Hyster-Yale Inc (HY) 2016 Q4 法說會逐字稿

Good morning, my name is Jody, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2016 Hyster-Yale Materials Handling Incorporated conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions). Thank you. Christina Kmetko, you may begin your conference.

Thank you. Good morning everyone. Welcome to our 2016 fourth 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, our Senior Vice President and Chief Financial Officer. Yesterday we published our fourth quarter 2016 results, and filed our 10-K. Copies of the earnings release and 10-K are available on our website. For anyone who was not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon, and available for approximately 12 months.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 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-K.

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.

Now let me discuss our results for the fourth quarter. I will discuss the highlights first, and then get into the details. Overall global lift truck markets remained strong in the fourth quarter of 2016, and increased over the prior year fourth quarter. In this strong market we saw a 3% increase in our fourth quarter shipments, and we have a very strong backlog of orders going into 2017. On a consolidated basis our revenues increased 7% to $690.6 million, up from $645 million in the prior year quarter. This includes $40.5 million of revenue from Bolzoni, which we did not own in the fourth quarter of 2015.

Consolidated operating profit and net income declined compared with the prior year. Operating profit decreased from $26.2 million in 2015, to $8.4 million this quarter while net income decreased $12.2 million, or $0.74 per diluted share in 2016, from $17.2 million, or $1.05 per diluted share last year. in our previous outlook we stated that we expected operating profit to decrease in the fourth quarter, driven primarily by the lift truck and Nuvera segments, and that occurred as planned. However, Bolzoni's results were better than expected.

At our lift truck business, fourth quarter 2016 revenues went up 1% to $649.5 million, from $644.6 million in the prior year fourth quarter, mainly as a result of an increase in revenues in EMEA, but operating profit substantially decreased to $19.3 million this quarter, compared with $32.3 million last year. This decline was driven primarily by the Americas, with an additional small decline in JAPIC, primarily as a result of unfavorable currency. Revenues and operating profit both decreased in the Americas. Despite an increase in revenues from shipments of our new Class 5 internal combustion engine standard truck and other high capacity, basically the 3.5 to 8-ton Class 5 trucks, fewer shipments of big trucks and Class 1 trucks were the primary drivers of the decrease in the Americas revenues.

As expected, deal-specific pricing in North America also added to the revenue decline. The decline in operating profit was the result of a substantial decrease in gross profit caused by a shift in sales to lower price, lower margin units, and certain deal-specific pricing, as well as an overall decrease in unit shipments. As previously mentioned, EMEA drove our consolidated lift truck revenue, improvement with a 10% decrease in revenues, but currency was still a headwind for this segment. Higher unit shipments of the new Class 5 internal combustion engine standard truck drove much of this increase. However, this increase was partially offset by unfavorable currency movements of $6.2 million. Operating profit in EMEA also increased substantially from the prior year, primarily as a result of reduced operating expenses, and modestly higher gross profit.

Increased sales of higher margin lift trucks and lower material costs were mostly offset by unfavorable currency movements of $4 million. We usually don't discuss the full year results during our quarterly call. However I feel it is important to provide a bit of perspective about the large decrease in our full year 2016 consolidated lift truck results, while providing a high-level view of our overall lift truck outlook for 2017. Details regarding the outlook for our geographic segments is outlined in our earnings release.

Our full year 2016 lift truck results were significantly affected by upfront investments made to move forward our share gain initiatives. Overall full year lift truck net income declined as a result of the unfavorable effect of lower pricing, including deal-specific pricing, and reduced shipments, which led to lower absorption of fixed costs and higher manufacturing variances. Increased selling, general and administrative expenses including acquisition-related costs and higher marketing-related expenses, also contributed to the decrease in net income, as we invested to position ourselves to achieve our targeted objectives.

In contrast, in 2017, progress toward achieving our targeted objectives is expected due to the continued focus on gaining market share, the development of new products, and the 2016 investments made in the share gain initiatives. The global lift truck market in 2017 is expected to be comparable to 2016. Despite this market environment, we expect these activities to result in increasing sales volumes, and enhanced margins through pricing while maintaining headcount near current levels. More specifically, we expect unit and parts revenues and operating profit to increase in 2017 compared with 2016, as a result of the anticipated market share gains. We also expect 2017 net income to increase modestly from 2016, as benefits from the improvement in operating profit are expected to be partially offset by a higher income tax rate, and the absence of tax benefits recognized this year.

Moving to Bolzoni, this segment contributed incremental revenues of $40.5 million, operating profit of $1.7 million, and net income of $1.6 million in the fourth quarter of 2016. Both operating profit and net income includes $1.6 million of expenses related to the amortization of acquired assets. At Bolzoni, the majority of the revenues are generated in the EMEA market, primarily eastern and western Europe, and to a lesser degree in the North America market. As a result of anticipated growth in the EMEA markets, recent OEM commitments and the implementation of sales enhancement programs, we expect Bolzoni's 2017 revenues to increase compared with its full year 2016 revenues, and be comparable to the annualized fourth quarter 2016 revenue. In addition to the increase, we expect that the implementation of integrated lift truck and Bolzoni programs will generate growth in operating profit and net income, and generate more operating leverage from sales growth. In addition, the absence of the one-time purchase accounting adjustments recognized in 2016 will contribute to the improvement in results.

Finally, I have much to explain regarding Nuvera, but first let me explain the current quarter results. Nuvera reported revenues of $600,000 this quarter, compared with $400,000 last year. Similar to last quarter, Nuvera had larger operating and net losses than in the prior year, as it continues to ramp up inventory for increased production of its Fuel Cell system units. Nuvera's operating loss increased in the 2016 fourth quarter to $12.6 million from $6.1 million in the prior year, this larger operating loss was because of an increase of $5.2 million in development and production start-up expenses, including unfavorable inventory adjustments to reflect current selling prices.

In addition, Nuvera had increased marketing and employee-related costs as it continues to transition from product development to commercialization and production. With initial commercialization now underway, we are shifting Nuvera's focus to its core competencies of Fuel Cell stack and engine manufacturing, while it continues development of its hydrogen generation appliance and its electrochemical compressor. After its success of delivering to its launch customer, and successful trials and demonstrations at other customers, we are confident there's adequate demand to begin volume production of the battery box replacements and integrated solutions at our Greeneville, North Carolina manufacturing plant.

As a result, and consistent with our original acquisition plan, responsibility for the next generation of battery box replacements, as well as the integration of Nuvera's Fuel Cell engines directly into the lift truck product range, will be shifted to the lift truck business during the second half of 2017. For new, Nuvera will continue to manufacture its current generation battery box replacements, but as a manufacturer for the lift truck business, and it will provide ongoing design assistance to the lift truck Business Development group. The first shipments of Nuvera's battery box replacement product began just before the two year anniversary of the acquisition of Nuvera. While initial commercialization took longer than anticipated, we are pleased with the design innovation Nuvera has shown in its core technologies, as well as in its current generation of battery box replacements.

However, production costs for these units are currently higher than target costs. We are focused on reducing manufacturing costs per unit as production increases, and greater economies of scale are achieved through the combination of Nuvera's technology, and innovation with the lift truck business' supply chain manufacturing and distribution expertise. While transition plans continue, new orders are being received, and further demonstrations are planned, which are expected to provide additional sales opportunities.

As a result, Nuvera Fuel Cell system unit shipments and related revenues are expected to increase significantly in 2017 over 2016, most substantially in the second half of the year. Nuvera plans to build out its first generation current inventory prior to transitioning production to Greenville. Until the target cost structure is in place and the supply chain and manufacturing efficiencies are realized, we expect development and inventory costs to result in continued inventory adjustments to reflect current selling prices, but at a decreasing rate.

In 2017 as additional revenues are generated and we work to reduce manufacturing costs per unit, we expect Nuvera to have a lower net loss than in 2016, including inventory adjustments, especially in the first half of 2017. Nuvera's objective is to reach a quarterly breakeven operating profit during 2018. Before I open up the call for your questions, I wanted to make a comment about our cash flow.

At year-end our cash position was $43.2 million, which was down from the prior year's balance of $155.1 million. In addition our debt was also much higher than the prior year. Our cash decreased and our debt increased primarily because of the acquisition of Bolzoni, but also as a result of an unplanned systems-related acceleration of supplier payments in December of 2016. It was this unplanned event that was the primary driver for the uncharacteristic fluctuations in cash and debt. This unplanned event has also skewed our cash flow before financing. We do not expect this systems issue to recur, and in 2017 consolidated cash flow before financing activities is expected to be positive, and increase significantly compared with 2016, excluding the cash that we paid for the Bolzoni acquisition. That concludes our prepared remarks. I will now open up the call for your questions.

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mike Shlisky from Seaport Global. Your line is open.

Hey, good morning, guys.

Morning, Mike.

Can I start off, maybe just start off with a very broad question. Can I kind of get your broader outlook as to why you believe the lift truck market is going to be flat globally next year? Just looking at what's happening in the stock market, for example, it would suggest there's some increase in industrial and economic activity in 2017. So I'm a little bit surprised at your flat outlook. What are the kind of big puts and takes as to why we might not see any growth next year in the lift truck market?

I think there are probably two aspects to that. One is that we want to be conservative. There's no reason not to be, as we think about how to run our business. And we have been growing for quite some time, and some markets go up and some markets go down at this point in the cycle. On the other hand, it may turn out that you are right in certain areas. Certainly there is evidence that areas that have had difficulties are bottoming out and turning up, it's hard to say how quickly they'll turn up. So I think we'll adjust our thinking on the markets as we go along through the year. Remember these are global markets, not just the US, and even in the US if there is a major focus on infrastructure, there might be some impact on some segments of the forklift truck business, but probably not really broad. Colin, do you want to add something on this?

I think, if anything, it maybe is a reflection of how strong 2016 came in against our expectations. The overall market in 2016 grew by 7.5%. We've seen very strong growth out of Europe, about 10.5% growth in 2016. When you really dig into it, a lot of it was on Class 3, so you have to be very careful when you look at the headline numbers, at the quality of the bookings. We saw very strong growth in the Asia-Pacific region, but it was really a rebound in China. China was very soft in 2015 and it rebounded in 2016, and we think a lot of that rebound was maybe a little bit of pent-up demand from 2015.

And certainly the Americas, overall the Americas only grew 1%. North America grew by about 2%. And we saw softness down in Brazil, compared to the prior year. So we're projecting 2017 being sort of broadly flat. I think if there's a, on the balance of this an opportunity, maybe there's a little bit more opportunity. But what I would encourage you to do always is look at the type of bookings, and where the growth is coming from. A rebound in North America in the above 3.5-ton IC engine to us is much more important, than the growth of the Class 3 market in Europe. So I think the bias would be for, maybe it's a little bit more optimistic than we put in our outlook. But I think overall, certainly from a dollar term, from a dollar term it's pretty just unbiased.

And remember that the bookings market is not the short-term driver of our shipments plan, necessarily. We can build backlog if the market is better, or if our shares are higher than we forecast. And then produce those trucks over a considerable period of time. So we want stability in our manufacturing plants and in our supply chain ordering structure, and that will also have an impact on how we think about the shipment side of it.

Thanks. That's great color Colin and Al. Just a quick follow-up on that, then. Your backlogs were up 8% to 10%. Your shipments in your system were down, somewhere around 85,000 this past year, and you want to get to 115,000 in a couple of years. So with your backlog up 8% to 10% here, do you think your revenues will be up in the double-digits in 2017? That might be a good pace to get you from 85,000 to 115,000 eventually?

Well, I think, as usual, we're not going to forecast the percentage. But I think your general interpretation, that we were pretty conservative on our shipments in light of the bookings last year is correct. And you can assume that with a higher level of bookings, we're more comfortable moving our build schedules up, and our shipments up to some degree.

Super. I just wanted to just turn to a comment made you made, Christina, on deal-specific pricing. It sounded like there's some package deals just to get some deals done yet, do some pricing there. Can you give us a sense as to, is that sort of a more widely used tactic in the market these days, to kind of get people on board with your brand, and other companies on board with your brand? Or is that really just a very short-term issue, just to kind of get your share going?

Well, let me put it in a broader perspective and then ask Colin to comment. First of all if you look at the gross margin position, the shortfall really occurs in Americas. Within Americas it's essentially all in North America. And there was a combination of some revenue shortfall in comparison to the previous year, which is largely driven by large trucks, which were called out in the discussion as being weak. And they were particularly weak in the Americas, and we had a downturn in that segment of the market which began in 2014. And there are some signs that portion of the market is coming back as we look to the future. But explaining the past, there was some volume impact. There was also a considerable share impact.

And we have some new customers of real significance in size. And they require an investment up front, to put the infrastructure in place to provide the kinds of trucks they need. We have opportunities to reduce costs over time. But it's really positioning ourselves particularly in segments of the market where we have been less strong, with a really first class participation with certain accounts. Now I would also say that is sufficiently specific that we don't expect that to recur in any way on a regular basis. So as we look forward, there is an element of quarter impact that's unusual. But I would also say that mix is always important to us, and when we don't have that those big trucks and we do have other trucks, the margins are a little bit slimmer. Colin, do you want to add anything to that?

Yes, as Al said, it's really North America. I mean, we have made some very significant penetration into some very large accounts. When we do that, sometimes we have too much truck than what the customer is looking for. Maybe it's a combination that has been incumbent for some time, and has developed the truck specifically to meet that application. So getting in means that we have to hit a price point, but then it allows us to work with that customer, in order to optimize our specs to meet their needs. I do want to stress that this is a handful, or two hands full of accounts. I mean this is not a very long list. We very carefully look at our pricing, looking at these target accounts, and then looking at what I would call our flow business. And we feel pretty secure that our pricing is holding, or is stable on our flow business. And what we have been doing is using the opportunity of getting into these target accounts to build our position for the future. And we would aim to improve our margins over time as we prove ourselves, and as I say, optimize the spec to meet the customer's needs.

But let me be very clear, we don't really put, as a follow-on comment to Colin's observation, is that we aren't in there buying the market. We don't think that's the right way to go about business, even though we're committed to share gains. We want more value for our customers. We want to win them on the basis of the quality of the product that we offer. As Colin suggested, obviously we have to be competitive with our prices. And sometimes we get into situations where, as he suggested, our costs are somewhat higher, and they need to be brought down over time, because in all of these cases, we expect that these are long-term relationships that we're entering into. They're not just one-time situations. We wouldn't put the manpower and the positioning in place if they were just a one-time deal. So these are all situations where we're developing a long-term relationship, and certainly our hope and expectation is that we are providing value to our customers that they appreciate, and that has caused them to want to use us as their provider as we look forward. Hopefully that helps to answer your question.

Definitely. And I just want to squeeze one more in here. I don't want to leave Ken out. Ken, can you give us as any color as to where you think would be an approximate range, I know there's differences in each segment, for a tax rate for 2017 in your opinion?

Yes, Mike, I think what I would say is that we did drop from 28% to a little less than 10% from 2015 to 2016. The big driver there is if you look at our footnote, I think it is page F-20, you will see that our income in the US dropped dramatically, which is our highest tax jurisdiction. I think we had about a $70 million decline in US pretax income. And of course in our rest of the world, we actually increased by about $6 million. So it's that swing that caused the very significant reduction in our rates. Now as the US comes back in 2017, we'll again be providing for at a 35% to 38% rate with state, and that will grow the rate more in line with where we were at the beginning of this year. So I think if you go back to the rates we had at the beginning of this year, I think that's the profile that we would expect.

Okay. That makes sense. I will pass it along. Thanks so much, guys.

(Operator Instructions). Your next question comes from the line of Joe Mondillo from Sidoti & Company. Your line is open.

Hi. Good morning everyone. So my first question regarding sort of gross product margins related to the product mix, the gross margin related at the Americas segment was sort of the weakest we've seen in the while. I know in the fourth quarter you were dealing with that product mix issue, and you have been doing that for several quarters now. But looking at the backlog, if you look at the backlog on a unit per dollar basis, so the backlog in units divided by the dollar basis, it's up three straight quarters, essentially throughout 2016 it increased. But we also saw that trend on that sequential increase throughout 2015 too, so year-over-year it's still slightly down. I'm just wondering, if you look at the backlog and the mix in there, are you starting to see an improvement in your orders of larger trucks, and that sort of gives you confidence that the product mix issue will sort of reverse in 2017?

Colin?

The short answer is yes. We are seeing an improvement in bigger trucks, everything from 3.5, 4 tons and upwards, all the way up to our Big Trucks. It's not consistent. It's not consistent by industry or by geography. But you just take the Americas, which clearly is a big market for us, we're starting to see improvement in industries like steel and concrete, mining starting to recover. We're starting to see a little bit more activity coming out of the ports. So yes, we came down quite significantly from where we were in 2014, all of the way through, really the first half of 2016, and then started to see the recovery. But it's by no means yet back to full force. But we are cautiously optimistic we will see a continued recovery going forward.

And let me add to that, and it's a little hard for us to be absolutely clear about it but I think our instinct is that with the very deep downturn in 2008/2009/2010 in some of the industries in which we're strongest, that some of our customers really cut way back on their bookings and their orders. And then by the time things turned up in 2013/2014, they got pretty aggressive, because they had gone for a long time without buying. And then you came to 2015 and 2016. So in addition to hesitation about the direction of the US economy, I think there was also something of a cyclical pattern among, where you can at least argue that there was something of a cyclical pattern amongst some of those customers that are our most traditional customer base. And they in a way kind of went to sleep.

And I think our hope is now they're waking up, and if the economy continues to be robust as seems to be the case, that this slow growth is continuing, much less if, as the new administration hopes, the growth rate can be increased, we think that some of our traditional customer base may come back and complement our initiatives, with both new customers in certain segments of the market, as well as a strengthened position in markets where we haven't been as strong. So you put all of that together, and I think it's too early to forecast it, but we're certainly hopeful that things are going to move in the direction that you're implying.

The other thing I would add is that dealers are seeing their rental utilization increase all of the way across the board, in Big Trucks. And that's typically a leading indicator, and a sign that we could see the industry becoming stronger. People tend to rent to meet the short-term need, and then turn that over into a unit acquisition once the demand solidifies.

I might also add, with regard to the Americas, that in sort of the fourth quarter of this year versus last year, that the comparison for North America is a tough one, because for quite some period North America had been benefiting from deflation in its supplier costs. The dollar was very strong. Commodities were very weak. All of that was beneficial. And so the margins under those circumstances tend to perhaps be artificially a little higher than our target margins would be on average over a cycle, in terms of our objectives. And now you're starting to see things move in a little bit of different direction, commodities improving. The dollar has been stronger but that's sort of stabilized in terms of its impact in buying a lot of the components that we buy.

So that's also a factor that's probably going on a little bit in the situation that we see comparing the fourth quarter-fourth quarter in terms of gross profit. And don't forget, too, that in gross profit is not only our product margin position, but also the manufacturing variances that we have. And we had factory variances which result from the shipment levels that occurred during the quarter in certain plants that also had an impact.

And our Greeneville plant was hit by a hurricane in the late third quarter, which affected what went on in the fourth quarter.

So a lot of factors at work, which doesn't help you, but it's part of the explanation.

All right, great, thanks. And then looking at Bolzoni, the operating margins excluding that one-time inventory adjustment, or purchase accounting was 8.1%, a lot higher than I was anticipating. It looks like it's in the SG&A line. Is that stronger than you were expecting going forward? 8% seems a little higher than what you guys have been talking about in the past. But just in terms of that, why was it so strong in the fourth quarter, and what's your sort of thinking related to that in 2017?

Well, they had a good quarter in the fourth quarter. That is number one. And some of that was sort of getting up to speed after the acquisition, which always has a slowdown effect of one kind or another while it's going on. So that's a part of it. But also keep in mind that we expect enhanced volume in Bolzoni through increased share, and also by serving certain segments of the business more broadly, including to us. And they have the capacity to do that without adding a lot of extra cost. So the leverage that they should have as their volume grows is very substantial.

So we're very optimistic about the impact that Bolzoni is going to have over a period of time. I think at this point it's living up to our expectations. The toughest thing for us is the accounting treatment. And you have to keep in mind that because of acquisition accounting, some of our earnings, effective earnings in cash are not treated as GAAP earnings under the accounting. And so it's really performing better than the numbers suggest. Ken, I think I said that reasonably accurately?

Yes, I couldn't agree more. I think we're thankful for the strong fourth quarter out of Bolzoni. The fourth quarter is their strongest quarter historically and seasonally. So I don't think we were unexpecting a good quarter, but we're happy that the transition to being part of the Hyster-Yale organization is now behind them.

And there was another disruption in the second and third quarter to do with the acquisition. I mean in the second quarter we had the worst of all worlds, because we own 51%, and yet it was we had to treat them absolutely separately, and couldn't cooperate on things like in-sourcing of forks that we've now been able to really get moving on in the fourth quarter.

So the gross margin doesn't look a whole lot different when you compare the fourth quarter to the second quarter, it's a little bit better but it's not a whole lot better. But the operating margin, I guess that's what I'm focusing on, is 8%. So it looks like it's in the SG&A line. I don't know if there's something seasonally in the fourth quarter that causes that SG&A to be lower than the rest of the year. If that's the case, are we expecting that next fourth quarter, is there anything else that you can sort of explain why the SG&A was --?

Joe, the only thing I would point out is second quarter of last year, they would have had the acquisition costs in SG&A. So we would have to --We would have to go back to that release.

Yes, I was excluding that.

Well, it's hard to exclude it, I think, on a fully comparable basis. We can do it in terms of certain accounting adjustments that we have to make. But non-accounting adjustments are a little harder to identify in certain areas.

How about this, do you think, it looks like the 35% or so gross margins seems to be sustainable. Do you think the 8% operating margins are sustainable? If so, I'm assuming that the SG&A was lower than expected. Or for some reason it's lower in the fourth quarter?

I think we would have to look at that level of detail, and we're not likely to forecast it that way. I would just put it in terms of the fact that looking forward, we expect more volume to flow through, and we expect that there will be leverage, and that the performance of the business is going to be very satisfactory.

Okay. I just had a couple of questions on Nuvera. The revenue a lot less than I was expecting. I thought these products would be starting to ship in the fourth quarter, and you saw less revenue in the fourth quarter than the third. Just wondering sort of your outlook there, and how the orders have been trending? Are we expecting shipments in the first quarter? Just give us more of an indication of how shipments in that top line part of the business is trending?

I think Colin will comment more specifically on some of the timing. I just introduced the subject by noting that we're in an odd period, in my judgment. If we chose to, we could probably take more, we could probably be more aggressive about taking orders with certain customers. We don't choose to do that at this point, because we would rather get the product, a little more comfortable that the product cost structure is down where we expect it to be quarter by quarter, number one. Number two, that the introduction of the product into the marketplace is fully bedded down, so that from a customer's point of view, it's perceived as very high quality with very strong service and support. And so we're being a little bit careful in our introduction cycle here, to make sure that we have exactly what we want. We would rather go slowly than stub our toe, bottom line. But with that background, let me ask Colin to comment more directly on kind of the pace that we do see as we look at it now.

You will see shipments pick up as we go through 2017. To Al's point, we want to operate at a very measured pace. We could have took bookings in much greater numbers than we have done, if we had made commitments to customers to deliver in certainly third and fourth quarter of 2017. We do have a couple of products that we're still in the development phase on, that are critical to be able to offer some customers the complete package to meet their needs.

Let me be clear what Colin is talking about, when he's talking about a product here. It's not a new product, it's a new packaging of our existing capabilities to meet battery box sizes.

Battery box sizes. Responsibility for the development of those new battery boxes is being done now out of our Portland development center with the cooperation of the Nuvera engineers. And that's a change to the way we have been doing it. As we articulated in the release, we have moved the responsibility for the packaging of the Fuel Cell engine over to Hyster-Yale Group. And Hyster-Yale Group will also be working not only on development of the new battery box packages, they'll be working on value engineering. The ones that have already been delivered, they will be putting them through the very rigorous test protocols that we put all of our new product developments through.

But they'll also be working on integrated solutions, where instead of just having the battery box replacement, it will be integrating the Fuel Cell engine, and all of the relevant components into the trucks themselves. That is going to happen very quickly. We envision that really happening during 2017. So from a piercing point of view, we are working on getting the cost down of components. We don't want to, we articulated this in the release that as we're shipping units today, basically we're losing money on them, because our costs are too high and we're working on bringing the costs down. At the same time we're working very hard on making sure that we have Best-in-Class meantime between [fairly] on these units, because we want, we would rather make a customer wait and then provide them with the right unit with the right quality level, and a lot of value-added capabilities, than to stub our toe, more than stub our toe by putting units in when we're really not ready to meet that volume of production.

It's useful, too, to remember that the cost in the meantime between failure issues can really be a part of the same equation. Because if we are using components that are still not fully commercialized, that are quasi-prototype components, where the supplier is not fully bedded down for volume production, sometimes the performance of the components is less reliable. And so we go through this in every new truck that we do. And we think we're bringing real power to this by the division of responsibilities that Colin outlined, and that are outlined in the news release, with the forklift truck business not only having responsibility for the packaging of the engine, but also for the sales of trucks that use fuel cells. And that puts it in the hands of the people who know what the customer's needs really are. And we have always said that what we want to do is have a variety of solutions for our customers, that can meet the very specific needs that they have.

So one of the solutions we have is a Fuel Cell power generation capability. But that's not applicable across the board in all applications. It takes a relatively high-intensity application to make it economical for the customer, or a particular environment, where electric, traditional battery electric trucks don't make sense for a particular customer. A variety of things. So we now think now that we have got our first commercial customers, and we're shipping to them, and really up and operating, that now we can shift focus, and put the commercialization responsibility for everything except the engine, in the hands of people who, after all, are packaging engines all of the time. They do it with electric motors, motor power, they do it with internal combustion engines, different kinds of those. So that is their business, in a way.

Again, coming back to the original question, we expect the results to improve during 2017, while volume will ramp up during 2017.

Particularly in the second half.

Particularly in the second half. And we feel very bullish going into 2018, because we'll have a full range of the battery box replacements to meet the customers' needs, as well as our intent is to have the integrated solution. We'll be manufacturing in Greeneville where we make our electric products. We'll work on getting the costs down to target levels, and we'll have units which will have a very high mean time between failure, which is something that our customers are telling us they're looking for.

Okay, great. Thanks a lot. I really appreciate it.

Your next question comes from the line of Mig Dobre from RW Baird. Your line is open.

Good morning everybody. It is Joe Grabowski on for Mig this morning.

Morning, Joe.

Hey, good morning. My first question was on EMEA. A very strong quarter, unit shipments and sales, strongest quarter in several years. Operating income pretty good also. I was surprised to see that you changed your outlook for 2017 operating income, from being up year-over-year to being down year-over-year. And just wondering what was driving that, especially due to looking at the fact that there was an unfavorable currency movement of $20 million on gross profit in 2016. So thoughts there?

Ken, maybe you would explain the impact of currency on the situation here, and that's probably the biggest driver for us overall.

Joe, for 2017 obviously the contracts we had in place in 2016 have expired and are behind us. So we have a reduction in the cover that we have in 2017 for the currency exposure in the EMEA division. They do purchase some US dollar components. Some of those US dollar components are from low-cost country sourcing, being so they're not necessarily US costs, but they are billed in US dollars. And as we work through that process, of course, the stair steps move closer and closer to market, and now we're seeing more of the full effect. Since year-over-year the Euro is roughly at the same place as it was at the end of 2016, as it was at the end of 2015. But now that movement has been fully adjusted into the forward rates we have for our contracts.

Okay.

Another comment that I would make is if the dollar weren't so strong in the broader sense, EMEA's operating profit performance would be a lot better than these numbers. Not just because of the comment that Ken made, but because of the translation effect, when you're taking the Euro-dollar relationship. The one thing I would note that we are encouraged by, and it's hard to say exactly how it will affect the numbers, it's really too early at this point, is that the Pound has devalued to some degree against the Euro. And that's important for us, because we have more Pound content than our competitors do. And so our Craigavon manufacturing facility in Northern Ireland has probably benefited to some degree, in terms of its competitive cost position, and its ability to have margins, and be highly competitive on price as a result of that. But the bigger effects you're seeing are the expiration of the currency contracts on the one hand, and the translation effects on the other.

I see. That makes sense. And maybe a similar question on JAPIC. I know there were negative currency impacts in 2016 on operating income in that segment also. But I think even if you strip those out, the segment was a little bit below breakeven. The way I interpret your guidance for 2017 is that it's going to improve, but probably also stay a little bit below breakeven. What has to happen to get back above breakeven on an ongoing basis in that segment?

Well, there are a whole series of things that come together in the reporting of our JAPIC area. And as a backdrop it's probably important to remember that we do many things in Asia which benefit the Company as a whole. The purpose of our business, and business relationships in China, is not just to provide product and activity for the JAPIC area. The trucks are shipped around the world. Our SN trucks made in Japan are shipped around the world. On the other hand, there's no question that the profitability of our business in, for example, China is less than it was a while ago. The market, which is our core market for foreign trucks, which tends to be highly western-oriented customers, or western-type customers, has been weaker than the overall China market, in which we are not a major participant. The situation has been very competitive in the Asia markets. I think we feel we're going to see some improvement in both Asia particularly, and Pacific and Australia. I think the best way to think about it is that it's not going to make a big difference from a JAPIC reported area point of view in the immediate future.

One of the areas, a big market for us is Australia. The Australian Big Truck market was down obviously with the collapse in commodities. Ask the other thing is margins in Australia have been under pressure, because of again, because of currency. So I would call that out as a special factor.

I think the Big Trucks business is important. I hadn't mentioned that.

That's a very helpful perspective. Thank you. A question on Nuvera, you kind of walked through the reorganization there. Was reorganization always something that was contemplated at this part of the development? Or was it kind of reaction to where you see the opportunity for the business going forward?

We always intended to have our production location eventually for the battery boxes in our Greeneville location. There's nothing new in that sense. I do think we probably accelerated our point of view about the value of having all of the selling activities concentrated in our Hyster-Yale Group, and probably also accelerated our shift toward more integrated solutions, and in conjunction with battery boxes for the non-fuel Cell engine business. So I don't think it's fundamentally a strategy that we hadn't contemplated.

I think the more important reason is that frankly the power that we see in establishing our position effectively, is we want to take advantage of the strengths of the Hyster-Yale Group, and they have the strengths in integrating engines into our product. They have the strength in selling trucks with any kind of different power based on the application. And don't forget that it isn't that there's a complete separation. Obviously Nuvera is going to continue to be highly supportive of the activities, because they're going to depend on the end market and its success. But they get to concentrate on their technology. And I think that probably we feel even more strongly than at the time of the acquisition, in the value of the technology and the breadth of capabilities that the development of the Fuel Cell engine business could develop for us over time.

The way we would like to think of Nuvera, really, is almost like the commons of fuel cells. We want them to be a stack and engine manufacturer, supplying to us for building into BBR, by us I mean Hyster-Yale, but also supplying those engines and stacks to other companies. So if you think about Cummins as an example, as an engine manufacturer, that's in effect what we want Nuvera to be going forward. And then our people, our Hyster-Yale people are out every day selling engine trucks, battery electrics, lithium-ion. They have the expertise. Their customers are asking them for Fuel Cell solutions. So as far as the selling of the battery box replacement or the integrated solutions, that responsibility is very much in the hands of Hyster-Yale. In terms of selling stacks or engines or the other technologies that Nuvera has, that expertise and competency will still reside within Nuvera.

That makes sense. Thank you. And then last question for me, kind of a bigger picture question. The goal is to get to 7% operating margin by 2018. I know a lot of that is dependent on increased lift truck volumes. Margins had been between 4% and 5% from 2011 to 2015. Took a bit of a step back in 2016 into the 3%, or in the 3s I guess. Kind of based on the way 2016 played out, is the thought that the 7% margin at the 115,000 produced lift trucks, is that kind of still attainable?

Absolutely. I mean, nothing has changed in our thinking. I would emphasize that we have to be at our target margin levels, as well as get the volume. In other words there can't be more discounting than is, or lower margins, lower pricing than is appropriate.

And it has to be incremental.

And it's got to be incremental. That's the option. But basically, I would just emphasize again, that filling up our manufacturing plants adds our standard margins, and then it covers manufacturing variances, which are contained in the other part of gross profit, and spreads the GS&A across a bigger amount of revenue. And that is the whole story in a nutshell, right there. So the real question is, when can we get to that number? Now, we're being pretty careful about that. You said something about 2018. I think in our news release, Christie, we said precisely what?

We actually said in our investor presentation that we would like to do in 2018, but 2019 was more realistic.

So I think we want to think about that guidance that we've used. And depending on how the markets go, it could even extend out a little bit longer than that. So we're, I'm less comfortable putting a specific time period on it. What we, and let me go back for a second to the discussion of the margins, and the new customers that we had some particularly strong shipments for in the fourth quarter. As Colin indicated, we expect those volumes over time to not only repeat but be greater. Those are long-term arrangements we've entered into. We think the margins will improve, and we think the volumes will improve. But that didn't happen overnight. We worked with that customer for a couple of years, maybe even longer, to get that value-adding relationship well understood. And sometimes they can come more quickly.

We've got a couple of other significant accounts that we have been fortunate enough to develop a new strong relationship with, where we've simply gone in and really thought through the forklift business could be structured differently for them, in a way that helps their P&Ls. But again you're starting relatively early in the cycle. You can't come in on a tender offer bid at the last minute, and offer a lot of value to the customer, because you don't have a chance to understand the application well enough. Now that's a long way of saying that there's a customer development cycle that we have to work with. But if the basic, so we feel that the programs we have in place, and I particularly mention count identification, because if we don't call on new customers, and have an understanding of them industry by industry by industry, we're not going to get share increase by definition.

And I would also call out the solutions capabilities that we've added in our business, because we're not going to get the business unless we have better solutions for people. And so we've got to really understand that. And we feel we have the capabilities in there. And we're building them in ways that reach more and more customers. It takes a little time, but we see it unfolding over 2017, 2018, 2019, 2020. That is the time period. And we feel comfortable that it can happen during that time period, but we're not very comfortable telling you when.

Sure. Okay, thanks everyone.

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

I would like to just provide one clarification on that effective tax rate I was providing before. That was before discrete items. So if you're trying to recreate those percentages, that's how you would do that. Secondly, Christie mentioned a couple of items at the end of her prepared remarks that relate to cash flow and other things. I would point you to our footnote on the acquisition of Bolzoni, because we do have receivables, payables, and other items, that are on our balance sheet at year-end that in the beginning of last year, we didn't own Bolzoni, they're not included in our results. And with respect to the Accounts Payable item, that represented slightly less than 40% of our debt outstanding at year-end, that would not have been there had we not had that unplanned item. So just to help you in putting your amounts together, I just wanted to share that information so everyone had that.

And understand that unplanned item had to do with dates, and a highly technical computer coding issue, but the net impact was payment a few days before we would ordinarily have paid those bills. This is not anything of any significant duration one way or the other. But it just happens to show up at year-end, and therefore be on the books at that period of time. So it's not a material issue from a financial point of view. It's more optics in any given year, I think is the twist I would put on it.

Thank you.

All right. With that, thank you again for joining us today. And we do appreciate your interest. If you have any further questions, please contact me. I can be reached at (440)229-5168. Have a great day.

Thank you for participating in today's fourth quarter Hyster-Yale conference call. This call will be available for replay beginning at 2 PM Eastern Time today, through 11:59 Eastern Time on March 8th, 2017. The conference ID number for the replay is 48444821. Again, the conference ID number for the replay is 48444821. The number to dial for the replay is (1)800-585-8367 or 1(855)859-2056. If dialing internationally, the number is 1(404)537-3406. This concludes today's conference call. You may now disconnect.