Hyster-Yale Inc (HY) 2016 Q3 法說會逐字稿

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2016 Hyster-Yale Materials Handling, Inc., earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Christina Kmetco. You may begin your conference.

Good morning, everyone, and welcome to our 2016 third quarter earnings call. I'm Christina Kmetco, and I'm responsible for investor relations at Hyster-Yale. Joining me on today's call are Al Rankin, Chairman, President and Chief Executive Officer of Hyster-Yale Materials Handling, Colin Wilson, President and Chief Executive Officer of Hyster-Yale Group, and Ken Schilling, our Senior Vice President and Chief Financial Officer.

Yesterday, we published our third quarter 2016 results and filed our 2016 third quarter 10-Q. Copies of the earnings release and Q are available on our website. For anyone who is not able to listen to day's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

I would also like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session.

We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q.

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

Our consolidated third quarter 2016 revenues were $629.3 million, down from $652.1 million in the prior-year quarter, and our net income decreased to $12.3 million, or $0.75 per diluted share, from $20.9 million, or $1.28 per diluted share, last year. Consolidated operating profit was $5.4 million for the third quarter of 2016, compared with $29 million for the third quarter of 2015.

In previous guidance, we stated that we expected operating profit to decrease significantly in the third quarter, driven primarily by the lift truck segment, and that occurred as planned, although the lift truck segment was better than expected, while the Bolzoni and Nuvera segments were lower than expectations.

Our consolidated net income was better than we forecasted, mainly as a result of income tax benefits. Our EMEA lift truck segment recognized a $3.2 million tax benefit from the release of evaluation allowance previously applied against certain Italian deferred-tax assets, and our Americas lift truck segment had a $2 million adjustment for a US tax benefit for manufacturing activities, certain foreign earnings and repatriations, and research and development credit.

Now let me explain the main factors driving the year-over-year decrease in our consolidated operating profit. Specific factors in each of our segments contributed to this decline.

In our lift truck business, third quarter 2016 revenues were down 9.2% to $591.7 million, from $651.6 million in the prior-year third quarter, and operating profit decreased to $20.5 million for the third quarter of 2016, compared with $35.6 million last year. The decline in revenues was primarily the result of lower shipments in the Americas and Europe and deal-specific price reductions predominantly in the Americas.

At the operating profit level, lower revenues combined with unfavorable currency movements, mostly in EMEA, contributed to the decline, as did higher SG&A expenses. On the positive side, we continued to see benefits for material cost deflation, and our backlog increased significantly year over year.

Despite the decline in our results, we are seeing benefits from the implementation of our strategic initiatives, and we continue to make headway with certain target accounts. Our bookings were up 1800 units from the prior-year third quarter, and our backlog of 30,600 units went up moderately from 30,500 units at the end of the second quarter of 2015.

I would also like to point out that while our lift truck revenues were lower for the quarter, our gross profit was only slightly below where we expected it to be and our operating profit was actually higher than we anticipated as a result of lower actual operating expenses than forecasted.

In early July 2016, we completed the acquisition of Bolzoni. This segment contributed incremental revenues of $36.2 million in the third quarter of 2016. However, this segment reported an operating loss of $2.5 million and a net loss of $2 million as a result of $2.6 million of purchase accounting adjustments booked in the third quarter that were related to the second quarter of 2016. Bolzoni also recorded $1.7 million of expense related to the amortization of acquired assets.

Finally, Nuvera successfully installed its first fuel cell system units for class 1, 2 and 3 trucks, and recorded revenues of $1.4 million compared with $500,000 in the prior year. However, as a result of Nuvera's ramp up of inventory for increased production of these units, the operating loss increased in the 2016 third quarter to $12.6 million, compared with $6.6 million in the prior year.

This larger operating loss was mainly due to an increase of $5.6 million in development and production start-up expenses primarily resulting from unfavorable inventory adjustments caused by a higher initial cost of prototypes and early production components at low volumes compared with expected selling prices. In addition, Nuvera's marketing costs increased as it began transitioning from product development to commercialization and production.

Those are the significant factors affecting our operating results. Now, let me turn to outlook. I am going to provide a very high-level look at our 2016 fourth quarter outlook and our 2017 expectations for our three different businesses. We have provided more detail for the geographic segments in the earnings release we issued last night.

At the consolidated Company, we expect consolidated cash flow before financing activities to be a use of cash in the fourth quarter of 2016, which is a substantial decline from the fourth quarter of 2015. In 2017, excluding the cash paid for the Bolzoni acquisition, cash flow before financing activities is expected to be positive and increase significantly compared with 2016.

At our lift truck business, we expect the overall global lift truck market to increase slightly in the fourth quarter of 2016 compared with the prior-year quarter primarily as a result of market growth in Eastern and Western Europe and China.

Given our current backlog, we expect unit and parts revenues in the lift truck business to increase in the fourth quarter compared with 2015. Operating profit for the lift truck segment is expected to be lower in the fourth quarter of 2016 than in the fourth quarter of 2015, as anticipated increases from parts and unit revenues are expected to be more than offset by lower product pricing and higher operating expenses.

Likewise, fourth quarter 2016 net income is expected to decline compared with last year's fourth quarter after excluding the unfavorable $7.5 million valuation allowance adjustment related to Brazil taken in the fourth quarter of 2015.

In 2017, global lift truck markets are expected to be comparable to 2016, but because of anticipated market share gains, we expect unit and parts revenues and operating profit to increase in 2017 compared with 2016. We expect 2017 net income to decrease modestly from 2016 as a result of a higher effective income tax rate and the absence of tax benefits recognized in 2016 that are not expected to reoccur.

Finally, we expect cash flow before financing activities at the lift truck business to be positive but decline substantially in the fourth quarter of 2016 compared with the fourth quarter of 2015. Excluding the cash paid for the Bolzoni acquisition, cash flow before financing activities is expected to improve in 2017 compared with 2016.

At Bolzoni, the majority of the revenues are generated in the strengthening EMEA market, primarily Eastern and Western Europe and, to a lesser degree, in the North America market. We expect Bolzoni's fourth quarter 2016 revenues to be comparable to the revenues of EUR36.2 million, or approximately $40 million, at current exchange rates reported by Bolzoni for the fourth quarter of 2015.

Excluding the costs of the acquisition, estimated integration costs and purchase accounting adjustments, Bolzoni's fourth quarter 2016 operating profit and net income are expected to be accretive and slightly higher than the third quarter of 2016.

We expect the implementation of the anticipated cost reduction and sales enhancement programs to generate gradual growth in Bolzoni's revenues, operating profit and net income, with 2017 quarterly income gradually increasing and more operating leverage is gained from sales growth.

Finally, at Nuvera, progress towards full commercialization is expected to continue throughout the remainder of 2016 and into 2017 following shipments of the first-class 1, 2 and 3 Nuvera fuel cell system units, which began in this past quarter. Customer interest in these products is higher than initially projected, and production is ramping up for sales of an increased number of Nuvera fuel cell system units. New orders are being received, and negotiations for several large orders are expected to reach completion following several successful customer demonstrations.

Further demonstrations are planned and are expected to provide additional sales opportunities. As a result, we expect Nuvera fuel cell system unit shipments and related revenues to increase modestly in the fourth quarter of 2016 compared with 2015 and increase significantly in 2017 over this year.

Nuvera expects to continue to focus on commercializing its fuel cell technology by expanding its product line and integrating its technology into the Hyster-Yale lift truck product ranges. As part of this process, Nuvera is focusing on reducing manufacturing costs per unit as production increases and greater economies of scale are achieved through the combination of its technology and innovation with the lift truck business's supply chain, manufacturing and distribution expertise.

However, this cost reduction process is expected to continue during Nuvera's rapid production ramp up and transition from product development to full commercialization. Until the lower-cost structure is fully in place and supply chain and manufacturing efficiencies are fully realized, development and inventory costs are expected to result in continued inventory adjustments to reflect current selling prices, but at a decreasing rate.

In 2017, as Nuvera continues to generate additional revenue and works to reduce manufacturing costs per unit, we expect a moderately lower net loss than in 2016, including significant inventory adjustments, especially in the first half of 2017. Nuvera's objective is to reach a quarterly break-even operating profit sometime in 2018.

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

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Mike Shlisky, Seaport Global.

First off, I just wanted to touch on a couple of follow-up questions. For Nuvera, is the higher cost that you saw in the third quarter here -- is that going to be additive to your previous sort of outlook for an operating loss of $14 million to $15 million for the back half of the year, or do you just pull forward some of your costs from 4Q into 3Q?

I'm going to ask Ken to give you a more technical explanation in a minute, but basically we're very encouraged in the outlook for the business. The volumes are going to be, we think, moving up significantly in 2017. But the pace at which we reduce our costs is continuing at sort of roughly the pace that we've been anticipating, so the increased volume leads to a higher level of losses in the short term because the components we're using at the moment are prototype and development components, and the volumes are very low, so there are no economies of scale or very limited economies of scale.

And the accounting requires that some of those costs of the products, which will be sold in the future, be recognized in the current period, so there's -- we're in a situation where the implications of the sale are not being recognized in the period in which the sale is actually occurring, but are being recognized earlier. So that -- with our improved expectations and acting on those by bringing in more inventory, we have a situation where the inventory charge that we've outlined in the earnings release was -- occurred in the third quarter, but it affects units that will be shipped in the fourth and particularly in the first and maybe even the second quarter of 2017.

Ken, do you want to add anything to that?

Yes. Al, I think you've got the dynamic correctly stated. Mike, because we bought that inventory in front of the demand, we are taking those write-downs to the realized value. That's what we're required to do on our GAAP. And as we see the ramp-up, we'll be buying inventory to fill the pipeline. The question we'll come down to is how do we reduce costs over this period of time to reduce that margin gap, which will then cause us not to have to consider the pull forward of the loss on the inventory before we build it.

Now, I should say right there that we have plans being executed to reduce costs, so it isn't as if we've now got to figure out how to do reduced cost, but in working with suppliers and changing components and changing certain designs and so on, it takes time to have that occur, so Ken is suggesting that those costs won't come into line with the pricing until later in 2017 and certainly in 2018, as I think we said in an earlier press release that we have to have a level of -- appropriate level of volume and our target margins. Well, to get to the target margins, we have to get to target costs, and that process is going to take us significantly through 2017 to get to the point where -- that we want to get to.

Yes, I think to answer your specific question, the answer is, yes, I think our loss that we would expect for the full-year 2016 is higher than the last estimate we gave you, and it's due to, in part, this pull forward of losses on the positioning of inventory ahead of our build to meet what we expect to be enhanced customer demand. We're buying a lot of product that is being built with prototype tooling. We expect to get economies of scale and standard tooling in place to lower those costs.

And reeingineered components and different suppliers or reduced costs from those suppliers.

Okay. Well, I didn't want to focus on this in my question, so maybe I'll just follow up by asking, I mean, if you mark down everything now, does that artificially pull forward the potential break-even for Nuvera at some point?

It's hard to say how that might work, but it certainly would reduce the losses in later periods, if that's the question you're asking. Whether it affects the timing of break-even is harder to say, right, Ken?

Yes.

But certainly it reduces the losses of future periods that we would have expected during this start-up phase.

The losses will be higher now. They'll come down more quickly, because you won't push -- you won't have a matching of the cost of what we paid for inventory compared to the cost of -- the price of what we sell, so when you get to break-even, you don't need to make this adjustment. We wouldn't have an issue when we got to break-even anyway. So I think instead of a kind of straighter-line trajectory, you end up with more of an acceleration down to break-even.

So here's the dynamic that I would think in terms of. We think our prices are competitive. We think there are maybe opportunities as we get later in 2017 and 2018 to actually have somewhat enhanced prices, because we believe that our products will have sufficient competitive advantages to justify some increment relative to our competitors. Second, on the cost side, we feel comfortable that we would get to our target costs towards the end of 2017 and into early 2018.

Now, at some point, we pass through the break-even point and then we progress towards our target margins, so there are two different points there, but nothing has particularly changed there in terms of our expectations of the timing of reaching our target costs, roughly speaking, and our pricing expectations, roughly speaking. What has changed is our confidence in the volumes during this development period, if anything has changed.

That's certainly good news. Why don't I just move on to the lift truck segment as well. In your release and your comments, you also mentioned that you expect to see growth in the business in 2017, probably outperforming, it sounds like, given some of your share gain efforts. I was wondering if you could give us just a little more of kind of a sharper view on what kind of growth you're expecting there on the top line, because you have such a pretty high bar set for yourselves for a couple years out. I mean, is it going to be a very small growth rate? Is it a high double-digit growth rate? And I was wondering if you think your operating profit as well, which is also looking to grow -- will is scale in line with your revenue, or are you still going to be facing some pricing or SG&A costs next year as well?

Let me comment in a general sense, if I could. Our share gains process has been, of course -- our expected results for the full-year 2016 are looking encouraging to me. They're looking encouraging particularly in the Americas. In Europe, in total, it's reasonably flat, pretty flat, and in JPAC, it's pretty flat.

On the other hand, inside those numbers by region are some significant differences in -- if you look at it by product line, and we -- if you look on a global basis, we're feeling pretty good about our electric counterbalance line, we're feeling pretty good about our narrow aisle line. Our low-cost end of our motorized hand line had some share challenges, but the margins are slim and the sales dollars are relatively small. And in our internal combustion engine product lines, the results have been extremely encouraging from a share point of view.

Now, the complexity here, if you look at it in aggregate, is that the narrow aisle and motorized hand markets have been growing fastest. The electric counterbalance lines have been growing more moderately, and the place where we have the strongest share position by a significant margin is in the class 4 and 5 set of markets, particularly in the Americas. And the market for those products at this point in the cycle has actually been declining, so despite the sheer increases in product line by product line, the mix of product lines has had an impact on us. It's most severe at the moment in the Americas and our big truck product line, where there's been a significant contraction in the volumes and the revenues over the course of 2016 in total.

And in addition to those factors and the implications that they have for our sales volumes, we also have some pricing actions, which are taking place, but those are two somewhat different types. There are certain areas where we are establishing a stronger position in certain product lines, particularly in the warehouse product lines, and in order to be competitive in some of the large accounts, particularly ones that we've been winning, we have to have prices that are below our average margins, and so that is very much selected pricing that is related to competitive situations and part of our long-term share gain progress with customers that we haven't been doing business with.

But we also have some areas where our costs have been favorable, particularly in big trucks in the Americas, and despite the down market, we're in a position to gain share because we can reduce prices because our costs have gone down. And so those products, you may remember, are made in Europe and shipped to America, so they are denominated in terms of euros, from a cost point of view, in large measure.

So there are a lot of factors that are at work, but generally speaking, we feel pretty good on the share side. Now, those are shares of bookings that I just gave you, and you may want to note in particular that in the third quarter, as our earnings release indicated, our bookings improved compared to 2015 by something over 3000 units.

On the other hand, our shipments compared to 2015 declined by 2000 units, so there's a swing between the bookings and the shipments of 5000 units, and that's the basis for the comment that as we look forward into fourth quarter and particularly 2017, we have a healthy backlog that is a result of the enhanced share and the enhanced market levels, and we think those programs are going to continue to pay off during the course of 2017. And obviously, bookings in the first half of the year will affect the second half of the year, so some portion of the bookings in 2017 will affect the shipments in 2017.

So you put all those factors together, and that leads to the comments that we gave you with regard to 2017. Now, as far as the margin side, some of the factors -- a combination of currency and the pricing I discussed -- will be affecting the -- and the overall mix of products that we have that's moved towards lower-margin products and away from the higher-margin products is affecting our overall margins.

And as far as the GS&A is concerned, I think our expectations are that in 2017, they're going to be pretty comparable to 2016. So from our perspective, the period of putting in place additional GS&A capabilities to meet the needs of our share gain program is pretty much over. Now it's a question of getting the full benefit from those over time, which we're working very hard on and which we feel is moving in the right direction.

That's a long explanation in answer to your question, but hopefully it's helpful to you in explaining the rather complicated dynamics that are going on.

Sure. I have just one quick follow up on that question and on your answer. Is it fair to say in the class 4 or 5 and the larger units that there's an overlap here, perhaps, with some of what we've been hearing from the aerial work platform providers for the lifts and so on simply by saying the order trends from seven or eight years ago, during the great recession, were pretty weak, that you sold only a small amount of units, and now we're entering the replacement cycle of that smaller unit class from several years ago and now we're still looking at a pretty low replacement level into 2017 as well in that kind of category, or is your business really not -- in that size, not really tied into the aerial work platform replacement cycle?

Yes, I wouldn't want to compare it to the aerial work platform cycle, but I would say this, that particularly in the Americas, we have a significant slowdown in big trucks and particularly the larger end of the counterbalance trucks that lies below the big trucks, and it's certainly related to industry slowdown. There may have been some pent-up buying that occurred to some degree after the downturn, so, I mean, I'm inclined to think about it a little bit less from a replacement point of view than I am from a cycle point of view and perhaps margin -- or perhaps unit volumes that were higher in the 2011, 2012 period because they were so low in the 2008, 2009, 2010 period, or something along those lines.

But let me ask Colin Wilson, who is also on the phone, if he has anything he wants to add to that perspective. Colin?

It's very much industry-related, so our big truck is down because business is down in Texas due to the oil and gas, down in metals because of the low price of steel. It's down in paper. That industry is a little bit soft. So it's very much related to the health of the customers and the industries that we sell those products into, and as Al said, it really -- if we look at the demand, up to about four tons capacity, it's pretty healthy, but then compared to where it's been over the last couple of years, you get to five tons and above and that's where you see the softness.

So I think the simple answer is it's -- I don't think it's at all related to the same dynamics as you were talking about on the aerial work platforms. I think it's very much related to the industry segments into which we sell these trucks.

Okay, guys. Fair enough. I'm going to pass it along at this point. I appreciate it.

Mig Dobre, Baird.

I want to follow up on a couple of Michael's questions here, maybe going to Nuvera. I want to clarify that you're saying that in the fourth quarter, the operating loss is going to be similar to what we've seen in the third.

No, I think what we said was that our full-year operating loss that we previously provided will be higher as a full-year loss. In the third quarter, we had to take the inventory that we had on-hand and take the market adjustment down to the sales value or the replacement value, and in that regard, we've kind of taken that.

Now, as we build product and we buy new inventory, we will be buying that and sourcing it hopefully at lower costs. As we get lower costs, the gap between the realizable value and the cost we pay will shrink, so on a per-unit basis. So we don't -- I guess the way I would say it is, again, our loss will be higher for the full year than what we've previously provided you.

Well, okay, I understand that bar, but I'm still wondering -- I mean, you were pretty specific as to what you expected in the back half for a Nuvera loss. Now it's higher. I'm just trying to understand how much higher.

Largely in the third quarter and largely due to the one-time -- or I won't call it one-time, but to the developmental expense that we incurred related to the components, and we brought a lot of that inventory in for future build in that quarter, so that's when those charges were incurred.

If we end up with a lot of orders, Mig, and we need to buy more inventory, it's volume-related as well, so that's where it's a little bit difficult for us to give you a full estimate.

But you're also talking about this being an issue in the front half of 2017, so compared to what you've put up in the third quarter, how should we think about that? I mean, are we -- yes, how do we think about the front half of 2017 if you're saying that the fourth quarter is going to tick down in terms of the loss?

As I said in my comments earlier, one of the complications of the accounting requirements is that the costs associated with the sales come in earlier periods -- or some of the costs associated with the sales come in earlier periods than the sales, and so over the course of 2017, things may well average out, but that really isn't the case in 2016, and some of the components that have been brought in are really related to 2017 already.

I think our guidance is that we expect to have a lower overall operating loss in 2017 compared to 2016, and that I think what we're saying here is that our first half of 2017, those significant inventory adjustments will moderate.

Yes. Now, having said that, we feel that those numbers could be influenced by the volume -- would be influenced by the volume in 2017. Now, practically, if we have additional bookings in 2017 over and above the numbers that we are currently thinking may come to pass, we may actually have those bookings shipped in 2018 rather than 2018, and the reasons for that are largely related to bringing up the manufacturing process in an orderly way over the course of 2017, and it would be our hope that we could work with our customers to tie in shipments to a sensible, orderly manufacturing ramp-up, and also that has the benefit of tying more closely to the cost-reduction programs which are under way in the Nuvera business.

So I just want to caution that all of these comments about 2017 are highly volume-dependent, and that's the best perspective we have at the current time.

And I appreciate that. I guess my struggle as an analyst trying to put together a forecast is this -- if it's difficult to gain visibility in basically next quarter's or the next six months' operating income, how can you have visibility 18 months out to be able to say that your operating loss is going to be slightly lower than 2016? So I was just sort of looking to gain insight as to what makes you think that that's possible and what the front half versus the back half of 2017 would look like based on what you know your expenses to be. But maybe you can't provide me with that. I don't know.

That's the point. It's certainly transparent to us in terms of our expectation based on all of the moving parts that I've described. Now, the moving parts could change in terms of timing and so on and so forth, but certainly we have visibility, but we're just not going to get into the level of detail that I think you're suggesting. I just bring you back to the point that in the third quarter and a comparison to a running rate basis, we had some special charges related to the inventories, and that gives us the inventory we need for a while. Now, we may choose to bring in some more. The timing of that is going to be, to some degree, order-dependent, and then it ties into the actions we have to take from a GAAP reporting point of view.

But let me just back away from all this and from quarter-to-quarter analysis or even 2016 and 2017. The real question here in our minds is are we feeling increasingly good and confident about the long-term prospects of the Nuvera business? The answer is we are, and the getting there simply has costs associated with it, but we feel the products that we have are highly competitive, that many of the customers who are using fuel cells and already have them and are going to be -- or who are going to be adopting them are increasingly active in this marketplace and causing it to grow more quickly.

And they, at a minimum, are interested in dual-sourcing, so that in a product which is evolving in terms of its capabilities and in terms of the customer's sort of risk profile, if you will, they are very interested, in many cases, in dual sourcing. And there are really only two of us with effective product -- competitive product out in the marketplace, so the market is continuing to ramp up, if anything, at a greater pace than we were anticipating, and we think we're going to get our fair share of that market.

And we feel that over the next 18 months, the costs are going to come into line, and so from our point of view, there's a great deal of uncertainty about specific numbers and any during that period, but we're feeling that the program is really moving in the right direction, from our vantage point.

Okay. I guess I understand that, and I appreciate your thoughts on it, but maybe, if I'm to look at this through a slightly different angle, looking back since Nuvera came into the fold, there have really been some changes that you had to make with regards to your -- you're really cost forecasting more than anything else. You had additional marketing and research and development costs that came in and added another kind of layer of expense, which, if my memory serves me right, were not initially anticipated.

Now we're talking about these inventory dynamics that, as early as the analysts' day, were not really anticipated or disclosed publicly, so I guess I'm wondering here as to does this business surprise you with regards to how much cash it requires and how much expense it requires versus what you thought initially? And as you're looking at the long term, at what point do you say -- hey, look, we need to adjust our thinking here because we simply have dynamics that we did not necessarily anticipate when we started on this journey?

I'd just leave it at we feel better about the business. Of course we would wish that there were lower cash expenses associated with getting to where we want to, but this is a start-up business. Remember that we bought a product or a potential product capability that needed to be commercialized. The technology was there. Nothing has changed. Forecasting all the detailed costs, from our point of view, we do the best we can, we give them to you. It's not atypical to have them go up. In some ways, from our point of view, we want to keep a tight rein on the costs so that everybody feels accountable and their budgets are not too big and then cause them to feel comfortable and then we do have overruns.

But at this point, the expectation of specificity is not something I'm very comfortable with. I think the people running the business are doing a very good job. We're bringing Hyster-Yale capabilities to bear, especially on the supply chain and the manufacturing side of this, where we have great expertise and can help them. But at the end of the day, what's really critical here is that the payoff we consider to be, if anything, bigger than we had anticipated when we started down this path, so we feel good about the equation.

I certainly take your point that we'd rather have lower costs of doing it, but the most important thing is to do it in the best possible way and to recognize the uncertainty that's associated with a start-up business.

All right. Thank you very much. Thanks for taking my questions.

Yes. Thank you.

Joe Mondillo, Sidoti & Company.

So on the Bolzoni business, I'm just wondering -- it seems like even if you exclude the acquisition-related expenses as well as all the purchasing accounting, even the amortization that's going to stay with that business, if you exclude all that, it looks like the business is operating at about a 4.4% operating margin, which I think is below the sort of historical margins that that business has been running at. Correct me if I'm wrong. I'm just wondering. It seemed like the profitability there should be a lot higher. It seems like you're looking for a little bit of improvement in the fourth quarter, but I'm just wondering sort of what's going on there and if you see sort of the 5% to 6% operating profit margins that it seems like it's capable of getting to bouncing back pretty quickly.

Well, I think our basic view of the story at Bolzoni remains pretty constant. I think perhaps one of the factors at the moment is that -- remember that the process of acquisition was extremely complicated, and it was a process, because of Italian law for public companies, that meant that effectively our detailed planning process was delayed significantly from what we had anticipated when we first went into this.

So the -- and indeed, the acquisition itself occurred somewhat later, as well as the assessment of the sort of operating plans for going forward. But I think that the sales volumes are not way off where we anticipated that they would be when we thought about things a quarter ago. I think that if you focus on the sort of costs in the third quarter, I don't think our perspective has changed significantly on the fourth quarter.

What I would say is that our important challenge is to take advantage of all the opportunities that we saw in the acquisition of Bolzoni, and we're working hard to do that. You remember that there were opportunities to change our sourcing patterns to take advantage of the Bolzoni capabilities. Those plans are under way. They take time. They'll mature much more in 2017. We have programs to try to help Bolzoni's cost structure by leveraging the volume capability that -- or position that the lift truck business has in terms of purchasing power. We want to enhance the market share position of Bolzoni, particularly in the Americas.

And as a practical matter, there's always a period of some unsettlement in the immediate aftermath of an acquisition. It's awfully easy to think about this acquisition as if it occurred at the beginning of the year, because we announced it, I think, when, in December?

February.

When we announced that we were having the discussions the first time?

That was in February.

February officially.

With our year-end results.

Yes.

And so -- but we had been thinking about it from the -- a lot of the thinking was associated with the beginning of the year I guess is the point, and there had been some -- but we've only had it for a quarter as a practical matter.

Yes, 100% only for a quarter.

Yes, I understand. I guess I'm just wondering is -- I understand a lot of the things and the synergies that you're going to try to put in place. It's way too early for progress to happen. I'm not really concerned with that. I understand that's going to take a little time. I'm just wondering are the margins a little lower than maybe the last 12 months or the third quarter of last year? And if so, is there anything -- is it just revenue being down year over year? I don't even know what the year-over-year change of revenue is. Is it a mix issue and it's just sort of a one-time type thing, or what's going on with the actual business in the third quarter, excluding any of the things that you are intending on doing?

I'd sort of pass over the third quarter and look at the fourth quarter, and our expectations are pretty much in line with what we anticipated before. I just would leave it at that.

Okay.

That's what our thinking is at this point, so in that sense, nothing fundamental has changed. Remember, in the third quarter, just as an incidental matter -- I don't think we mentioned it in the press release, but it's always vacation time and a lot of things go on in the summer in Europe well beyond what happens in terms of the US, and so there probably are some elements there that affect the third quarter, but on an ongoing basis, we're still looking at the fourth quarter and reasonably similar terms.

Okay.

Joe, Italy, Germany and Finland are three of their main locations, so the summer schedule in the third quarter affected us, but that affected third quarter last year, so that's comparative, but it gives you kind of a sense of third quarter affecting third -- the run rate.

In Bolzoni.

In Bolzoni, yes. The third quarter this summer's close schedule would affect it. I think our guidance here is that we're expecting revenues in the fourth quarter close to their fourth quarter last year. We have had some comments about class 1 and 5 product. Bolzoni products aren't typically sold for (inaudible) in class 3 or for a lot of class 2 product. They're really on counterbalance products, and those markets have been mixed around the world. Some are --

On the higher end of -- the heavier end of those markets.

So those industrial customers that would have those types of attachments, paper being a very significant one where the Finland location is focused on, is also affected by that. So end-user demand for a class 4 and 5 -- class 1, 4 and 5 product really helps drive the story on the top line.

Okay. In terms of the guidance that you provided for Americas, you're talking about operating income being down year over year in 2017. Is that excluding some of the one-time costs that we saw in the first half of the year in 2016?

In terms of the total --

So if you exclude -- there's a loss and a recovery of assets of $2.8 million in the first quarter. If you exclude those, the operating income for the year in Americas in 2016 is going to be a little higher than the GAAP numbers, so if they're higher, are you looking at GAAP numbers or are you looking at excluding some of those one-time type items and it's going to be down from there?

Yes, I think we're talking about GAAP numbers, and of course, in the first half, we also had acquisition costs that are in those GAAP numbers.

Right. So the GAAP numbers are going to be more depressed, and so you're saying that 2017 is going to be down from even those sort of depressed levels in 2016.

Yes.

Okay. I guess that brings me to my follow-up, then, if that's the case. I guess the biggest issue that came through in the press release, which isn't surprising at least this year, is the mix. Obviously, the heavier trucks, big trucks are not seeing as much demand and those are higher margin, which is understandable. I'm just wondering -- as we go into 2017, it seems like the comps should be easier, especially in the back half of the year. Could you talk about the backlog trends within big trucks? Is that backlog continuing to decline and that's why you're sort of pointing to the fact that this mix issue is going to continue into 2017?

Joe, let me back you up to the question before, because I want to make one clarifying comment. We had an awful lot of good tax adjustments, favorable tax adjustments, in 2016 that we don't forecast to reoccur in 2017, so there's quite a swing on the tax line that's not -- that gets us back to a more normal rate, because those discrete items that we recorded, in particular there were two this quarter and others that we've noted through the year 2016 that we don't forecast those reoccurring, so I just want to make sure that you -- I was talking about it from a net income level, not necessarily from an op profit level.

Well, in the press release, you say full-year 2017 operating profit in the Americas segment -- operating profit -- is expected to decrease.

In the Americas.

Yes, that's what I'm talking about, Americas.

I'm sorry.

So I'm just clarifying. Are you continuing to see a declining backlog of big trucks, and is that why you're sort of pointing to this mix issue continuing to remain in 2017?

Well, let me just say that I think that our unit shipments -- if you're really asking about the effective unit shipments, our big truck shipment volumes will be lower in 2017. Now, they're a lot lower in 2017 than they were in 2015, but they'll still be somewhat lower in 2016, but as you suggested, that will be mainly in the first half. So the big truck --

I guess what I'm suggesting is the back half of the year is going to have an easy comp, and I would think, if any -- the easy comparison and even -- I mean, you've been seeing for a couple quarters the sort of headwind of a tough mix issue, so I'm wondering is the backlog -- I guess could you just clarify is the backlog of your big trucks continuing to decline, or has that stabilized?

I think it's probably pretty much stabilized at this point, but a comparison to shipment terms will show that the first half of next year will be adverse.

Yes, and it's a geographic shift as well. I would expect Americas backlog would be down, AP's backlog would be down. Europe has been a pickup, but even when you get the anecdotal kind of story in Europe, purchasers now are taking longer to make a decision, and I think we had a couple competitors out there who put out releases that were talking about that, that are based in Europe that produce product in that heavy range.

But the broader picture is we expect significantly greater bookings in 2016 than we had in 2015 in the Americas, although big truck is down, and in 2017, we expect again to have significantly greater bookings than 2016. And the big truck, as I said earlier, is likely to be down in terms of bookings comparisons in the first half, but at a much more moderate level than was the case in 2016 versus 2015.

Okay. Okay. Just lastly, I just --

The overall backlogs have been rising, as you've noted, and we certainly hope that trend will continue over the course of next year. Now, we ramp up our volumes from a production point of view in a disciplined and structured way so that we don't lose efficiency and production, and so that's a factor we're taking into account too in terms of we don't want the backlogs to get too long because our customers would become concerned, but on the other hand, we're in no hurry to ship units as long as there are not any customer issues, and we want to make sure that we do it in the most efficient way possible.

Let me ask Colin if he wants to add anything to this general discussion. He may not, but Colin?

No, I think the -- certainly as we've gone through 2016 just really focusing on the bigger trucks, our team in the Americas was calling the market down. We did, in fact, see the market going down. If anything, they are more optimistic about the prospects for 2017. However, we haven't really seen it in the numbers yet, and so what they're hearing from the market is more optimistic noises, but we're being very careful not to plan significant increases until we actually see the bookings coming in. I think the same can be said for the smaller four- to seven-, four- to eight-ton capacity units.

Okay. Thanks. I just wanted to ask just lastly in terms of Nuvera. How much was the actual prototype costs, and if you were doing 38 trucks in the third quarter, what kind of, sort of level do you think you need to get better sourcing costs to lower the source of -- the cost of production?

I think the only comment I'd make on that is that -- I don't know that we had it in this earnings release, but in a previous one, we had indicated that if we could get to 700 units a quarter at target margins, that we would be -- and there were some power cap units as well, hydrogen-producing units, but we could get to break-even, and I think that equation is still roughly accurate.

But the complexity in terms of forecasting is that if our units go up, even above 700, but we're not at the target margins yet, you may actually have somewhat larger losses, although the business is doing better in terms of building its position in the marketplace. But generally speaking, that's the equation that we are looking at, so from a volume point of view, we expect to significantly enhance volume and are encouraged about 2017, at least at this stage of the game. And on the other hand, our target cost structure is -- we're still aiming at sometime, hopefully, in the early part of 2018 to get to that level.

Okay. And can you comment on what your backlog at Nuvera looks like relative to the 38 units that you shipped in the third quarter relative to the 700-plus units that you need to get to break-even?

I'm really not going to comment on backlog. I think the earnings release used some pretty precise, specific language in that regard about the nature of the discussions that we're having with customers, including some very large potential bookings about which we feel very positive for the reasons that I described to you a few minutes ago.

Okay. Thank you for taking my questions.

Yes.

(Operator Instructions). Mike Shlisky, Seaport Global.

Sorry to harp on this whole thing with Nuvera, but I want to confirm can -- do you use LIFO or FIFO for Nuvera at this point?

LIFO.

LIFO?

LIFO. LIFO.

Okay. All right, got it. I'm sorry, F or L?

Sorry, go ahead.

I didn't hear you. You said FIFO or LIFO? Sorry.

Lower of cost or market would apply to either, so you can have a LIFO adjustment, but you still have to recognize lower cost or market.

Got it. Just wanted to confirm that. And then I just wanted to make sure I also got -- so this inventory change here, was it something that was kind of brought to your attention by your auditors, or is this a policy that you just decided you have some kind of GAAP flexibility here? Is this your internal decision?

This is a GAAP requirement, and we're reflecting it, but what has changed is the inventory accumulation that we have for purposes of building, and that had to be recognized in the third quarter.

Yes, Mike, we've been --

We called out, mind you, that because of its size, we called it out.

Yes, we've been posting a lower cost or market adjustment. Our volumes were very small up to this point. We've now bought inventory to produce higher volumes, and that's what's driving the need to call out the lower cost or market.

Got it. Okay. Okay, got it. That makes a lot more sense now. Thank you.

(Inaudible), and maybe we should have been clearer about that, but I think Ken described it very precisely a minute ago.

No, that's the usual way. I got it. I got it. And then the other thing I want to ask about while I'm on the call here is about your tax rate. You said you'll get more normalized tax rates in 2017 after some unusual stuff going on in 2016 on the positive side. Can you maybe tell us what you think your normalized tax rate is in 2017?

Well, we've always talked around about a 28%, 27%, 26% blended rate. Mike, it really comes down to how much of our income we earn in the US and, to a lesser extent, in Brazil and Italy versus other places in the world that have a lower effective tax rate. And what you saw between Q2 and Q3 was this mix shift because of the larger Nuvera loss and because of our reduction in our income we expected in the US segment, that less of our income would get taxed at the highest rate and more of our income would get taxed at lower rates, and it's just a mix shift across.

Then, of course, in the quarter it looks really odd because we're adjusting down to that lower rate and re-accruing at a lower rate the entire year's worth -- year-to-date worth of pretax income, but the numbers to focus on are really the year-to-date numbers, and I think typically in the past we've talked about the effective rate that's shown in the table less the permanence, getting you to a tax paid or tax accrued after permanent adjustments.

Compare that to your pretax income, and if I do that, we're at 15.6% year-to-date in 2015. We were at 27.7% last year year-to-date in 2015, so you can see that we did drop about 12% year over year in that effective rate, but that's the mix shift issue. That doesn't account for the two discrete items we had in the quarter, the one we announced with the second quarter earnings release as a subsequent event, the Italian tax ruling that allowed us to reverse a valuation allowance we previously had, as well as the US tax items we noted related to R&D and manufacturing credits.

So I think you've got to set those on the side. They kind of happened this quarter, but -- and we should see an increased R&D credit due to the investments we're making in the commercialization of Nuvera's technology going forward.

That's perfect, Ken. Thank you so much.

There are no further questions at this time. I will turn the call back over to the presenters.

All right. Thank you so much for joining us today. We do appreciate your interest. And if you do have any follow-up questions, please feel free to give me a call. You can reach me at 440-229-5168. Have a great day.

This concludes today's conference call. As a reminder, this call will be available for replay in approximately two hours by dialing 855-859-2056. The encore pass code the replay is 91062222. Again, this call will be available for replay in approximately two hours by dialing 855-859-2056. The encore pass code for the replay is 91062222. Thank you.