Hyster-Yale Inc (HY) 2017 Q2 法說會逐字稿

Good morning.

My name is Meriama, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q2 2017 Hyster-Yale Materials Handling, Inc.

Earnings Conference Call.

(Operator Instructions) Thank you.

Christina Kmetko, you may begin your conference.

Thank you.

Good morning, everyone, and welcome to our 2017 second quarter earnings call.

I am Christina Kmetko, and I am responsible for Investor Relations at Hyster-Yale.

Joining me on today's call are Al Rankin, Chairman, President and Chief Executive Officer of Hyster-Yale Materials Handling; Colin Wilson, President and Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President and Chief Financial Officer.

Yesterday, we published our second quarter 2017 results and filed our 10-Q.

Copies of the earnings release and 10-Q are available on our website.

For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

I would also like to remind participants that this conference call may contain certain forward-looking statements.

These statements are 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.

Now let me discuss our results for the second quarter.

I will discuss the highlights first and then get into the details.

Global Lift Truck markets continued to be strong with double-digit growth again in the second quarter of 2017, although the year-over-your percentage increase was not as high as the first quarter.

Excluding China, the market did not grow substantially, but still saw 6% growth with increases in all of our geographic segments.

In this stronger market, we had a 5% increase in our second quarter Lift Truck shipments, driven primarily by strength in EMEA, and we built backlog during the quarter.

On a consolidated basis, our revenues increased 6% to $685.5 million, up from $645.6 million last year.

Our operating profit increased over 60% to $18.3 million from $11.4 million last year and our consolidated net income increased 98% to $16.4 million from $8.3 million last year.

I want to point out that a discrete tax benefit in 2017 versus discrete tax expenses in the prior year contributed to the increase in net income.

Excluding these discrete tax items, net income increased approximately 38%.

Overall, the Lift Truck business's results were better than we anticipated.

While Bolzoni's and Nuvera's results were lower than planned -- although the Bolzoni mix was predominantly currency driven while order growth exceeded plans.

At the Lift Truck business, second quarter 2017 revenues were up 6.3% to $647.7 million from $609.6 million in the prior year second quarter.

We saw an improvement in all of our geographic segment's revenues, mainly as a result of an increase in unit shipments in each area as our new products continue to sell well, especially our new Class 5 standard product and our electric product with battery side extract.

Operating profit also increased 50.5% to $28.6 million this quarter compared with $19 million last year and our Lift Truck operating profit margin increased to 4.4% from 3.1% in the prior year second quarter.

These improvements were mainly driven by the Americas.

Operating profit in the Americas increased substantially, primarily from an improvement in gross profit of $9.9 million.

The gross profit improvement was the result of improved pricing, net of material cost inflation and production efficiencies driven by higher unit volumes, partly offset by a shift in sales mix to lower margin products.

The higher unit volumes in the Americas was driven mainly by increased sales of our higher capacity, 3.5 to 8 ton Class 5 internal combustion engine trucks, the new Class 5 standard trucks and Class 1 and Class 2 electric trucks.

The increase was partly offset by fewer sales of Class 5 Big Trucks as a result of the timing of shipments.

Despite an increase in revenues, both EMEA's and JAPIC's operating profit decreased this quarter compared with the second quarter of 2016.

In EMEA, benefits realized in gross profit from higher unit shipments and lower warranty expense were fully offset by unfavorable material costs, a shift in sales mix to lower margin products, unfavorable manufacturing variances from increased spending and unfavorable currency movements of $1.1 million.

In JAPIC, results declined due to higher operating expenses.

Those are the significant factors affecting our Lift Truck operating results.

Now let me turn to the Lift Truck business outlook.

I am just going to discuss the high-level Lift Truck outlook.

Details regarding the outlook for our individual geographic segments is outlined in our earnings release.

In the first half of this year, the Global Lift Truck market remained strong.

And with the stronger-than-expected market, we have focused on a carefully paced ramp-up in production and achievement of price goals while maintaining a healthy backlog to manage production efficiencies.

We have maintained a strong focus on account identification and industry strategy as a means to achieve sustainable share gains.

In addition, in the past, we have discussed a number of headwinds in the market.

Those headwinds are continuing to abate.

We have been able to achieve better pricing.

We have seen greater demand for our higher-value internal combustion engine trucks, and we are seeing improved demand from traditionally higher share countries such as Russia, Turkey and Brazil.

We have also realized an overall positive mix of bookings in the first half of this year.

Nevertheless, in the first half of the year, we have seen an increase in dealer shipments and fewer national account shipments than planned.

As a result, a shift back toward national account shipments in the second half is expected to provide a second half headwind.

In the remainder of 2017, we expect the Global Lift Truck market to maintain its strength, but the pace of growth is expected to moderate compared with both the second half of last year and the first half of this year.

Unit shipments and unit and parts revenues are expected to increase during the second half of 2017 compared with the same period last year.

Despite an increase in revenues, we expect the Lift Truck business's operating profit to decrease in the second half of 2017 compared with the second half of '16, driven primarily by an anticipated significant decrease in the third quarter, as higher unit volumes and anticipated benefits from favorable current currency rates are expected to be more than offset by higher operating costs and material cost inflation net of price increases.

Overall, we expect full year 2017 net income to increase modestly over last year, as anticipated benefits from the improvement in full year operating profit are expected to be partially offset by a higher income tax rate and the absence of tax benefits recognized in 2016.

Moving to Bolzoni.

Bolzoni reported a net loss of $100,000 and revenues of $41.9 million for the second quarter of 2017 compared with net income of $100,000 and revenues of $38.9 million last year.

Operating profit was $500,000 for this quarter compared with $700,000 in last year's second quarter.

Despite improvements from an increase in sales, operating profit and net income declined primarily due to unfavorable currency revaluation of $1.7 million pretax.

As we have previously stated, the majority of Bolzoni's revenues are generated in the EMEA market, primarily Western and Eastern Europe and, to a lesser degree, in the North America market.

As a result of the anticipated growth in the EMEA markets, recent major customer commitments and the implementation of sales enhancement programs, we expect Bolzoni's revenues in the second half of 2017 to increase over the second half of last year.

In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growth, we expect the implementation of several key strategic programs to generate substantial growth in Bolzoni's operating profit and net income in the remainder of 2017 compared with the second half of '16, excluding the effect of onetime purchase accounting adjustments of $2.6 million recognized in last year's third quarter.

Finally, our Nuvera segment.

Nuvera's operating loss increased in the second quarter to $10.5 million compared with an operating loss of $8.3 million in the 2016 second quarter.

But this quarter, the increase was not the result of development costs.

The increase was predominantly the result of higher professional fees and other general operating expenses.

We see results improving over the second half of '17 and next year after losses peaked during the second half of 2016.

Progress continues to be made at Nuvera with the gradual buildup of orders of first-generation battery box replacements, growing customer interest and engagement of the dealer network.

During the second quarter, additional orders for first-generation battery box replacements were received from both end-users and Hyster-Yale dealers.

However, as a result of a shipment hold on a key supplier component, no shipments of the battery box replacements remain, but are expected to commence in the third quarter now that the supplier shipment issues have been resolved.

We expect Nuvera's backlog to grow during this quarter as dealer training and ongoing customer demonstrations are completed.

As we've previously discussed, we are in the midst of an organizational realignment designed to enhance the overall strategic positioning and operational effectiveness of the fuel cell business, with Nuvera focused on fuel cell stacks, engines and associated components.

And the Lift Truck business focused on battery box replacements and integrated engine solutions.

The realignment is progressing as expected, and we are realizing improvements in the process.

The net impact of additional -- of added operational expenses on the Lift Truck business is expected to be modest.

Design responsibility for the next generation of battery box replacements has fully transitioned to our Lift Truck business development center, and design work is progressing on 14 and 18-inch battery box designs, which are necessary from any high-density warehouse application and which are expected to be launched in the first half of 2018.

The dedicated design team is also expected to implement a design review of existing products to increase quality and reliability.

We expect the Lift Truck business to integrate fuel cell manufacturing, whether for battery box replacement solutions or fully integrated engine cell solution -- engine fuel cell solutions, into existing manufacturing plants, initially in North America and eventually into other plants over the long term.

The transition of sales responsibility for the battery box replacements from Nuvera to the Lift Truck business has also been completed.

At this time, the Lift Truck business's sales team is focused on applications for the current range of battery box replacements.

Demand is expected to accelerate in 2018 as new products are launched.

During 2018, Nuvera expects to phase out a battery box replacement production at its Billerica facility and focus solely on the manufacture of fuel cell engines with support for the engine business from the Lift Truck business's supply chain and quality enhancement units.

Plans for the European launch of the battery box replacements are advancing and work continues on the development of the next generation of fuel cell stacks, an electrochemical compressor and the Nuvera Hydrogen Generator.

Discussions with several third parties are encouraging, and fuel cell engine orders from certain OEMs are in process.

We are seeing increased interest from China.

Shipments of a modest number of these engines are expected to start this quarter.

Nuvera continues to focus on lowering the costs of manufacturing its fuel cell engines and enhancing their reliability over future quarters.

We continue to work toward the objective of reaching quarterly breakeven during 2018 by achieving target costs and target fuel cell engine volumes.

However, to achieve this will require a significant ramp-up in volume.

We plan to make an assessment during the third quarter about whether the target for 2018 is achievable or if 2019 is more realistic given the slower place of product introduction resulting from a focus on developing superior solutions at target costs.

Securing one or more of the third-party deals under discussion would accelerate achievement of the breakeven goal.

Before I open up the call for questions, I wanted to make a comment about our cash position and cash flow expectations.

At the end of the second quarter, our cash position was $239.9 million, which was substantially higher than the year-end balance of $43.2 million.

Our debt balance was also much higher than at year-end.

These increased balances can be attributed to the new $200 million term loan facility we entered into on May 30.

We entered into the term loan to provide more appropriate long-term capitalization following the Bolzoni acquisition, which we completed last year using cash on hand and borrowings under our short-term revolving credit facility and to pay down our revolving credit facility.

The remaining term loan proceeds are available for future acquisitions and strategic investments.

For the full year, consolidated cash flow before financing is expected to be positive and increase substantially compared with 2016, excluding the cash paid for Bolzoni and adjusting for the unfavorable effect of an unplanned systems related acceleration of supplier payments in December 2016.

However, it is expected to decrease significantly in the second half of '17 compared with the first half of the year and the second half of last year after excluding the 2016 acceleration of supplier payments.

That concludes our prepared remarks.

I will now open up the call for your questions.

(Operator Instructions) Your first question comes from the line of Mig Dobre with RW Baird.

It's Joe Grabowski on for Mig this morning.

So backlog looks great.

According to my model, Lift Truck units in dollar backlog are at a record high, up over 15% year-over-year and sequentially.

How do you see that backlog flowing through shipments the back half of the year?

I mean, I would think that, just based on where the backlog is now, that shipments would be up strongly in the second half.

Kind of where do you see the backlog at year-end?

And again, how does that backlog convert to shipments in the back half?

Well, I guess, I'd just say that we do expect the shipments to be up in the second half and we also expect our bookings to be up in the second half.

I'd kind of leave it at that.

I'd say that we never try to push the shipments too hard because there are always mix questions in the backlog, and we really want to be sure that our plants operate efficiently.

And that's far more important to us than the particular month in which the units are shipped.

But I think the answer to your question is we do see a continued year-over-year increases, quarter-by-quarter in our shipments.

Got it.

Okay.

And related to that, dollar bookings in Q2 were up 15%, unit bookings were up 27% in Q2.

Was there something unusual about the quarter?

Did you get a large order or large project or anything like that to throw those very strong bookings in the quarter?

There's always an element of lumpiness from quarter-to-quarter because a good portion of our bookings do relate to larger national accounts.

But that's true in -- sort of in all quarters.

So I think the market's doing a little bit better, and that's encouraging.

Colin, do you have anything you want to add?

Well, mix has a big impact on the dollar value, particularly the timing of Big Trucks.

And as Christie called out, the -- we had fewer shipments of the very large trucks.

But having said that, our bookings were quite strong.

So our backlog there is healthy.

I think I've mentioned on a previous call, when you're looking at the biggest units, we're looking at round about $700,000 a unit.

Whereas when we're talking about Class 3 trucks, it can be as low as $2,000 a unit.

So looking at the absolute numbers of units shipped and looking at the dollar values can quite often be misleading, particularly when we're talking about bookings on one hand and shipments on another.

That's why Al said, it can be very lumpy.

Yes, the conversion of shipments into revenue too can be different between quarters.

As we ship to more of the national account shipments, the timing of when we recognize a shipment as revenue is longer, is delayed compared to when we ship to a dealer.

So that will also affect kind of the lumpiness of converting shipments into unit revenues.

Right.

Bookings into shipments, shipments into revenues, yes.

Yes.

Got it.

Okay.

Another question in the Americas segment, forecast for a decrease in year-over-year operating earnings in Q3 attributed to higher SG&A and material costs.

Can you drill down into that a little further?

What's driving the higher SG&A?

I assume the material costs are steel costs, but maybe just drill a little deeper into that.

Yes.

I mean, I think our gross profit numbers are going to be moving up because the volumes are moving up, and it's always difficult to predict exactly what that percentage is going to be because there are a lot of things going on in terms of the mix of national accounts and dealer accounts and differing profitability.

Don't forget that the third quarter is a vacation month from a manufacturing facility point of view around the world and that does have, in the normal time, an effect.

On the operating expense, it's kind of a -- it's easily a confusing story because part of the story is last year's story.

And last year -- and a lot of this is associated with incentive compensation accruals.

And last year, we had some reversals of accruals in the third and fourth quarters.

And this year we're continuing to book them at fairly high levels.

And so the swing between those 2 has a big impact on the observed GS&A number.

It doesn't necessarily mean that the true running rate is a lot different, but that's a significant factor from our point of view as we look at the numbers.

Got it.

A couple of more questions.

EMEA has been on a roll lately, 15% organic growth each of the last 3 quarters, nicely profitable.

It seems like FX is no longer a headwind to earnings.

So what drives the anticipated earnings losses in the second half of the year?

Compared to last year?

No.

I think the press release just said that there were going to be absolute earnings losses in the second half of '17 and EMEA unless I'm reading it wrong.

Third quarter is really more dramatically affected by the seasonal shutdowns in Europe and EMEA.

So you've got that effect in Europe.

We're also seeing, of course, that material cost inflation effect that Colin had mentioned as well as pricing has been more difficult in that environment than in North America.

Got it.

Okay.

Two more questions.

Nuvera has averaged about an $11 million per quarter loss the last 4 quarters.

It sounds like those losses are going to improve in the back half.

Can you kind of quantify it any more than that, where the losses in the back half will be versus the recent run rate?

I think there's certainly, at least as we're looking at it now, likelihood of some moderation, and it will improve quarter-by-quarter.

But I don't want to say a lot more about it than that at this point.

Got it.

Okay, last question for me.

Bolzoni had nice sales growth in the quarter, but it got impacted by a $1.7 million currency revaluation, which erased a lot of the potential earnings in the quarter.

Was that revaluation more of a onetime event?

Or kind of -- how does that accounting work?

It was primarily a onetime event.

We have now looked at and implemented some hedging strategies at Bolzoni that should buffer -- won't eliminate, but should buffer some of the impact of currency on a reval perspective.

Going forward, of course, they're going to be -- they sell product into the U.S. that has euro costs.

So ongoing, there will be a dissonance between their costs and their revenue streams.

Yes.

What I would say more in the abstract is, if anything, Bolzoni is ahead of the plan, that we had when we made the acquisition.

We feel that the programs that we have to enhance their profitability are going very well and we're very pleased with the acquisition.

Your next question comes from Joe Mondillo with Sidoti & Company.

I wanted to ask a question regarding the Americas' gross profit.

As far as I can tell, that was the strongest gross profit that you saw in at least 4 years.

You've seen this kind of revenue before, you did not cite that product mix was a big benefit.

In fact, you cited pricing and production efficiencies based on volume.

So have you changed anything regarding your processes, your operations, to garner these efficiency improvements?

And I suppose you increased prices beyond rising material costs that was able to help as well.

Could you just help me understand how you saw sort of these near-term record gross margins without seeing a bump in product -- a favorable product mix?

Well, let me just -- it's a helpful question in terms of addressing a broader issue in understanding our earnings from quarter-to-quarter.

We have said in the past that on selected individual deals that, as part of our program of establishing an enhanced market position, we're willing to have some lower margins at least on a temporary basis.

Because in many times, we're able to change the cost structure in due course of the trucks that we're selling and improve the margins, but we have to be competitive in the marketplace in areas where we've not have the applications before.

So we didn't have much of that in the first and second quarters.

And so in addition, some of the national account business is going to fall more heavily in the second half of the year than the first half of the year.

And at least at the margin level, the structure of the business is that the national account business can have some slimmer margins and a different GS&A structure, but it shows up in gross profit as a slimmer margin.

And again, we had quite a bit of dealer activity relative to national account activity.

So the first 2 quarters were pretty favorable from both of those points of view.

Now in the last -- second half of the year, we're going to have more national account shipments.

And it -- and there may be shipments from time to time in different quarters of some of these special deal accounts that are not embedded in our general gross profit structure.

So that's the way I'd answer the question.

Okay.

And then regarding sort of the material pricing inflation that you're seeing, has anything -- has something -- has that gotten worse since the second quarter because you cited the second quarter as net pricing being a benefit at the Americas segment and you're citing that as being a headwind in the back half of the year?

Well, one of the reasons that it's a headwind on a delayed basis is that we've a terrific of group people in our purchasing and supply chain organization, and they're often able to enter into contractual relationships with our suppliers that commit the suppliers to call out prices, specific prices, for a certain number of months into the future.

But eventually and understandably, that sort of protection against material cost increase runs out.

So I think what's been happening a little bit is material costs have been going up, but our suppliers haven't been able to pass it onto us.

And so there'll be a catch up period when we come into the third and fourth quarter.

We're not exactly sure how much, but there'll probably be some.

Yes, there are signs that some of the pressures on material costs are starting to abate.

So that might provide an opportunity against our forecast in the back part of the year for the reasons Al said.

Okay.

And can you address the product mix?

How that's been trending within the backlog?

It looks like your backlog on a dollar per unit basis has actually declined over the last couple of quarters.

So it looks like maybe the mix is becoming a little more unfavorable regarding lower-priced units and such.

Could you just talk about product mix and what you're looking at there?

Yes.

I think when you look at mix in particular, our 1 to 3 ton standard truck is selling extremely well.

But in terms of mix compared to the higher capacity ICE trucks, as well as against our premium product, that is a mix unfavorability.

We want to continue to be out and to gain and hold our share of the premium truck market, but we're also gaining in the standard truck market.

And that mix shift is causing us to have some negative impact on an overall basis.

And as we said earlier, I mean Big Trucks is positive in terms of the backlog.

The Class 3 market continues to be strong, and we continue to do quite well.

So those units have much lower value.

So it's only difficult to look at it and draw 1 conclusion, there are multiple reasons why the backlog is the way it is.

Suffice to say, we're very pleased with the -- very satisfied with the shape of our backlog at this moment in time.

I would say that as we look to the second half in comparison to the second half of last year, that we're seeing some -- we're expecting some strength in some of our Class 3 shipments and some lower levels in some of our counterbalanced shipments, particularly the smaller internal combustion engine trucks in our -- of our cushion type.

But on balance, as Colin said, it's a pretty strong backlog, and we're rather pleased with it.

And what we try to do is we have various production lines.

So we look at our backlog and how many weeks of backlog we have for each of our production lines, and then we can initiate a program.

There is some flexibility in terms of how long a customer is willing to wait, but they are only willing to wait so long.

So once backlogs get too long, then we take action either by ramping up production or trying to get more price for the product.

Likewise, when the backlog on a particular line gets too short, then we go out with programs to try to accelerate demand or we feather back our labor on those lines.

So again, we manage our backlog to manage our production lines as efficiently as possible.

At the same time as meeting customers' needs for the delivery of the products.

I guess, one of the things that I'm trying to understand is, over the last couple of years, the pressure within the Big Truck ICE premium trucks, which you -- which carry the higher margin for your company, really pressured your earnings overall.

So I'm trying to understand, have orders for those particular types of trucks started to accelerate?

Heading into 2018, do you think that's going to be a benefit to your overall earnings as the mix returns more favorably to that side of the business that was really pressured over last couple of years?

When we look at Big Trucks, I would say there's 3 categories of Big Trucks: between 4 and 9 ton, which is sort of just bigger standard type of counterbalanced trucks; then there are the 8 to 16 ton; and then there are what we call jumbo trucks, which is everything above 16 ton.

I would say all 3 were a headwind in 2016.

Those headwinds have abated, and we're seeing increased demand.

Certainly in the second quarter, that was a driver behind our results.

We had very good shipments of the 4 to 9 ton, and we have very good bookings in all of the 3 categories that I've mentioned.

So we are very positive about the outlook for those.

We see demand continue to increase and then continuing further in 2018, but still not getting back to prior peak levels.

And the very big jumbo trucks, we're seeing a pickup in demand from the ports again.

That went very quiet for a period of time.

We're seeing rental demand increasing.

We're seeing a little bit more increase in coming out of the mining industry for our tire handling-type products.

We're seeing pretty good demand coming out of Latin America, out of Europe, out of Asia Pacific.

So again, not back to prior peak levels, but certainly significantly better than they were in 2016.

Yes, and Christie did note that there were fewer sales of the Class 5 Big Trucks, that was predominantly -- as Colin had pointed out, predominantly just in the jumbo line.

The backlog is strong.

It's just the gating of the timing of fulfilling those orders, we were down this quarter compared to last year's second quarter.

But the book is strong on the jumbo segment.

Okay.

And overall, this 4 to 9 ton through jumbo-type trucks, is that up year-over-year at this point on an overall perspective if you look at total units?

Or...

Yes.

Okay.

And just one last question regarding this.

The smaller trucks are outpacing still in terms of growth than compared to these big trucks, is that correct?

Yes, generally speaking, that's correct.

The Class 4 cushion market in the United States is a little bit different from the pneumatic, and those volumes are a little weaker.

But the other categories are doing pretty well.

Okay.

Just last question...

(multiple speakers) are driving a lot of our volume in those smaller trucks.

You have slight (multiple speakers)

Right.

And I know that's a big focus.

Class 1 product in the XT/MX, the standard ICE truck.

The volumes in our Class 1 electrics have been pretty good, and we're very encouraged about that.

Okay.

And last question for me related to Nuvera.

So there's a lot of different dynamics going on here, and it seems like the biggest dynamic is really just volume at this point.

It sounds like mostly your production line is in place, maybe you still have to do some work with your parts and sourcing of parts and materials and maybe that will help a little bit.

But at this point, it sounds like volume, the more volume you'll be able to -- so are you, at this point, opening the floodgates and taking as many orders as possible?

Are you still being sort of slow in terms of that slowly to ramp up?

If so, why?

And just give us an idea of how orders have been trending.

If you can quantify anything that would be great, too.

I don't know that we're going to quantify it, but I would say is this.

There are 2 major factors that will determine profitability as we look forward.

One of them is a question you asked, that's volume.

And volumes are beginning to ramp up and we see that happening increasingly during the third and fourth quarter.

We have some products that are ready to go.

We've got a couple of battery box replacements that are delayed a little bit.

So we're not pushing the sales of those until we are a little further down the completion.

And we're not talking about large numbers of quarters here, we're talking about 2 or 3 quarters before those products are all ready.

But we said, first half of '18.

So say, first half of '18.

So there's some different pacing depending on which product you're talking about.

But we have significantly ramped up in the last quarter or 4, 5 months, the effort to sell battery box replacements, and we feel that that's going well.

The second piece of the challenge is probably not so much the manufacturing side, which as you point out, is pretty well in place now.

It is really the cost of the purchased components that are going into the battery boxes, and that's from 2 points of view.

One is designed, where there's still a focus on fewer, more robust parts.

And 2, is simply getting our suppliers down the cost curve, and in some cases, making sure we have the right suppliers for the components.

And that is a process which is going to improve quarter-by-quarter.

So the 2 pieces have to come together for us to meet the breakeven point, which we said we're going to assess again sometime during the third quarter here to see exactly where we are from 2 points of view.

One is the fuel cell engine, which is now the focused responsibility of the Nuvera team.

And 2 is the other components that are wrapped around the engine but contained within the battery box structure.

And those are the responsibilities of the Hyster-Yale Group and our design team there.

And we expect those to come down the cost curve in a reasonably rapid way.

We got very focused on that.

And it's reasonably rapid because it's familiar territory in the sense that we've been in the business of packaging engines of various different kinds, engines or motors or whatever, for a long time.

And so those 2 have to be driving forward to reduce the cost so that we can actually meet our breakeven as we move down the track.

And we'll -- but there's nothing that has come up that says if that process isn't working, we're going to reevaluate exactly the time line in which it all comes together.

And we, as Christie said in her remarks, we do have a determination or a point of view that we would rather wait and be sure of the reliability and the quality of the product we're putting in the marketplace because we think that can be a tremendous competitive advantage for us.

And so we're focused very heavily on that, and we'd rather take a little bit more time coming at -- to the volume levels because of that.

So that's kind of the overall perspective on how we look at Nuvera at this point.

Okay.

And just to clarify, it sounds like a large part, maybe not the whole thing, of the component issue is volume.

So as volumes does ramp up, that component issue will dissipate as well and you'll be able to get better margins just on the big -- larger volume.

You'll be able to go to your suppliers, get better pricing on the cost side?

Yes, absolutely.

That's an important factor because as you can imagine, the volumes we've been at so far, some of our suppliers would consider experimental volumes much more than large-scale production volumes.

So as we move to production volumes and they tool up for it and have their processes in line, the costs should come down.

Your next question comes from Mike Shlisky with Seaport Global.

I just want to follow up first with the last question on the component issue at Nuvera.

It sounds like that was kind of resolved in the quarter, but is there a chance that could happen again?

Is this kind of like a component where you only have one single supplier?

Have you locked up a second supplier in case there's issues with shipments going forward?

Is this the kind of high-tech, I don't know, only 1 company can produce and supply to you?

Well, in the particular issue that you are referring to -- from time to time, we have stop shipped on components and trucks in our forklift truck business, too.

So on the one hand, you're right that these are less mature supply relationships, but these are things that do happen in the business.

So overall, and as we indicated, that was resolved.

And hopefully, we're not going to have those issues going forward.

But -- and as our suppliers become more and more robust, everything is tested out.

But I -- it wasn't something that was a terribly serious problem, it just had to be fixed before we were ready to release it.

That's all

Yes, I don't think we're single-sourced on any component.

What happened was the supplier changed the process, delivered some components to us that were a result of the changed process.

They hadn't told us, and that the components were not acceptable.

So that issue has been fixed.

And we'll continue to do business with our supplier, but yes, there were are alternatives to that supplier for that same component.

Okay, great.

Further along on the fuel cell side, the last few weeks 1 of your "competitors" in the fuel cell business, that doesn't obviously make the whole lift truck, but they did announce a pretty good-sized deal for its lift trucks -- its powered lift trucks at Walmart.

I was wondering if you know if Nuvera was in the running for that business or was there a competitor sort of at a first-mover advantage with that account?

And it kind of appears, though, they're kind of only working with the Walmarts, the Amazons, the Home Depots, is it possible you can get some kind of Nuvera presence in those larger retail customers over time in a mix feed scenario?

Or are you actually pursuing other many more industrial or higher tonnage customers there?

It's an important question.

And I think to experience our views on that have probably changed a little bit in the last several quarters.

We have had extensive discussions with the big customers like Walmart and Amazon.

And the commercial situation with them is extremely demanding in terms of support and price.

And it's -- we'll have our opportunities there in both of those accounts, but I think our choice is to do that down the track when our cost structure is somewhat more mature than anybody's is in this industry when the opportunities to make money are greater.

And I think our point of view is that the interest in fuel cells is coming along so quickly that we're going to have plenty of business without committing ourselves to the kind of performance requirements and conditions that people like Walmart and Amazon might require.

So down the track, we'll be doing that, but we're not in any hurry on those.

Now I will say that your conclusion was probably correct that there were at least some of the trucks where we felt -- that they needed, where we felt we were less mature and we were simply not willing to have the risk of hurrying that process up.

And so we think there are a lot of other customers out there.

We've had a great experience with Martignetti.

We've had other accounts where we are introducing the fuel cells.

And we -- from a longer-term point of view, we're not so worried about the -- what you call the first-mover advantage.

We think our technology is different and better.

And we think we have significantly greater power density and that our fuel economy, which translates into the number of refuelings that a forklift truck will have to go through in a shift, is better than our competitors are likely to be.

So we feel pretty good about it.

Do you want to add anything, Colin?

Just that, as we look to the future, I mean, the technology is technology that can be serviced by our dealer network.

So we're going to have in excess of 5,000, 6,000 technicians able to support this product in the field as we roll it out.

And many of our dealers are actively engaged with us in terms of promoting our solutions.

They're acquiring demonstration units.

They're partnering with us and with third parties with regard to different means of hydrogen supply.

So we're playing a long game.

As Al said, in terms of getting the reliability up, we already feel that we're where our primary competitor is, but that's not good enough for us.

We want to get our mean time between failure significantly higher, approaching that of our lift trucks.

And that's what we believe our customers will expect in the long term and that's what we're devoting our design efforts towards, coming up with a high-quality, a better performing unit that will deliver significant value for us in the medium to long term.

It's also worth noting, and I don't pretend to have anything like full knowledge of the arrangements surrounding the commercial agreements that you mentioned.

However, I would just note that they're not straightforward agreements.

And in fact, on the 1 hand, there's a commitment to supply at a pretty sharp price.

And on the other hand, a right on the part of the purchaser of the units to invest in the business of our competitor.

And so those transactions are highly dilutive from the point of view of the current shareholders of the company.

And they also appear to be a method of financing working capital needs in a situation where the cash requirements have been pretty significant.

And so I think there is much more to that story than perhaps we really understand.

Yes, but we continue to wish them well and hope they're successful because they're helping to develop the demand for fuel cells, and we think that's a very positive thing.

And that's really an important point because -- and it's especially good that big companies like Walmart and Amazon are adding the sense of legitimacy to the fuel cell business.

And we think that's going to benefit us.

And it just reinforces our desire to focus on other parts of the market for the time being.

Sure, absolutely.

Great.

I wanted to turn to 2 questions on lift truck as well if I could.

I just wanted to -- kind of sort of after your guidance from, I don't know, a few quarters ago now.

Where you said you'll get to the full 115,000 unit production level over the next couple of years, I think it was between 2018 and 2020.

To me that kind of requires double-digit shipment growth pretty much every single year between now and then.

In the first half, you didn't really get there, you didn't quite get 10%.

I don't want to pin you to a back-half number as far as shipments, but do you think you can get enough shipments in the back half to at least cover a 10% growth rate in shipments for the full year?

I wouldn't really want to comment on that at this point, but I would say that what we said was we'd like to be at that level at the peak of this cycle.

The cycle is still moving up.

Our market is still growing, that's been beneficial to us.

I would say that, while some of our share gain programs have had an effect, that the bigger effect is still to come.

Christie mentioned the focus on individual industries in meeting the needs of the customers in those industries.

And from our vantage point, that process is still has -- is still at a point where it hasn't had nearly the impact that we think it's going to have.

So much lies ahead in terms of the impact of our share gain programs and in the mean time, the market has been moving up.

All right.

And I also want to touch on your JAPIC segment as well for 2018.

I mean, is there a chance you think that can get to an operating profit -- positive operating profit in 2018?

Can you kind of outline maybe just a little bit more detail on the backlog you've got there right now as far as the mix and perhaps other inefficiencies we got going in Asia that might be impactful on the positive side to 2018?

I think the fair answer to that question is it's going to take us a little while and the reason for that is pretty straightforward.

The market in China has been changing considerably.

The importance of the purchase of Western-type product or developed-country-type product by developed-country customers for use in China has moderated.

And at the same time, the -- some of the Japanese -- I mean the Chinese product has become more aimed at what we would call the standard segment and are certainly the upper end of the utility segment.

And so we're in the process of localizing production of product to reduce its cost, to have more cost that is China-based.

We're also focused on ensuring that we have the right products to offer, and we're doing a lot of work on our China strategy.

And that's probably -- that's a significant source of the shortcoming that you're focusing on.

I think the other comment we'd probably make is that the numbers associated with our Japanese business, which is doing quite well and which you may remember is a 50-50 joint venture, did not show up, unfortunately, in the JAPIC line.

They show up below the line because it's equity accounting, not a consolidated entity.

But that business is doing quite well.

And so it's not the whole story in terms of the numbers that you're looking at as I say.

Unfortunately, that's the way the accounting has to be handled.

Sure.

So one last 1 for me on your cash balance, and I'm not surprised you went to the market for some additional debt.

I mean, it's been a very, very favorable loan market for the borrower in the last few months.

But can you kind of give us -- share with us?

I mean, is there a major M&A target that you're pursuing right now?

Are you close to a deal?

Or you kind of like just -- kind of admiring the market to hold onto cash here in case something comes along?

Well, what I have to tell you is what you already know, which is if there were something we couldn't tell you about it.

That's true.

So it's not a question that I really can get into one way or the other.

And I would just say that we felt very good to have the cash availability under our revolver and our cash position to be able to buy the Bolzoni business.

It worked well for us.

And certainly, the one thing we can say is that by readjusting for the impact of the Bolzoni purchase, by issuing debt, we're back in the position that we were in before we bought Bolzoni in terms of our flexibility to do whatever it is that may make the most sense.

So I'd just leave it at that.

(Operator Instructions) Your next question comes from Philippe Lorrain with Berenberg.

I have basically just a follow-up on the cash that you've taken on board now and the option of doing more M&A.

And I appreciate that you wouldn't share with us in detail what you aim to do, but perhaps, if you could give us guidance on what kind of activities you would be ready to purchase?

If it's about pure vertical integration in what you are doing in the forklift business or if you are thinking about in, let's say, white spots in geographical term, that would be quite helpful.

I think if you look at what we've done in recent times, everything that we did that we believe had significant synergistic potential.

We felt that way about Bolzoni and its ability to not only be a good business on its own, but to help us to gain share position in industries where their attachments are used and for us to be able to help them, generally speaking, in the Americas where we're strong.

It's just a good fit from our point of view.

And we made a small acquisition as a company in the telemetry business.

Telemetry is a critical element of a Lift Truck going forward.

It's had a very attractive impact.

And Nuvera as you know was, on the one hand, a different kind of acquisition.

But on the other hand, we felt continued our quest to have the flexibility and power sources for Lift Trucks and to be a leader and would help propel the Lift Truck business.

We've made a small investment, I think just this last quarter, in a company called Balyo in the automation side because we already have some significant contracts in providing automated Lift Trucks.

And so I think the answer to your question is, we are focused on synergistic acquisitions.

And that's where our emphasis is from our point of view.

Okay.

I appreciate.

So that means you're already focusing still on the forklift side of operation and every kind of technology that really has to do with the forklift itself and not with, let's say, with how automation system, whatsoever?

We're interested in the warehouse automation activities to the extent that it is core to the forklift truck business.

That's the way I would answer that question.

But not as a general -- not as a general abstract matter in terms of warehouse automation.

That's not something that, at this point, we have a focus on.

Your next question comes from [Glenn Primack with Promise Holdings].

What's the margin differential between dealer and national account?

It depends on product, depends on geography.

Sometimes, depends on account.

We have some business that's same level and some that's low.

But we sell some business through dealers at very low prices.

So it's very much -- you can't just come up with a single number and...

Let me say, in addition, that's a very complicated question to answer.

Because at the one level, Colin's comments, I think, are aimed mainly at sort of the gross profit observable impact level.

But if you think about the GS&A structure, we have a large set of costs that are associated with serving dealers at a very strong and very capable way.

That's not a part of the cost structure in serving national accounts.

And so it isn't just a question of the gross profit.

It's also a question of how it flows to the bottom line and what's in GS&A relative to the other and it's -- so I's just note that, that.

I figured the cost level of service is a lot less, but I'm wondering at an operating margin level, is that different?

I considered also a point that the revenue cycle is a little bit different both in the shorter term because national accounts extends out and we can incur costs and periods before the revenue is actually booked.

And just because of the way the contracts work also a lot depends in the longer term on whether their full-service contracts associated with these and the parts and service business is locked in or not locked in.

But there are an awful lot of factors.

The hard question to answer is the answer to your question.

But I think...

Okay.

It must take a while internally to do your -- just -- budgeting on an annual basis.

From an observable point of view, I think what we were saying earlier was you're likely to see a greater mix at gross profit of the national account business in the second half of the year than in the first half.

That I think is kind of a factual perspective line, but if you look at -- we can't lock them in terms of 1 quarter or another quarter, but if you look at it on a yearly cycle, things don't vary a whole lot and the whole equation comes together in a more normal basis.

Okay.

That's more important anyways.

With procurement, is that centralized globally or is it -- Europe has its own and the U.S. has their own...?

It's centralized globally and is an extremely effective process and our low-cost country sourcing is running now what, Colin?

30?

Above 30 -- between Europe and Americas, it's a bit higher in Europe, but is over 30 -- about 32%.

And I should say procurement is centrally led.

We have a centralized team and then we also have geographic people on the ground locally.

But they're part of a global organization.

So in other words, we have European suppliers for the U.S. and we have Asian suppliers for the U.S. and for Europe.

And so it's a -- but it is a global system where we are managing it by type of component, by commodity and people who are very expert in managing that.

Okay.

So with the material cost increases is that a function of you had your blanket order and that kind of expired and as you put like something else out there with those suppliers, it's at a higher cost?

Yes.

They can roll through price increases at some point, yes.

Okay.

With Bolzoni, what was the return target when you purchased it?

What was the goal for return on that capital?

Well, I'm not sure we've ever given a public goal, Ken, have we?

No.

I don't think -- we don't really disclose that.

When you look at it, we have obviously our hurdle rates, on our return, on our investment and the business case clearly met that and Bolzoni is performing approximately comparable to our business case although a couple of the items have said not accelerated at the rate we had hoped.

But sales -- the sales have been very strong.

Sales growth, we're very happy with the business.

But with your hurdle rates that you put in place there, is it safe to assume that you wanted a positive NPV-type outcome with Bolzoni?

It safe to assume we wanted a very substantial positive outcome.

Not just an outcome.

And let me say that we're very aware that when you purchase a company on the outside as opposed to do something yourself that you're buying 2 things: 1, the tangible assets of the business; and 2, the goodwill that the marketplace is associated with those tangible assets.

Obviously, if you start a business and have no acquisitions, you have no goodwill.

And the chance that you're going to earn the same return on the goodwill that you earn on tangible asset and since you have to think a bit little differently about the returns on the business.

Having said that, I assume you are listening to the comments that we made a bit earlier when we said that we focused on opportunities with synergy values because the only way you can really get the goodwill piece to have a good return for the buyer is to have a synergy value that the buyer -- that the seller doesn't have.

And that's what allows us to get back up to the levels of our hurdle rates in total.

Okay.

I mean I was impressed when I saw the display of ProMat.

It seems like there was a big opportunity for Bolzoni to grow into the United States which, is that something that's a...

We think there's opportunity worldwide.

It's an excellent business, and we think it'll do well over the long term.

Okay.

And then lastly, on Nuvera, I appreciate your comments with the unnamed competitor and -- Amazon and Walmart.

Because it seems like whoever sells to those guys is the big loser.

I saw the structure of those deals that you kind of talk about.

It was just confusing.

To me, it seems like the huge opportunity is in Europe and Asia, given -- I mean, China wants to clean up their environment.

And so I was wondering within that big port show in Europe, what kind of turnout did you see for your kind of Nuvera inside Hyster...

Let me answer the question just a little bit differently.

We agree with your assessment.

We think they're going to be significant opportunities in Europe and we think they're going to be significant opportunities in Asia.

We are exploring opportunities in both of those areas and making plans for -- in 2 ways.

Number 1, the extension of our Lift Truck battery box in integrated solutions business around the world, first in the U.S. then in Europe on a fast- [followed] basis and Asia.

Second, we are also looking at the expansion of our engine, fuel cell engine business into other industries in many cases, probably through joint ventures or direct sales, to other OEMs around the world, including both Europe and probably particularly Asia.

Because as you point out, they have something of a central mandate to reduce CO2 emissions and this fits rights into that.

So we see significant opportunity and it's one of the things that we can now capitalize on better with the restructuring that we undertook because the forklift truck business is focused on taking the engine and putting it into forklift trucks.

And the engine business, the Nuvera business itself, is now focused on maximizing the opportunities or its engines, but taking into account that there are many markets where we may provide technology and core capabilities.

But at the end of the day, we're not going to be the primary driver of those businesses.

And the obvious candidate would be the automotive business.

So we've got a lot of conversations underway and opportunities that we think will bear fruition -- come to fruition over time.

Okay.

That's great because it seems like that -- I agree on that giant opportunity in China.

And if you can license it or do whatever with Nuvera now that the restructuring in the Hyster got the battery and the box on their size, it's just a -- that's a -- there's a lot of probably missing value within your equity, given...

A lot of opportunities.

Given what's fallen in your lap.

There are no further questions at this time.

I will now turn the call back over to the presenters.

Do you have any closing comments?

Okay.

Thank you for joining us today.

We do appreciate your interest and if you do have any follow-up questions, you can reach me at (440) 229-5168.

Thanks, and have a great day.

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