Hyster-Yale Inc (HY) 2017 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Hyster-Yale Materials Handling 2017 Third Quarter Earnings Conference Call. (Operator Instructions) Christina Kmetko, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2017 Third Quarter Earnings Call. I'm 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.

Early this morning, we published our third 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 archive 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 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 third quarter. I'll start with the highlights, and then get into the details.

Once again, this quarter, global Lift Truck markets continued the double-digit growth trend that we saw in the first part of the year. In fact, growth this past quarter was higher than in the second quarter. When you exclude China, the market growth was not as substantial but it was still very strong with an almost 10% increase, with increases in all of our geographic segments.

In this strong market, we had an 8% increase in our third quarter Lift Truck shipments, driven primarily by strength in EMEA, and we maintained a very strong backlog. On a consolidated basis, our revenues increased almost 10% to $691.1 million, up from $629.3 million last year. Our operating profit increased over 200% to $17.9 million, from $5.4 million last year, and our consolidated net income increased to $16.5 million, or $1 per diluted share from $12.3 million, or $0.75 per share last year.

I want to point out that last year's operating profit and net income included $2.6 million of pre-tax unfavorable one-time purchase accounting adjustments related to our acquisition of Bolzoni. In addition, the third quarter 2017 net income includes discrete tax benefits of $4.9 million, compared with discrete tax benefits of $5.1 million in the third quarter of last year.

Overall, the Lift Truck business' results were significantly better than we anticipated, which more than offset modestly-lower-than-anticipated results at Nuvera, primarily due to fewer product shipments than expected. Bolzoni's revenues were higher than anticipated, but operating profit was in line with our expectations.

In our Lift Truck business, third quarter 2017 revenues went up 9.6% to $652.3 million from $594.9 million in the prior year third quarter, driven by substantial improvements in the Americas and EMEA, mainly as a result of an increase in unit shipments in these segments. Overall, in these markets our channel mix is strong, more dealer sales than national account sales, and our new products continue to sell well, especially our new Class 5 standard product and our new electric products.

However, JAPIC's revenues decreased as this segment saw a decrease in shipments of higher-priced, higher-capacity Lift Trucks, predominantly Big Trucks.

Operating profit increased 17.6% to $24.1 million this quarter, compared with $20.5 million last year, and our Lift Truck operating profit margin increased to 3.7% from 3.4% in the prior year third quarter. These improvements were mainly driven by the Americas.

Operating profit in the Americas increased substantially, primarily from an improvement in gross profit of $10.8 million. The gross profit improvement was the result of increased unit volumes and improved pricing net of material cost inflation. The higher unit volumes in the Americas was driven by increased sales of our Class 5 internal combustion engine Lift Trucks, including the new standard truck and Big Trucks, and our Class 1 and Class 2 electric trucks. Our gross profit improvement was partially offset by higher employee-related marketing and product development costs in the quarter.

Despite an increase in revenues, EMEA still generated an operating loss in the quarter, albeit a much smaller loss than the prior year. The seasonality in EMEA is normal. Benefits realized in gross profit from favorable currency movements of $6.7 million and higher unit sales were mostly offset by unfavorable material costs, a shift in sales mix to lower-priced, lower-margin products, and an increase in operating expenses. In our JAPIC segment, 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 outlook. Details regarding our individual geographic segments is outlined in our earnings release.

The global Lift Truck market has remained stronger than expected all year, and with this we have continued to focus 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 strategies as a means to target sustainable share gains. We continue to achieve better pricing, and we have seen greater demand for our higher-value internal combustion engine trucks. We have also realized an overall positive mix of bookings throughout the year-to-date.

While we expect a continued increase in unit shipments and unit and parts revenues in the fourth quarter compared with last year, an expected shift away from dealer shipments back towards national account shipments in the fourth quarter is expected to provide a modest headwind.

We also expect our Lift Truck business operating profit to increase in the fourth quarter compared with last year. This improvement is expected to be primarily driven by the higher revenues and anticipated benefits from favorable current currency rates, partly offset by higher operating costs and material cost inflation net of price increases. However, despite this operating profit improvement, we expect fourth quarter net income to be comparable to last year's fourth quarter because higher interest expense and the higher effective income tax rate are expected to offset the fourth quarter operating profit.

Now, let me provide a high level look at what we expect for 2018. However, I'd like to note that we are still going through our detailed annual planning process, and we will provide more color on 2018 with our year-end earnings once this process has been completed.

At the global level, we expect the global markets in 2018 to be comparable to this year. Within our Lift Truck business, we anticipate that benefits from expected unit and parts revenue increases, driven by our continued investments in our strategic initiative, will be partially offset by higher operating expenses and moderating material cost inflation which we anticipate to result in a moderate increase in operating profit in 2018 compared to 2017. However, we expect 2018 net income to decrease modestly from the share as a result of higher interest expense and a higher effective income tax rate, as well as the absence of tax benefits recognized this year that are not expected to reoccur.

Moving to Bolzoni, Bolzoni reported net income of $1.9 million and revenues of $44.3 million for the third quarter of 2017 compared with a net loss of $2 million and revenues of $36.2 million last year. Operating profit was $2.1 million this quarter, compared with a $2.5 million operating loss last third quarter. As previously mentioned, the third quarter 2016 operating loss included $2.6 million of one-time purchase accounting adjustments. Bolzoni's revenues increased as a result of higher sales volumes driven by the Americas and EMEA markets, in part due to increased sales to the Lift Truck business. The operating results improved primarily as a result of the absence of the one-time purchase accounting adjustments in 2016, the improvement in revenues, and higher productivity despite the normal third quarter seasonality.

Looking forward, as a result of anticipated strong growth in both the EMEA and Americas markets, and the continued implementation of sales enhancement programs, we expect Bolzoni's fourth quarter revenues to increase over the prior year fourth quarter. 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 fourth quarter of 2017 compared with last year.

Continued improvements in revenues, operating profit and net income, are also expected in 2018 compared with this year.

Finally, in our Nuvera segment, Nuvera shipped 18 units during the 2017 third quarter compared with 39 units in the prior year quarter, while the third quarter operating loss decreased $8.1 million from an operating loss of $12.6 million last year and a $10.5 million loss in the second quarter of 2017. The lower operating loss was the result of lower product development and production start-up costs.

As we have been discussing for a few quarters now, progress continues to be made on the organizational realignment between Nuvera and the Lift Truck business. The transition of the design, sales, marketing and product support responsibilities for the battery box replacements from Nuvera to the Lift Truck business has been completed, but the manufacturing of the current range of battery box replacements remains at Nuvera's Billerica facility at the present time.

Due to the relatively high cost position and limited product range of current available battery box replacements, we are taking a measured approach to developing a customer base by building relationships with customers that are willing to pay a premium for the high power density of the Nuvera battery box replacement solution and the product support now offered to our Lift Truck business. During the 2017 third quarter, a number of additional units were built for further testing and development applications by the Lift Truck business, and the sales of battery box replacements are increasing, with production slots filled through the end of the year.

We expect Nuvera to ramp up shipments during the fourth quarter from third quarter levels, with shipments expected to continue to increase in the first quarter of 2018. As the supply chain matures and volumes increase, we expect that the cost for battery box replacement components will decrease and as new cost-reduced models are introduced, including the new 14-inch and 18-inch battery box replacements, we expect the target customer portfolio to expand. By the second half of 2018, production of the new 14-inch and 18-inch battery box replacements is expected to begin at the Lift Truck business' manufacturing plant in Greenville, North Carolina with a steady ramp-up in demand anticipated.

In addition, the battery box replacement manufacturing now at Nuvera's Billerica facility is expected to be phased out and transferred to the Lift Truck business by the end of 2018. The phase-out of production in Billerica, Nuvera will focus on the design, manufacture and sales and marketing of fuel cell stacks and engines. In addition to growing demand for engines for battery box replacements, Nuvera has seen significant interest for its stacks and fuel cell engines for applications outside of this market, and believes this can be a significant and profitable growth opportunity.

As we indicated last quarter, during the third quarter, the fuel cell engine and battery box replacements reached a sufficient level of maturity where we could perform a detailed review of the most likely forward financial projection for the Nuvera business, taking into account the status and timing of engineering projects currently underway to cost produce current products, the timing of the introduction of new products, the projected trajectory of sales by product type including development activities and sales of fuel cell stacks and engines for applications outside of the battery box placement market, and the level of operating expenses required at full commercialization. As a result of this exercise, and based on our revised business model, we believe we now have better visibility of the future costs and actions required to reach profitable commercialization. Our current target is to achieve break-even in the last 2019 period, although this target could be achieved earlier or later depending on sales volumes for fuel cell-powered Lift Trucks as well as sales in other markets. The expected path is for moderating losses over the next 2 years.

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 third quarter our cash position was $238.2 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 in the second quarter. We expect our consolidated cash flow before financing activities to be a use of cash in the fourth quarter of 2017 and we expect it to be a substantial increase from the fourth quarter of 2016 after adjusting for the unfavorable effect of an unplanned systems-related acceleration of supplier payments in December 2016.

We expect consolidated cash flow before financing activities to be positive and increase significantly in 2018, compared with this year, excluding the favorable effect the 2016 unplanned acceleration of payments had on 2017's first quarter balances.

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

(Operator Instructions) Your first question comes from Mig Dobre from Baird.

I joined the call just slightly late, so if I missed this, I apologize. My first question is on the Americas segment, and the change in outlook. I remember from last quarter, you talked about the second half 2017 operating profit being comparable to the second half of 2016, and being down from a strong first half of '17. Now, in the third quarter, you put up profit that increased 17%, now you expect the fourth quarter profit to increase substantially. This is night and day different than what we have heard last quarter, and I'm wondering, what changed and how could it change so much, in such a short amount of time?

I think we feel more bullish about the industry's prospect, the size of the market. Also, the activity level within our data network, we're seeing all sorts of indicators turning positive. The used truck business is doing better, rental demand is up, and the mix of trucks we're selling is richer than we were anticipating earlier in the year. I think coming from different industry segments that are perhaps doing better than we were projecting early on in the year. So, we have turned our outlook up for '17 and '18 on the industry size, and also feel good about the mix that we're currently seeing.

If you focus on the backlog numbers as well, our backlog numbers are showing significant growth in value. We're seeing higher-value trucks being placed in the backlog. I think we worked off a little bit of the backlog in terms of unit count between the end of second quarter and the end of third quarter, but again, the value of the backlog that's coming in is richer than what we had previously seen and expected.

I appreciate that, and I obviously see it as well and I agree with it. I remember making this point last quarter also. The part that's not clear to me is how your profitability expectation could have changed this much. It begs the question as to your visibility and to costs. It seems that something has changed on the cost side that is allowing for a better margin. Am I misinterpreting this?

No, I think there's a bit of timing play here. We had expected more high volume, national account business to flow through in the third quarter than what we ended up with. Some of that is getting spread out more evenly. We also had currency improvements, and of course, SG&A was lower than our expectations.

Okay. In terms of demand, obviously you have positive commentary and I appreciated that, but I'm wondering as you're looking at your business, we obviously are seeing an inflection in manufacturing activity overall. How does that kind of play out, in terms of demand for heavier trucks for you? Where do you think we are in terms of current demand for these types of trucks versus the prior peak that you attained? And as you look at the next call at 12 months, do you think the trend for better demand that we're seeing now is sustainable?

I think we're seeing demand improving over 2016, but if you go back to the prior peak which was back in '14, oil and gas were going strong, steel business was strong on the basis of demand for pipe for oil and gas, the port business was healthy, mining was strong, concrete was doing okay. So, I don't think we're back to those sort of dynamics. You look at oil being around $50, clearly it's better than it was, but nowhere nearly as good as it has been. The ports, we're seeing a little bit better activity in the ports. There's been some consolidation in the ports, and it looks like that profitability is improving. So, we are starting to see a little bit of stronger demand coming out of the port segment. We're seeing pretty good demand coming out of Latin America. Inner model is up on '16, and mining is starting to recover. So, all in all, I think the environment is better and we're seeing a pick-up in demand for equipment in those segments, but it's nowhere near the peak that it was back in 2014.

Can you sort of gauge for us how far from the peak we are currently, in terms of demand?

Well again, you'd have to look at each of those segments. So, I mean, we can maybe cover that outside the call. I don't have that information here. But, last year we called out the headwinds we were facing, and those headwinds have abated, but we don't have the tailwind that we had back in '14. But we can, I'm sure Ken can get those numbers.

Okay. From a pricing perspective, things are getting better as well. I guess I'm wondering here, is this a function of just initiatives that you've got individually, as this function of the industry where you're getting a sense that pricing is getting better for your competitors as well? Any color helps.

I think there's two elements of price. I mean, there's general price increases which we put in place earlier in the year, and really we're seeing more of the positive pricing coming out of the Americas. It's a little bit tougher in Europe. And then also, if you look at what's in our results so far, we've called out, we've had less national account business and some very [low] national account business that hasn't flowed through the P&L. So, that comes through as price, but it's really, we call it customer-specific pricing. So, we've had less customer-specific pricing in 2017.

Okay, last question for me on Nuvera, I'm sort of trying to maybe get a little better clarification here as to what the expectations ought to be here for 2018. When we're talking about lower losses, if you would, what sort of cadence are we talking about in '18 versus '19? Half the losses from '17? More in line with '17? How do we think about next year?

Obviously, we have our own internal forecasts, but they're highly dependent on what happens in the marketplace. And as Christi pointed out in her summary, we're being selective about the customers that we choose to do business with, so that we can get the margins that we think are appropriate. I think the way I would look at it, is that 2018 is still, in our minds, a significant year of strengthening of our product cost and meantime, between failure, position, the quality, and shifting production from Billerica to Greenville. And my core feeling is that we should look at 2018 as a year of further strengthening of the commercial capabilities of the business, and 2019 as the time when we really begin to have a significant impact on the losses with the engineering programs that are underway, the improvement in costs, and the movement to the Greenville facility.

So if I understand what you're saying here, you're pretty much saying hey, look, in '18 losses are probably going to be pretty much what they've been in '17?

Well, I don't want to get that specific about it, but I think there's going to be a continued period of significant loss in 2018. I do think that the longer-term prospects for fuel cell usage continue to be at least as strong as we were hoping they would be, and in fact I was interested to see at least in this preliminary House tax bill, that support is continuing for the introduction of fuel cells as an alternative energy source. And that, I think, will continue to stimulate demand for the product.

Then lastly, the goal posts are moving and have been moving on Nuvera, and I understand that this is an evolving technology and I think you guys are learning as you go. But, at what point will the goal posts stay actually firm, and some decisions will be made vis-à-vis the cash drain and profitability of this business, if this forecast that you currently have on better data now doesn't quite pan out?

Well, we expect it to pan out, and we're patient. We always have been, and we expect to continue to be. But, I would emphasize the point that you I think were touching on, that we made in our earnings report, that we have reached a point where we're in a much better position now to gauge costs of our components at different volume levels for our battery box replacements, to forecast the detail, the impact of the engineering programs on the cost structures that we have. So, we're in a much more stabilized position now, and I have considerably more confidence in the forecasts that we're putting together at the moment in terms of the likely outcome of those forecasts from a timing point of view. Very difficult when you are really ramping up to commercial production and commercializing a technology that has been developed but hasn't been put in commercial operation. I think now, we're really getting through that position, and we're in a much better position to have confidence in our forecast. We signaled that, I believe, in the second quarter conference call, that we thought that we would be in this position and we feel pretty good about our ability to look at this in a lot more detailed way, literally for each battery box replacement product, at every single component that's in that battery box, both in the engine and the stack which is Nuvera's responsibility, and the balance of the product which is the responsibility of the Forklift Truck side of the business. And, to put a set of numbers around those in a way that I think gives us, as I said, much more confidence.

Your next question comes from Mike Shlisky from Seaport Global.

I wanted to just check quickly first on your incremental margins in the third quarter. It looks like they kind of stepped down a bit. The operating pull-through, it was very solid the first half of the year of course, so it might be net-net okay by the time the year is through. But, how I get a sense into 2018, in the past you've been talking about getting low-to-mid-teens incremental margins on good volume. Is that what you're looking at in 2018, or do you feel you've got something there that can make it go a little bit higher than that, given the mix next year?

I think we're confident, overall. Again, a lot of it's dependent upon the mix of products we sell, and the markets in which we sell. I think we've done the add-em-up in terms of overall performance for 2018, based upon again, the type of trucks we think we're going to sell, and what markets. We are seeing quite a bit of material inflation coming through, but our plans will have enough pricing in to cover the material inflation. So, I think if you look at a steady-state truck, we don't see a material change in individual truck margins in 2018.

I think we ended up at about, I think it was about 3.7% in the Lift Truck business in the third quarter. Based upon the guidance we gave at the beginning of the quarter, that's an improvement over what we expected. So, the trend is there that we've seen kind of quarter-on-quarter improvement after in 2016 we took a step back primarily related to that deal-specific discounting and the currency headwind that we suffered. Now, currency has been easing off a bit, but it still isn't in the same position, the same favorable position, that we were before the 2016 period.

And we get the leverage of extra volume.

Absolutely. Absolutely, and that's showing in our numbers.

Okay, I may have to talk with you guys on that offline. I also wanted to ask secondly about your long-term plan. We haven't mentioned this in a long time, but are you still talking about 115,000 units, I think it's by 2019, maybe 2020? Is there still a good path to that, given where you are today? Just kind of your thoughts around your long-term goals?

Yes, we still believe that we can reach a target of 115,000 units. I would clarify that that's of trucks that we produce, as opposed to trucks that we source from others, and that we think we can do it in this cycle. The timing is harder to forecast, but we think as we approach the end of 2019 and 2020 we should be -- we would hope to be in that kind of position.

In the industry, every category is different but I've been hearing elsewhere in kind of heavy equipment, there's been a big dealer inventory build in the third quarter. I was kind of wondering, if your mix to dealer shipments in the third quarter had anything to do with individual dealers trying to have more in stock, for what they might be seeing as a coming retail sales uptick in Q4-Q1?

No, maybe on an individual dealer basis, there might have been -- you know, there may be stray ones here and there, but I wouldn't say there was any significant buildup in dealer inventory.

Okay, and then I saw in your release that you're testing a pretty big 52-ton Big Truck that has a lithium-ion battery in it. I kind of wanted to go through detail in that product, what you're targeting there as far as penetration, what kinds of engines size will that displace? And, are there any big marked differences compared to the ICE engine, and are there other competitors out there making similar product to this Big Truck here?

I think it's a lot of -- clearly, if you look at what happens in ports, ports are quite large polluters. So, there is a significant interest in clean energy for ports. We see a big market for our fuel cells in port applications, but we're not one-trick ponies, and we do have an initiative where we're using batteries, battery-electric products, lithium ion-type solutions, that we're doing some work on. And we'll continue to work on all those fronts. I think you will see an electrification, significant electrification going on in the ports over the next several years.

All right, perhaps one more from me. Just want to get a sense on interest costs in the quarter. It looked elevated, I imagine there was some kind of one-time fee or charge in there but I just want to make sure I got the right number that's kind of ongoing run rates for 4Q and 2018 there, as well.

This is our first full quarter of the term loan B facility. I think if you look at our detail, I think we're talking about close to 5.25% all-in. So, it's predominantly the term loan B interest coming into the picture. Obviously, the cash we're holding on our balance sheet isn't generating the interest income to offset that interest expense on a net interest basis, either.

So, the [$50 million] is the appropriate run rate going forward, or close to it?

It is. There may be items quarter-in, quarter-out. We had a couple, an item that had some incremental interest in this quarter, that I wouldn't expect to see in future quarters. But, from a run rate, Mike, it wouldn't change the magnitude of the change caused by the term loan B coming into the picture.

Your next question comes from Joe Mondillo from Sidoti and Company.

Questions on Nuvera. Number one, I'm wondering if you could talk about your sort of external costs that you really have, you don't have much say upon? And also, if you could address what you mean by supply chain matures, the wording that you used in the press release, regarding your supply chain?

Well, I think that you're talking -- the two questions are really one question. The costs that are external are our supply chain costs, and by that we mean the payments that we make to the suppliers of our components that go into the stacks, engines, and the balance of the product. Those, when you're operating at very low levels of volume, typically the suppliers are charging you a developmental price. And then after you establish that the components really do what they're expected to do, you can get into a negotiation which is often dependent on volume, as to what the prices would be as a supplier ramps up its volume and determines how to produce the product, the component, in the lowest-cost possible way. So, when we talk about the supply chain maturity, that's the process we're talking about. It's getting from their point of view to full commercial productivity in the components that we need for our battery box replacements.

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

I've got a couple of questions, but perhaps we can start with the first one, which is on your long-term target of reaching 115,000 units, and you said that's towards 2019-2020. You are quite confident that you could be in that range. And according to my calculations, that implies something like around 7% growth on a yearly basis, between 2017 and 2020. So now, the question is, how confident are you that this cycle, this current cycle that we see in the [forklift] market is actually providing you good conditions for reaching the target? I'm more interested in your view, really, on the cycle itself and how it could play out in the next couple of years.

Well, I think we continue to feel pretty comfortable that the cycle is still in expanding position, and what we hope -- and this is a very strong hope on our part -- is that the market doesn't expand too fast, too quickly. That's what really led to some of the severe downturn and certainly in the last cycle, and at this point slow and regular growth, not only in the United States, but generally around the globe I think is creating a set of conditions that are not overly-expansive and leading to a sharp downturn anytime soon. So, what we are expecting is moderate growth in the markets over the next few years, combined with increasing maturity of the programs we have in place to gain share industry-by-industry, customer-by-customer. And it's really the combination of those that we expect to lead us to the volume levels that we have outlined.

Okay, so if I understand correctly, you're guiding from probably something like let's say a global [forklift] truck market growing at a mid-single-digit pace for the next couple of years, with the common (inaudible) background. I'm just interested, I mean, do you see good conditions still apparently in the U.S.? You must think a bit about Europe as well, but in Europe if we take a look back at the previous cycle, we're going to exceed these volumes quite considerably in the next couple of years. So, do you feel that here perhaps the market has been overheating a little bit?

Well, you know, the way we tend to look at it is that at the upper bound of the cycle, we would exceed the median growth rates. And so, one of the things we do is look at the sort of pattern, if you will, around a long-term trend growth rate, which suggests a level at which peaks should occur and the level at which downturns should occur. And so, we track all the markets. And if you look at the U.S. market, the North American market, at the current time it isn't up at the level of the trend line that you would expect for the peak at this point in the cycle, but I just emphasized my point that what we hope is that the economies for both Europe and the Americas will grow at a moderate rate, not an explosive rate, because we think that then sets in motion a longer cycle with less susceptibility to a sharp downturn.

(Operator Instructions) Your next question comes from Joe Mondillo from Sidoti & Company.

Hi guys, I ended up getting cut off there, sorry about that, but I had a couple follow-ups on Nuvera. So, regarding the supply chain and sort of the issues, it seems to me -- and correct me if I'm wrong, I'm really trying to understand, because the last several quarters we've been talking about this -- that you need volume to try to lower your cost basis of your parts and your supply chain. And so, at this point in time, it seems like the biggest challenge is maybe volume, and then also is that correct? And if that is correct, is there more of a challenge that you're seeing within the market adoption? And then also, how big of a deal is the development of the production of streamlining fuel cell stacks into actual trucks, as opposed to the battery box replacement aspect?

Well, there are several different questions embedded in that. First, we do see an evolving market for fuel cell engines outside of battery box replacements. It's early days, but there's quite a bit of interest in that area, and it plays very much to the strengths of our product design and the capabilities that we have with our fuel cell engine. With regard to volume for battery box replacements, I guess what I'd say is that it is somewhat sensitive to the price at which you choose to sell the product. Our choice is to sell the product into applications where the superior characteristics of our fuel cell can bring benefits to the customer in terms of productivity, and therefore pay a price for the fuel cells that is in our mind, a more appropriate price given the early stages of our cost structure. So, there's an interplay of choosing your customers, of getting a good price, and the timing of the building up of the business around the engineering cost reductions as well as the supply chain enhanced productivity and lower costs. So, it's a tricky process to look at all of the factors. There are a lot of moving parts. That's why we emphasized in the release, that we felt that in the third quarter for the first time, we were really in the sort of position that would allow us to look in detail at the evolving cost structure, component-by-component, of our fuel cell engines and our balance of the BBR to make much better cost forecasts than we previously have been able to make, that take into account further engineering changes and simplification and consolidation of different components and products, and all the things that you would expect in the early days of a new, highly-technical product. So, we're trying to manage the increase in volume very carefully over the course of 2018 and 2019, and then into 2020, so that we can bring all those factors together in a way which gives us attractive gross margins to cover the rather stable cost of development that we have in the business. And so, that's kind of the way I would characterize it for you.

So, in terms of the market adoption of fuel cell, how would you sort of rate, based on your expectations a year ago or what-not, in terms of adoption, has it been slower than expected? Or, as expected? How would you describe that?

I think it's pretty much where we expected it to be, but I emphasize that if you cut the price to really low levels, you can generate a lot of volume. And because -- and I'm not trying to be at all humorous about that comment. I really mean it because fuel cells, like any other mode-of-power system, is competing against alternatives, and those alternatives can be lead-acid batteries, they can be lithium-ion products, they can be internal combustion engine products. And you need certain conditions in order to make the economics of a new power system like a fuel cell, economically attractive both to the customer and to us. And so, you phase it in, focusing on the highest productivity applications where the benefits of our fuel cells have the biggest impact on the customers' costs. These products are not appropriate at this point in their development for low productivity applications, lighter-duty applications. We want to pick the customers very carefully. And the adoption is there. They want the product. There's no question in our minds about that. We want to give it to them at a price which will allow us to make an attractive profit, and that's the equation we have to balance between the maturity of the product development cycle and production cycle, and the stimulation of demand on our part. Put another way, if our costs were where we want them to be in 2020 today, we could generate a great deal of volume today.

Also, I wanted to understand how much cost is being moved from the one facility, from the Billerica facility to the Greenville facility? How much cost is moving from Nuvera to the Americas segment?

I'm not sure that we can answer the question quite the way you phrased it. All aspects of the fuel cell engine business are going to remain in Billerica, and the fuel cell engines will be priced an appropriate price for fuel cell engines. All other aspects of the product are moving into the Forklift Truck business, but it isn't quite the way it seems because when we put a new engine, a new internal combustion engine into one of our trucks, there's an enormous cost associated with the development of that engine and that capability. And so, this is not dissimilar to everyday life in the -- as far as the development process is concerned. If you shift over to the sales and marketing activities, there are some increases in people that are occurring in the sense that we have dedicated service capabilities, or service training capabilities, and some dedicated sales and activities. Maybe a dozen people or so. As we flesh that out, it's less moving them over than it is building that capability in the Forklift Truck business. Now, let me give you some examples, nothing particularly unusual about this in the Forklift Truck business. We have a developing automation business of significance. We have people who are dedicated to selling our automation products. We are building very rapidly our telemetry business, and we have dedicated people involved in our telemetry business. So, an important thing here is to recognize that our objective is to leverage our entire distribution system, and that means for parts, it means for service technicians in the field who are trained to do all of the basic maintenance on these products. Doing that on a standalone basis would be very difficult, and very expensive. For us, we can put it on top of our existing dealer network, and so -- and those are in addition to the dedicated sales capabilities, although in general we expect it to evolve so that our salespeople and our dealer salespeople are simply selling these products into the right applications, and they may need some support in doing that. But, that's the concept we're pursuing. I hope that's helpful to you.

Yes, so I mean, I'm guessing, I'm just wondering how much (inaudible) related to the sales and marketing, related to the BBR manufacturing and product, is being moved from Nuvera to the Americas segment?

Well you know, it never really --

The reason I'm (inaudible) that because of your (inaudible) --

It wasn't really in Nuvera, because we hadn't reached that point. Certainly, there would be costs associated with assembling the product when we manufacture it there, but we expect those costs to be lower in Greenville than they would ever have been in Billerica.

Okay, I guess I'm a little confused. The point that I'm getting at, though, is because your qualitative guidance is describing that the Americas segment operating profit is expecting to be comparable to 2017, but your backlog was a mix with -- the volume, the mix, it seems like Americas should be a lot better. But you're saying it's going to be comparable because of the sales and marketing. So, I'm just curious, how much this sales and marketing is going to cost in 2018 that's going to offset all the positives with the core business?

And we don't expect that to be a particularly large number. That's not going to be the driver of the results in 2018.

All right, then I guess that would lead me to ask why would you say in your guidance that operating profit at the Americas segment is going to be comparable to 2017, in 2018?

Well you know, just a whole series of assumptions that -- on prices, costs, and so on, and --

I mean, the two big ones is currency, currency is a headwind, and then material costs. We've seen material costs continue to increase as we've gone through 2017 and we're projecting that to continue into, at a more modest rate, into 2018. But, all that cost is going into our standards. Our plants are performing well, but those are the two big headwinds.

I think, you know, there are other things we're doing to pursue our share gain program, that do add costs in a material way. We are strengthening our industry strategy capabilities. We are providing more -- we will be providing more direct support to our dealer network on industry-by-industry, and for the leading customers in each industry, and in fact that kind of commitment is probably more important than the one that you're inquiring about.

I think, Joe, in terms of the earnings release, including those specific words in the outlook, what we were just trying to do is to flag it to you that we know that that sales activity for directly selling the battery box are now moved over to the Lift Truck business. But to Al's point, the initiatives on automation, on telematics, on sales ID and sales processes, are significant as well.

Okay.

You know, [we'll be giving] more detailed guidance on 2018, I would prefer to have you come back and ask some of those questions in more detail after we have our profit plan reviews completed. To be honest, this is designed to give you sort of a heads-up perspective. We'll be refining it as we go into next year, making sure that our cost price assumptions are sensible in relationship to our target economics that any special pricing activity is properly targeted and carefully thought through, that the SG&A levels are in line with the levels that we really want them to be at. All of those things will be refined, and I would take this as kind of a perspective at this point in time.

Yes, I mean, we do very detailed [indicative] reviews with all the locations. That hasn't happened for '18. That will be happening basically through the month of December, November-December.

(Operator Instructions) Your next question comes from Mig Dobre from Baird.

Al, you know, I caught this in your comment and I think it's really interesting, it bears more discussion here. You talked about investments in automation and telemetry. Let's talk about that. What exactly are they? What's the opportunity here? What are you pursuing?

You want to talk about it? Colin?

Well, we did make a small investment in a French company called Balyo that did an IPO recently. We're working with some other automation third parties, and we've also got an internal team looking at some automation solutions. We really believe, firmly believe, that over the next several years there will be a significant increase in demand for driverless Lift Trucks, or automated Lift Trucks. The architecture within our truck lends itself very nicely to being automated, which gives customers the benefit of two things. One, the ability to hop on and hop off when the trucks needed to be operated at full blast, but also a much lower-cost automation solution than a lot of the specialty pieces of automated equipment that are out there, because you're taking units at a high volume, lower cost product, and basically putting an automation solution on them. We see the cost of the automation technology and architecture coming down over time. We're watching very carefully what's happening in the automotive space, and looking to leverage as much as possible about what's happening in automotive into our equipment. But, certainly, as we look to the future, we believe that demand for automated equipment will increase significantly and we aim to be a major player.

And in effect, we are a significant player in the early stages in the sense that we have a number of existing contracts that we are using both to meet customers' needs, and to develop our own internal capabilities at the same time, so that we're kind of engineering some of the details as we go in areas where we have a good understanding of what can be done. And it's done in a way, as add-ons, to the core sale of a Lift Truck. And so, that's how we're getting our feet wet in that business, and Colin, why don't you comment on the telemetry business which has been growing very rapidly.

Yes, we've made the acquisition of the distribution organization of Speedshield last year, and we've seen almost a -- well, I was going to say explosion, but a very rapid increase in demand for those solutions. We do have a dedicated team. Actually, what we're doing in the Americas is combining leadership of our telematics business with the responsibility for selling the BBR solutions, and expanding that team, so we're getting a little bit of leverage there.

In addition, the device itself that sends information from a truck to a central location in many ways is not the key to all this. The long-term key is the ability to use the information that can be sent directly from a truck. There are some obvious aspects of that. The ability to monitor performance and hours on a truck so that scheduled maintenance is done at an appropriate time, or if anomalies occur in certain areas that they're flagged and the truck is attended to immediately because it's through notification. So, there's a whole set of things that are related to that. There are ways to monitor productivity, there are ways to monitor the damage to a truck and operator performance, and to meet OSHA obligations more effectively and monitor more effectively what drivers are doing. All of that is sort of moving toward our own little framework of big data in terms of the analytical capabilities that are going to be needed.

And the technology is evolving all the time, and we're working on it. I mean, I think in the not-too-distant future we'll be repairing trucks, flushing trucks, remotely when we need to. So, we have a dedicated team managing this, both in Europe and the Americas, and sales are increasing significantly.

And we're really seeing the maturation of the adoption of the technology. When we bought the business, it really was, the majority of the installs were in the field, retrofits of existing equipment. Today, that ratio has changed and the majority of the units going out in the field are actually telemetry units that are built in our plants, that are hard-wired and leave the plant with the telemetry unit on it. So, that's really been the sling. You're seeing the customer order it directly now with that capability, rather than, gee, I want to change this facility and I'll retrofit this location. We're still retrofitting, but the driver has been -- the shift has been over to factory-installed telemetry.

(technical difficulty) we've got a number of (technical difficulty) going on in the technical area. It's not just the fuel cells. We're doing similar kinds of things at Bolzoni in terms of more sophisticated handling of attachments, the ability to sense the pressure that's put on cartons in order to make sure that there's a limit, you limit the damage to the product from the way it's handled. We're doing a lot with electronics, in the areas that we've just described. So, a very broad base of concepts that we're really rolling out, here.

How about lithium-ion?

And lithium-ion batteries as well. So, fuel cells and lithium-ion batteries, all energy solutions. We're trying to position ourselves as leaders in all these areas. And from a competitive point of view, the larger companies are going to be doing the same kinds of things. We have some proprietary capabilities, particularly in fuel cells, but it's going to be very difficult for some of the smaller companies to really handle this as effectively. So, from a competitive point of view, we think this is a positive trend for our company.

I see. So, I'm looking to clarify this, you're saying that now, new volume coming through the gate in terms of Lift Truck, that is telemetry-enabled, new product going to the customers? All of it, or some of it? Most of it? How would you characterize it?

I would say the vast majority is telemetry-enabled. I mean, we have the [can] system, which basically you link the telemetry into the can system. In the future, what we call the smart antenna will be built into the truck. Right now, we're still putting a box. But future architecture won't have a box, it'll basically be integrated.

That's really -- the mix shift wasn't that -- the majority of our trucks are coming out of the plant with the telemetry modules installed when they leave the plants. They all could have them installed at any point in time after they leave the plant as well, but the mix shift changed to, the majority of telemetry units, new telemetry units, being put in the field are really coming out of the plant rather than being retrofitted in the field.

No, I understand. I'm just trying to figure out how the product is evolving here, if now essentially the product that you're putting out there is telemetry-enabled. And related to this, I'm trying to understand if there is a revenue stream that's coming to the company because this option is being implemented.

There is. We provide -- there are monthly fees for the services that we provide in analyzing the data, and the connection fees and so on and so forth.

That's -- it's reported in our aftermarket parts, I believe.

Right, the aftermarket segment, yes.

Can you help us understand what the opportunity is, considering your installed base and the kind of volumes that you're talking about here?

I'm not sure that we want to get into any more detail on that at this point. That's getting down to a pretty detailed level. Things are always evolving in these businesses, and this is just one example. Christi, are we going to run out of time here pretty soon?

We're getting close, yes.

We can follow up some more offline with you if you want to have some further discussion on it.

(Operator Instructions) We do not have any questions over the phone line at this time. I will turn the call over to the presenters.

Okay, I don't believe we have any wrap-up comments, but if you do have any follow-up questions, you can reach me at 440-229-5168. Thanks so much, everybody, and have a great day.

This call will be available for replay beginning at 2:00 Eastern Time today, November 3, 2017, through 11:59 p.m. Eastern time on November 11, 2017. The conference ID number for the replay is 5598339. Again, the conference ID number for the replay is 5598339. The number to dial for the replay is 1-800-585-8367, or 416-621-4642. This concludes today's conference call. You may now disconnect.