amazon talks independently and customers who take Amazon talk independently with ourselves and our lift truck competitors and we don't see that changing.

We'll watch it very carefully and make sure that our analysis continues to be a correct analysis but at the moment that's the way we see it.

We are all working very closely with our dealers, really encouraging them to put more specialization into warehouse competencies to allow them to, again, sell their material handling [for the] truck solutions into a broader segment of this warehousing market.

Sure. And then maybe last question for me before going back in the queue is a clarification on EMEA margins. I understand you're citing some currency hedges as headwinds in the back half. I do want to understand if you're implying actual operating losses in the back half of the year, and maybe help us with the magnitude as to what you have in mind.

And related to this, I'm really trying to understand the base line margin for this business at this point, as we're thinking about the out year. If FX is not an issue, and we just make the arbitrary assumptions that volumes are flat, what would the natural operating margin for this business be at this point?

I'm not sure I could answer the latter question. Let me start with the former one. In Europe, the third quarter is always a quarter of disruption. It has vacations and significantly lower margins. That probably will be even more true in 2016 than it was in 2015.

I think you're going to see an impact of currency. You're going to see a very significant impact of currency in the third and fourth quarters. And then there will be some manufacturing variances that are greater than they were in 2015, in 2016. We use the vacation schedule to deal with that.

Those are the major drivers in Europe. But I think you have to look at our forecast and the suggestions that we've made about the forces at work and draw your own conclusions about the margins. But I think we feel that this is basically going to be driven by volume. Our objectives continue to be to focus all of our energies and efforts on improving the volume. The rest of the business is doing okay.

Right. I'm sorry to push on this, but that's the issue, that I can't draw my own conclusions based on all of the moving pieces. FX is obviously creating, just because of your hedging, some headwinds. And I'm trying to understand what the right way to think about the margin of this business -- is it earning 2%, is it 3% -- if FX wasn't an issue. That's the essence of my question, really.

I've said we don't give forecasts so you're going to draw your own conclusions in that regard.

Okay.

Your next question comes from the line of Mike Shlisky from Seaport Global.

Hi, guys, good afternoon. I want to echo Mig's comment that also it's very tough to find a good base margin in Europe. So, maybe I can ask you a little different way about Europe. Looking back on the past couple years, you haven't really gotten above the 5% margin range. Most years you haven't gotten above 4%, recently at least. So I was curious, is there any chance you might have in late 2016 or in 2017 to either restructure or cut costs in some way to keep those margins supported?

I'm also curious, we've seen the first half of this year some companies out there have been having a lot of success with their cost control. I'm wondering if that's a possibility for Hyster-Yale, as well, in Europe in the back half of the year.

Let me just take some of the pieces of what you might generically consider as a part of cost control. We have extremely good control and management of our supply chain costs. There are pressures that are causing some of those costs to go up. But we do manage our pricing to try to maintain our margins.

The only place where we tend to have sometimes some slimmer margins is in conquest account situations where we have to take a longer view about the situation and invest in serving the customer more effectively. But I think as to the gross margin we feel reasonable.

Currency obviously has an effect on us. As those hedges roll off, our gross margins are under pressure in Europe. We do source from the US, to some degree, in our businesses, and those sources at the moment are very expensive. We continue to look at opportunities for adjusting our sources so that we can manage those costs as effectively as possible. So, that's the material cost-price bucket.

Obviously, the degree of volume, particularly of the very large big trucks and significantly to the other larger trucks, those that are over 3,500 pounds -- tons (sic), have a significant impact on our volume variances. So, those are efforts where we have to try to get the volumes regardless of the size of the marketplace. But that's a tough proposition, particularly in the big truck market where we have quite a significant share to begin with.

Manufacturing margins and the degree of absorption of the fixed costs is a significant driver. But certainly we manage that to try to have the right direct and indirect force levels in place to mitigate any changes that occur there.

As far as costs below that are concerned, SG&A, we manage those pretty carefully. But I would tell you that in light of some of the uncertainty in marketplaces around the world and in our businesses, we are really focusing in on ensuring that the manpower levels are managed in the most appropriate way. We would like to have more and more of our manpower focused on revenue generating activities, and find as much productivity generating activities as we can to free up people to be on the revenue generating side. But, basically, this is not a time when we will be increasing our SG&A manpower, period. For the reasons you cited, we expect to control that.

That's the structure of the P&L. But as far as broader restructuring, we have done that a long time ago in our core forklift truck business. It's really a very efficient operation. The big driver is volume. That's why we have the share gain focus. And we expect that over the next couple of years to have an increasing payoff for us.

Now, there are opportunities with the Bolzoni business coming into play here and that will be helpful. As Christy indicated, now we own 100% of Bolzoni. Until we owned 100% we were not in a position of being able to work closely with Bolzoni to begin to implement, and even exchange certain kinds of information related to implementation of our key programs there, to gain synergy values. But we expect to drive considerable benefit from the Bolzoni business as we look forward.

We will continue to run it as a separate business. We have customers that are other lift truck OEMs and they deserve to have their business information kept on a confidential basis. And that's the way we're going to run the business. On the other hand, there are opportunities to reduce costs through various integration activities, which are really of beginning in full swing right at the moment.

That's the best way I can answer your question. We're very attuned to managing the cost structures but there are not significant opportunities out there for implementation. We have the right number of plants, we have the right number of facilities more broadly, the business is really run pretty darn efficiently. We've made changes in our supply chain structure and management, changes in our manufacturing management, over the years. So, that's pretty much behind us.

Okay, got it. I want to talk briefly too about Bolzoni here, as well. You had mentioned a flattish revenue outlook for the back half of this year but you didn't say much about the margins. If you back out the one-time items and look at last year's financials from them it's roughly a 6% to 7% operating margin business, or at least so it appears. Is that leading you to believe in the back half that it will not be in that range for that particular business? Or is there anything you're looking at that might make it at either higher or lower than that? And of course my question excludes one-time costs.

The real problem is excluding the one-time costs. I think you have to read Christy's comments, or think about them very carefully, because they are focused on the magnitude of the one-time costs that, as you know, flow through an acquisition as revaluations occur in that context. That process of flow through is going to be occurring over the rest of the year.

Secondly, one of the complications is you'll have to distinguish between cash charges and non-cash charges. The non-cash charges go up but they really don't influence the economics, they just influence the reported earnings from the business. Those, of course, are required by GAAP accounting and we have no choice in that regard.

But the underlying economics of the business this year in comparison to last year for Bolzoni, we think, are very sound and probably roughly comparable for the second half of the year.

So, so what are the driving factors that then need to be taken into account? We think there are opportunities to increase the Bolzoni volume in certain markets where they have less market position than they do in Europe. And we'll be working hard to develop those to enhance our position in those markets. That's number one.

And number two are the integration activities that I mentioned before. Those integration activities will fall into two or three different categories. There are the ones that will increase Bolzoni volume where we can move certain product sourcing into Bolzoni and have a better contribution to our overall Company profit than we currently have.

Secondly, there are opportunities to simply reduce expense in various areas by drawing on our joint capabilities. And we'll be focused on those, as well, while respecting that it is an independent business segment in terms of management and reporting. And we will be looking at a number of different actions that can save additional money at specific integration programs. Those could include, for example, supply chain opportunities to help them reduce their costs of purchasing certain kinds of raw materials, and so on and so forth.

I think the core of the business continues to be sound. I also think that, as a practical matter, Bolzoni's markets have seen the big upturn, just as we were discussing a few minutes ago, about the heavier side of the marketplace. A number of the Bolzoni attachments are used in that segment of the marketplace.

They saw a big upturn in 2009, 2010, 2011, 2012, and so on and so forth. And now we're going to need to enhance our market position in the areas where it isn't as strong as it is in Europe. So, that's our overall Bolzoni story. Colin, anything you want to add to that?

Just one comment. I want to stress running it as a separate business. So, all things commercial will be behind a wall and those will be for the management team of Bolzoni to deal with, their customers, including ourselves, from a pricing customer relationship point of view. We're really cooperating with Bolzoni and that's only very recently because we couldn't really do anything until the whole tender for us has been complete.

It's really what is it, how can we leverage that capacity to do things we're currently sourcing to other suppliers, and then how can we help them to get their costs down to make them a more efficient supplier. So, that's where the real effort is on the manufacturing side.

And then the big opportunity on the sales growth side is in the Americas. That's one of the prime reasons we made the acquisition because there is a majority supplier in the US, which is Cascade. We'll still be doing business with Cascade because many of our customers will still want to buy their attachments. But we really see good opportunity over time to significantly grow the Bolzoni business here and, to a lesser degree, in Asia.

Okay. I also want to throw one more in here before I hop back in the queue. If I'm looking at this correct on the press release and what Christy mentioned, you started shipping PowerEdge. [Really] sales are going to be in Q2. It looks like it started happening at the very start of Q3. But you didn't mention anything about PowerTap. Was there any PowerTap shipped during Q2 or have you had any PowerTaps shipped thus far in Q3?

We have a backlog for PowerTap production, but the sales weren't there in the second quarter, Mike. They do match up with the other -- in other words, a lot of the prospects for those match up for some of the fuel cell battery box replacements. So, our launch customer, for example, does have an order for a PowerTap. It's been installed. It will be recognized but it will be recognized in Q3.

Okay. I will hop back in queue, guys. Thanks so much.

Your next question comes from the line of Joe Mondillo from Sidoti & Company.

Hi, guys, good afternoon. Since we're talking about Nuvera I'll just start with that. Just wondering, in terms of your goal of trying to break even by the end of 2017, early 2018, just wondering, given the trend in that business and how things are going with what you're doing there, and combined with the softer economy that we're seeing globally, is that a harder goal at this point compared to a couple quarters ago? Or do you think that's still achievable?

I'd say that it is certainly an ambitious goal to reach that running rate the end of 2017 or in early 2018. We think it's still achievable. But I'd have to say that it's hard to make those kinds of forecasts with precision. Everything will depend on our ability to have a pipeline of customers. We think the products are going to be there. That's not going to be the issue.

We have seen tremendous interest. We're going to have some customers who want to test our products before they commit to buy them. But we feel when they are tested we compare very favorably to our competition.

We still feel that that's an achievable goal. But, at the end of the day, it's a long game we're playing here with very high stakes and tremendous upside potential, probably more than we anticipated when we bought the business.

Okay, great thanks. Then in terms of Bolzoni, that $1.9 million a quarter of amortization, is that a run rate or is there anything in there that's inflating that a little bit that we're not going to see going forward?

A portion of that is related to inventory adjustments that you have to take in the first quarter. And because we expect the turn, the turn was in the second quarter, those costs are now behind us. I would expect that $1.9 million to be reduced over the next couple quarters, Joe.

I think when you look at it in total, Bolzoni added about $2.8 million of depreciation and amortization. About roughly a little less than half of that was the add-on for the amortization on the purchase price intangibles. I don't know if that helps you.

Okay, yes, great, thanks. In terms of the America operating margin, when you look at your backlog, knowing what you have there, and looking at the back half, it seemed like a quarter ago you were thinking that operating margins may be somewhere comparable to the back half of 2015. When you look at the backlog now and how those orders have trended, especially with the big trucks, is there any reason to believe that we're going to see higher margins, that that 5% margin that you saw in the first half of this year that we're going to see any significant improvement from that?

Again, the way I would tend to think about it is that we're suggesting that the volumes in the back half, the revenues are going to be down, particularly in the third quarter. So, I think you're going to see some significant volume impact in terms of from an overall point of view. And you're going to see a significant mix impact because we don't have the larger trucks. Because there are fewer trucks flowing through, you're going to have more manufacturing variances, particularly in the third quarter.

But nothing fundamental is changing in terms of the prospects if you look through to the fourth quarter. Those are the major drivers, as we look at it. It's a volume related story, volume and mix related story. Those are the key factors that I would emphasize.

And you've got, of course, Brazil. Brazil is a bit of a wild card. We feel Brazil is showing some real signs of bottoming in terms of the booking level at this point. We're very well positioned in Brazil. We've been through a period when our dealers had excess stock in comparison to the number of units they were selling. That's really, Colin, essentially behind us.

If the market picks up it'll be an opportunity because they're going to have to start building their levels again. They've got the right levels for the market the way it is at the moment.

We have a new, very efficient plant that is ready to go.

Localizing more trucks down in Brazil.

And that will come through, some of it, in the third and fourth quarters, and some of it next year. So, there are a lot of important developments.

Colin, you might also say a word about another factor that is hard to calibrate, but we have some new products coming out. And we have a very high degree of confidence that those are going to help us compete more effectively in what I would call middle market applications or middle duty applications.

The new IC engine product coming out, starting to ship in the third quarter, this is a truck that will be shipping in the third quarter out of our Craigavon and Berea plants. That's one in Northern Ireland and one in the US. And then as we move into next year it will also be produced in China. It's already produced in Japan, and we'll be moving that into Brazil next year.

Dealers are all very excited, placed a significant number of advance orders for the product. It doesn't, obviously, appear in our numbers because we haven't shipped any of them yet. But there is a tremendous amount of excitement about the product, that it really hits the need for the type of standard duty -- when the truck can be worked hard, but it's at the right price point with the right specification to really attack the heart of the market.

We think that can open up opportunities with customers that we've had a tough time being competitive with, with our premium products. They are very sophisticated and they're not always precisely appropriate for those standard duty applications. So, if anything, there is an upside opportunity from those. But it's very difficult to forecast the quantity and the timing.

Okay. And just going back to my original question, it seems like mix is obviously the biggest issue. And I understand from a year ago it's definitely going to be a headwind. If we look at the 5% in the first half of the year, is that the bogey or is the backlog continuing to weaken directionally or sequentially, if you will, on a mix perspective? So, could we, because of that, see sub 5% operating margins because the mix is just continuously getting worse? Or has the mix issue stabilized on a sequential basis?

I'm not going to comment on the operating profit margin per se. But there's no question that in the third and fourth quarter there are going to be headwinds in truck shipments that are consistent with our comments about the adverse mix and the volumes in certain portions of the market. And those are going to have an impact in the third and fourth quarters.

When you say headwinds, are those sequential headwinds, because I realize year over year is definitely going to be a headwind, but sequentially, compared to the first half of the year, is it going to be a headwind?

Our volumes are going to be fairly comparable in the third and fourth quarters, better in the fourth quarter, really. But the mix issues become the predominant ones plus the currency effects that we described earlier. I'd leave it at that.

Okay, thanks. Just lastly, I just wanted to ask you about Western Europe and your orders that you're seeing there. Have you seen any effects from the whole Brexit event and anything with the economies over there in an adverse way?

Not from Brexit per se. At this point it's probably too early. There may be some slowdown but I don't know that we'd really see it.

Western Europe and Eastern European markets have both been very strong lately, in general. Middle East and Africa is the market that's been down. But within Western Europe you look at individual countries, the UK, people are taking a very cautious view at the moment so that market is down. But Western Europe as a whole is up.

The only thing I'd add is historically we've had quite a good position in Turkey and that's the real one up that's up in the air at this point.

Right. And the UK turning down, has that just been recently or has that been consistent for the first half of the year?

Last several months. UK was a pretty strong market last year. It's still strong if you look back compared to coming out of the great recession but there's just some hesitation.

On Brexit, it's too early, in my view, to say whether there's any cause and effect from Brexit. We can't see it at this point. Colin is making some observations, those are the facts. But I don't think we're really willing at this point to attribute them to Brexit at this stage of the game.

Right, I understand. Okay, thank you.

(Operator Instructions)

Your next question comes from Mig Dobre from Robert Baird.

Yes, thank you for taking my follow-ups. I wanted to ask a little bit about pricing, as well. You mentioned your specific pricing but general price pressure, I'm trying to understand if this has to do with you attempting to gain share or if this has to do with you trying to protect your share from others being aggressive with price.

And then related to this, materials are a tail wind for you, still, in 2016, but they're probably not going to be in 2017. If pricing remains weak, do you have any ways to address margin impact?

I think my assessment is that pricing, price-cost relationships with our traditional customers continue to be pretty consistent. I don't think that's a big issue for us. I think there are certain situations where, as I've said, we've had to invest in customers.

Some of it is price but some of it is also cost in terms of serving the new customers effectively, making sure that they're satisfied with not only the new units that we're selling them but also with the support of those units in terms of service and parts and the integration of the units into their activities on a successful basis, there's training to do. There are a variety of things that can, as we focus on our share gain efforts, that can have some price effect.

I think that we've been very fortunate that the material costs have been sufficiently favorable, in general, to overcome that. As we look forward, we're not forecasting that that's going to be as favorable. I would tell you that two quarters ago we weren't forecasting that it was going to be as favorable as it was in the first two quarters of this year either. So, that's been a helpful development.

But, still, we think the fundamental pressures are toward certain supply cost prices increasing. Some of the supply cost prices are sufficiently low that the commodity sellers are just really struggling. And as the volume comes up it's certainly understandable that some of those prices are going to come up, as well. I think, to that degree, we may not be able to forecast them particularly accurately in the third and fourth quarter. But if you take a little longer time frame, as you're suggesting, as you flow into 2017 those pressures are going to be adverse.

But I don't see an inability for us to address those changes in material costs by adjusting our prices in an appropriate way either. We're just not that kind of commodity business. In most segments of our business we want to make a fair return and we think we can do that because of the value that we offer to our customers. It's not like steel, selling around the horn and someone coming in with the lowest price and just selling a commodity at a lower price. That's the best answer I can give you at this point.

Yes, so you basically expect to be able to increase your prices with raw materials into 2017?

That would be our expectation, correct.

Okay, thank you for that. (multiple speakers) And then my last question is a bigger picture question here. When I think about your strategic goals and what you're trying to do to build the business, a lot of it revolves around the warehouse product. Obviously we spent the better part of this call talking about mix being an issue as some of this warehouse product is lower margin. My question is this -- as you are trying to gain more and more share in the warehouse space, does this imply structurally lower margins for your business, effectively taking off the table that 7% operating margin target that you outlined previously?

It depends how you define margin, Mig. We tend to use margin dollars or margin percent. So, particularly in the class 2 area, the opportunity of making margin percent very consistent with our 7% target, it's absolutely there. It could even be upside.

Class 3 is a bit more of a dog fight, particularly at the high volume end where a lot of people put very low prices out just to try to buy market share. What we are really interested in is growing the class 2 business in particular, and that can be very satisfactory margins.

Let me say, too, first, let me come back to a point you made a minute ago about pricing strength. All of my comments on the pricing reflect our sense of the current environment. If we were to go into recession or significant portions of the business throughout the world change, then that would change the environment. So, I'm really making those comments against that backdrop.

Just a comment on our aspirations in terms of share gain. Certainly we called out as a strategic initiative a focus on the warehousing segment of the business. And that was significantly because it hasn't been as much of a strength for us and we had to make sure that all components of that business, not just the product, but all of the service support, all of the ability to understand the customer's needs, and to have the entire spectrum of capabilities that a customer wants to have, was very much a part of the reason why we called it out.

But as far as a broader interpretation of share gain is concerned, when we say we want to fill up our factories, we mean each line within each of our factories. And that means we have to gain share in almost all areas of the business. And if the market is a little lower we set our sights a little higher for the share gain objective.

That's true in the different segments of the class 4 and 5 market and the class 1 market. The share gain really isn't in any way focused just on the warehouse market. I would describe that as a special subset of that. And in some ways we may have a more direct path to gaining share in our traditional counter balance markets, especially with some of the new products that Colin and I described, as we look forward. But it's an across-the-board effort.

Okay, thank you.

There are no further questions at this time.

Okay. Al, do you have any closing comments?

I do not. I think we outlined our basic perspective as we look forward, and we'll keep focused on the programs we've been focusing on.

Okay. Thank you, everybody, for joining us today. We appreciate your interest. And if you do have any follow-up questions, you can reach me at 440-229-5168. Thanks and have a great day.

And thank you, ladies and gentlemen, for participating in today's Q2 2016 Hyster-Yale Materials Handling, Inc. earnings conference call. This call will available for replay beginning at 4 pm Eastern Time today through 11.59 pm Eastern time on August 15, 2016. The conference ID number for the replay is 28468503. The number to dial for the replay is 1-800-585-8367. This does conclude today's conference call. You may now disconnect.