Hyster-Yale Inc (HY) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hyster-Yale Materials Handling Second Quarter Earnings Analyst Call.

(Operator Instructions)

Ms. Christina Kmetko, you may begin your conference.

Thank you.

Good morning, everyone, and welcome to our 2018 Second 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.

Yesterday evening, we published our second quarter 2018 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For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 everyone 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 second quarter results and activities.

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

In the second quarter, the global lift truck market remained strong and in this strong market, we had a solid increase in our second quarter Lift Truck shipments and bookings and our ending backlog increased 18% over the prior year.

We also experienced a large increase in our average unit backlog value as a result of the mix of products within backlog.

We booked more higher priced units and fewer lower priced Class 3 trucks.

On a consolidated basis, our revenues increased over 11% to $765.6 million, up from $685.5 million last year, driven by a 25% increase in Bolzoni's revenues and an 11% increase in the Lift Truck business revenues.

It should be noted that a significant portion of these increases were attributable to the translation of EMEA and Bolzoni sales into U.S. dollars.

Despite this revenue growth, our consolidated operating profit, which was broadly in line with our expectations, decreased 38% to $10.8 million from $17.5 million last year.

This decline was solely the result of a decrease in our Lift Truck business operating profit.

Our consolidated results also include an unplanned $2.6 million unfavorable mark-to-market adjustment on an equity investment and a $700,000 unfavorable pension settlement adjustment, both of which were recorded in our Americas segment.

We reported net income of $5.6 million this quarter or $0.34 per share compared with $16.4 million or $0.99 per share in the prior year second quarter.

I should also highlight that we completed the Maximal transaction on June 1, 2018.

As a result, the JAPIC segment second quarter results included revenues of $7.2 million and a net loss of $200,000 for the 1 month we owned Maximal.

In addition, our second quarter consolidated net income in both 2018 and 2017 includes pretax amounts of $1.9 million and $500,000, respectively, for Maximal acquisition-related costs, which were also recorded in our Americas segment as well as higher 2018 tax expense of $1.1 million related to accumulated nondeductible acquisition costs.

In our Lift Truck business, second quarter 2018 revenues went up 11% to $720.1 million from $647.7 million in the prior year.

Our gross profit was generally comparable to the prior year quarter, but operating profit decreased 37.8% to $17.3 million compared with $27.8 million last year.

Overall benefits from higher shipments and parts revenues in all geographic segments as well as favorable foreign currency movements in EMEA were more than offset by higher material and marketing -- higher material and manufacturing costs, net of price increases and higher operating expenses incurred to support our strategic initiatives.

Those are the significant factors affecting our Lift Truck operating results, now let me turn to the outlook for the consolidated Lift Truck business.

We continue to be focused on increasing our unit volumes and market share over the remainder of 2018 and in future years through the continued implementation of our key strategic initiatives.

We have realigned our sales and marketing teams and increased our sales and marketing resources to execute our specific industry strategies more effectively as a means to target sustainable share growth -- share gain.

This is one of the main reasons our operating expenses have increased in the first half of the year.

The overall global lift truck market remained strong in the first half of the year, but we expect it to grow only modestly in the second half compared with both the second half of 2017 and the first half of 2018.

We expect unit shipments and unit and parts revenues to increase during the second half and full year 2018 compared with the same prior year period.

We also anticipate the Lift Truck operating profit to increase in the second half of the year with a modest decrease in the third quarter, expected to be more than offset by improvements in the fourth quarter.

However, the improvements in the second half of the year are not expected to offset the reduced operating profit during the first half and as such, we expect this will result in an overall moderate decrease in full year 2018 operating profit compared with last year.

Nevertheless, net income in the second half of 2018 is expected to increase substantially over last year's second half as a result of the absence of the tax adjustments made in 2017 for U.S. Tax Reform legislation.

The anticipated decrease in our third quarter is driven primarily by shipments of backlog orders that were booked at prices in effect prior to price increases being implemented.

We expected fourth quarter improvements are the result of an anticipated increase in product pricing as trucks booked at the new higher prices are shipped.

These improvements are expected to be partially offset by material cost inflation and by the higher operating expenses I mentioned previously.

We implemented price increases to help recover anticipated material cost inflation, including the impact of Section 232 tariffs, and we expect to continue to implement pricing actions as needed.

We are still working to interpret the full likely impact of the most recent Section 301 tariffs on our future operating results and at the same time, we are reviewing a number of strategies to minimize their effect.

Moving to Bolzoni.

Bolzoni reported net income of $2.1 million and revenues of $52.5 million for the second quarter of 2018, compared with a net loss of $100,000 and revenues of $41.9 million in last year's second quarter.

Bolzoni's revenue increase was driven primarily by higher sales volumes in EMEA.

In addition, due to favorable currency movements, revenues increased $4.7 million as a result of the translation of Bolzoni's sales into U.S. dollars.

Bolzoni's operating profit and net income increase was the result of an increase in gross profit, including the absence of unfavorable currency movements in the prior year of $1.6 million.

This improvement was partially offset by higher operating expenses.

Looking forward, as a result of anticipated growth in the EMEA and Americas markets and the continued implementation of sales enhancement programs, we expect Bolzoni's revenues in the second half to increase compared with the second half of 2017, primarily in the third quarter.

However, the improvement in revenues in the second half of the year is expected to be at a lower level than in the first half of the year.

In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growth, we anticipate the continued implementation of several key strategic programs to generate substantial growth in Bolzoni's operating profit and net income for the remainder of the year as well as for the 2018 full year compared with the respective 2017 period.

Finally, in our Nuvera segment.

Nuvera reported an operating loss of $9.5 million and a net loss of $6.9 million in the second quarter compared with an operating loss of $10.5 million and a net loss of $6.3 million a year ago.

Nuvera shipped 91 battery box replacement units this quarter compared with 31 in the prior year, but revenue on these units has been deferred until a later period.

Nuvera's operating loss decreased in the second quarter compared with both the prior year second quarter and the 2018 first quarter loss of $10 million, mainly as a result of lower product development cost.

Nuvera's net loss increased primarily as a result of Nuvera realizing a smaller tax benefit on its pretax losses due to a lower effective income tax rate as the result of the U.S. tax reform legislation.

Shipments of Nuvera's battery box replacements increased in the first half of 2018, and we expect shipments to continue to increase in the second half of the year.

The unit backlog was just over 250 battery box replacements at the end of the year -- at the end of the quarter.

Nuvera expects demand to increase throughout the remainder of 2018 and expect it's cost base to continue to decrease due to substantial cost reductions on future purchases of core components.

Nuvera expects to continue to leverage improved designs and higher volumes through its supply chain to generate further cost reductions in 2019, although recently implemented tariffs on imported components will partially offset these reductions.

We are working closely with suppliers to find alternative sourcing for affected components.

Production of battery box replacements at Nuvera's Billerica facility is expected to be phased out and transferred to the Lift Truck business.

With the phase out of battery box replacement 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 that's used in battery box replacements, reinforced by recently extended federal fuel cell tax credit, Nuvera is experiencing significant interest in its stacks and fuel cell engines for applications outside of the Lift Truck market, particularly in China, and we believe this could be a significant and profitable growth opportunity.

Early in the third quarter of 2018, Nuvera finalized an agreement to manufacture and assemble fuel cell engines designed by Nuvera for use in the Chinese new energy vehicle market.

This agreement provides a product license for the exclusive manufacture of 45-kilowatt fuel cell engines based on Nuvera's Orion Gen1 fuel cell stack for sale in China over the next 3 years.

The units are expected to be integrated in transit buses, delivery vehicles and other motive platforms.

In addition to the fuel cell engine manufacturing license, the agreement also provides royalty and technology service revenues to Nuvera.

The agreement incorporates a minimum initial purchase volume of 500 fuel cell stacks after successful testing of the engine, with annual minimum purchases increasing significantly throughout the 3-year term of the contract.

The fuel cell stacks used in these engines will be manufactured exclusively by Nuvera, initially at its facility in Billerica, with localized manufacturing in China anticipated in the 2019-2020 time frame.

We are currently targeting Nuvera to achieve breakeven by late 2019, although this target could be achieved earlier or later depending on sales volumes for fuel cell-powered lift trucks as well as engine sales for other markets.

The operating loss in the second half of 2018 is expected to decrease compared with the second half of last year, especially in the fourth quarter and moderate more substantially over 2019.

While the 2018 full year operating loss is expected to be lower than last year as a result of improvements in the second half of the year, the 2018 full year net loss is expected to be comparable to 2017 because of a smaller benefit expected to be realized on Nuvera's losses due to the lower effective income tax rate.

So to summarize, our consolidated outlook for the 2018 full year, we expect our consolidated operating profit to increase due to our lower operating loss at Nuvera, principally in the fourth quarter, and an expected improvement in Bolzoni's operating profit.

These improvements are expected to be partially offset by a modest decrease in full year operating profit at the Lift Truck business due to the lower operating profit in the first half of 2018, combined with the modest decline in the third quarter, mostly offset by a substantial increase in the Lift Truck operating profit in the fourth quarter.

Our consolidated net income is expected to increase substantially due to the absence of net tax adjustments of $18.4 million made in 2017 as a result of the U.S. tax reform legislation.

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

Our cash position at June 30 was $152.4 million compared with $220.1 million at the end of 2017.

Our debt balance was $273.1 million, down from $290.7 million at year-end.

As a result of an unplanned acceleration of payments in December of 2016, we experienced higher than normal cash benefits from the restoration of accounts payable level in the first quarter of last year.

Excluding the favorable effect these payments had on 2017 and excluding the cash paid for HY Maximal in June, we expect our consolidated cash flow before financing activities to decrease significantly in both the second half and 2018 full year compared with 2017, primarily due to anticipated increased working capital and higher capital expenditures.

That concludes our prepared remarks.

I will now open up the call for your questions.

(Operator Instructions) And your first question comes from the line of Mike Shlisky from Seaport Global.

I just wanted to start off with a very broad overview here.

I know you've mentioned you've got all 3 segments combined, there should be an improvement in operating profit from last year.

Well, I wanted to get the basic view as to -- do you feel better about the full year this quarter than last quarter?

Or if things tick down slightly because some of the pricing and the backlog in Lift Trucks?

That's a hard question to answer.

It's a very subjective point of view.

The only comment I'd make is that there's more uncertainty now about the impact of tariffs than perhaps was the case 3 months ago.

It's a very difficult period from that point of view.

Nobody's quite sure what's really going to happen.

Are they negotiating?

Or is this a permanent environment?

There's -- and the challenge of balancing price increases with cost increases, including the tariffs, is a difficult one.

So that's the only comment I'd have.

Okay, that's fair.

And then perhaps as a follow-up to that question, on Maximal.

If things don't change from a tariff perspective, is there anything we should be worried about as to how effective you can be with what your original plans were for the Maximal brand going forward?

Maximal is really not affected by the tariff issue.

Maximal produces products that are appropriate for utility markets, particularly in China, Asia and segments of other markets around the world.

But there's very little that affects the U.S., so the tariffs really don't come into play.

Got it.

And then perhaps more broadly on Maximal.

Now that you own the controlling share of it, what are your first impressions now that you've been there and you're allowed go kind of behind the curtain and see the books, et cetera, if you own it now, do you feel any differently now than you did back when you we're just kind of looking at it from a distance?

Let me tell you, we've been behind the curtain for 18 months.

This has been an extraordinarily detailed due diligence period.

We have learned nothing new since the acquisition.

We had complete disclosure on their part.

We had teams of people involved in our due diligence, professional outsiders including accountants, advisers, lawyers and as well as our own teams in product development, supply chain, manufacturing, information technology, sales and marketing.

We've been crawling all over this for a very substantial period of time.

And in fact, that whole effort was in some ways complete some time ago.

And then it came down to hammering out all the details in the very complex set of documents that we have and we'll have to see.

And so those documents are now signed, and that was really the focus of the most recent months' efforts.

I would say, in addition, don't forget that the owners of the Maximal business still own 25%.

They have a huge stake in the success of this joint business, and they're -- they have interests that are very much aligned with ours.

So it's not a situation where the former owners and the managers are gone.

They're integral for this entire transaction and very important from our point of view.

Wow, great.

Just squeezing one last one and this one's for Ken here.

The backlog being up 18%, can you tell us what percent is due to currency?

Mike, let me get back to you on that one.

I don't have that handy in the backlog analysis.

But I would say that backlog is predominantly in the U.S., so I would say only about 30% to 35%.

I wouldn't look at it at a point of view of revenue.

I'd look at the units and the unit backlogs are up very substantially.

And that's really the key way to do that, I think to have a perspective on that.

I think the currency approach is to give you a flavor for the value of it, and the mix has been changing generally in our favor.

That is from smaller Class 3 type trucks to the larger Class 5 trucks, including big trucks.

And I think that, that's the way I would call it out.

And we say in the earnings release that the worldwide backlog was approximately 41,700 units compared with 35,300 at June a year ago and 36,100 at March 31.

So I think it's an indication of robust bookings, a moderate perspective in terms of the shipment cycles so that we can manage our shipments and any changes in volume in our plants in an orderly way, tied in with our suppliers and have it not be disruptive at all to our manufacturing productivity.

And I think it gives us a very healthy backlog in units as we look forward.

Now Mike, coming back to your earlier question how do you feel about this forecast compared to 3 months ago, certainly the outlook is more solid because we're booking well into the fourth quarter.

And we've been booking at higher prices for some time now.

So as we look at the third quarter and into the fourth quarter, we have pretty good visibility as to what we expect our results to be.

And as I said, Mike, 70% of our units are in the Americas where our currency is the U.S. dollar.

So only 30% really would have that effect.

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

My first question, I'm just trying to get a sense or try to understand better.

You said you have pretty good visibility into the business over the next couple quarters, so I'm just want to get a sense of the margin at the Americas segment.

A couple of years ago, we were in the 7% range of the op margins.

And just given the headwinds of material inflation in the first half of this year, we're looking at op margins in the 4%.

But if you sort of fully make up that with the price increases that you're instating, and the mix sounds the best that that's been in a very long time.

Could you help me understand where you think op margins can get at the Americas segment?

We really don't make those kinds of forecast, but dimensionally, I think your understanding of the situation is reasonable.

The important thing to understand is that the tariff situation has emerged over time, and as it has emerged, we have taken action to increase prices of trucks that are being booked, but those trucks that are being booked don't get produced for several months and especially with backlogs at levels where they are now.

So you're getting a mismatch between the assumptions for our pricing when we book trucks some months ago and the material cost levels that are resulting from the tariffs, so we have to work our way through that.

And I think as Christie suggested, the biggest impact comes in the fourth quarter, not in the third quarter when we're still working through some of the bookings at earlier numbers but dealing with the inflationary impact of the tariff increases.

So this is why I made my comment earlier that these are very uncertain times.

And as you read in the newspaper this morning, the Trump administration is even thinking about another round of tariffs and instead of 10% tariffs, 25% tariffs.

If that happens, that'll change the outlook very considerably with regard to the ability of the price increases to cover the tariff impact under those circumstances.

Now on the other hand, if somehow the 2 countries get together and start negotiating, it could be less impact than we think.

It all depends on the politics, the tariff discussions and what happens.

I don't think anyone expected that the U.S. would agree to sit down and try to reach resolution on all these issues with regard to the EU and U.S. differences point of view.

And so they held off on tariffs, and they're negotiating.

So I wish I could say what was likely to happen with regard to China.

I think that from our point of view, with this environment that we have to deal with, it's not closely related, these tariffs are not closely related to the issues that are most on the table in China, particularly the protection of intellectual property and other issues that sort of effect steel capacity and things like that, that are affecting global markets.

But we're dealing with an environment that we have, and there's -- we can just try to respond to it as effectively as we possibly can.

One of the things we wonder is if this goes on for a long-enough period of time, companies are going to have to look very carefully at having add-on charges for tariffs because of the unpredictability of this and its impact in terms of magnitude on the business.

So uncertain times.

Mike, as you think about -- I'm sorry, Joe, as you think about Al's comments, we have our third quarter and our fourth quarter.

Our third quarter, we're forecasting, obviously, our seasonal shutdowns that we normally have but also that lag period that Al described, predominantly from the steel and aluminum tariffs is still taking a bite out of us.

When we move into the fourth quarter, we start to get pricing that helps us out to somewhat balance that.

And of course, fourth quarter is a strong volume quarter for us traditionally.

So that's how you kind of you put those pieces into play.

When you think about the component side, Chinese components, that's the piece that has the uncertainty that Al's describing here, that's harder to calibrate.

There's so many factors as you probably noted.

The Chinese currency has devalued by a significant amount in the last couple of months.

That's something of an offset, assuming that the prices are negotiated in dollars, and so -- or in local currency.

So there are a number of things.

I think the other thing that we'd say is that we are looking at a variety of measures to try to moderate the impact of tariffs on the assumption that they will be with us for a period of time.

So we're actively looking at mitigating the impact of those through other means than price increases.

Can I try asking it another way?

So I'm obviously trying to focus on the spread between input prices and output prices as well as product mix.

I don't think we can give you any more visibility than what we've just said.

It's -- we're not going to get into detailed forecasts.

I think we've given you the drivers, and that's about where we're going to pause on our comments.

(Operator Instructions) Your next question comes from the line of Mike Shlisky from Seaport Global.

I wanted to touch a little bit on Nuvera now.

I guess first, great looking news on that China deal, to get some of your products into some nonlift truck applications on the road.

I guess I'm kind of curious, can you give me a sense as to what the potential market sizing is over the next couple of years?

And I'm also curious, can you tell us kind of why haven't we seen Hyster pursue this much in the U.S. or in Europe, where there are apparently also needs for a potential alternative fuel solutions for on highway applications?

I think the -- to answer your last question first that the pace at which different new energy sources are adopted can vary from country to country.

In China, there are serious traditional pollution problems and a tremendous need to address that, both in terms of the types of power plants that are used and in terms of the types of sources of energy for mobile vehicles that are used.

You couple that with commitment from China or desire on China's part to be a technology leader in the world and to -- and the centralization to drive change quickly and you have an environment in China where companies are responding to the expectations of the government.

And the market opportunity is expanding at a very rapid rate, particularly in vehicles like buses and automobiles and others.

I would say that as far as United States and Europe are concerned that the adoption in buses and other vehicles is simply going at a significantly slower and more measured pace because you don't have the impact of the governments driving the change as quickly.

And so we expect that the Chinese market is going to change -- going to grow very rapidly in these nonforklift truck applications and provide significant opportunity for us.

And I particularly note that the type of engine that we expect to use in some of these heavy vehicle markets is very similar to the type of engine that we will be using in our larger forklift trucks and that will be used in the demonstration project in California port equipment and other efforts that we're making in our larger vehicles.

So -- and then I just note that our focus in the forklift truck business is quite different in the sense that it's not comprehensive across all forklift truck applications.

It's focused on heavy duty applications where the use of the fuel cells can improve productivity and help in those applications the users of the forklift trucks achieve the lowest cost of ownership.

So it's a selective market-driven opportunity as opposed to what's emerging in China, which is very much a response to government objectives and those kinds of pressures.

And just to kind of broaden that exposure -- the question a bit further.

There are some other major global engine makers that are also pursuing fuel cell-powered engines.

They're most likely well behind where you are, of course.

But my concern, I guess, is one whether anyone in China, is there kind of any risk to technology transfer if your stuff is on the road there?

And then secondly, could some of the larger global engine players, will they step in and make a big push if they already have capacity in China to kind of serve that market?

I think the answer to your first question is that in all of our work in China, we -- with a variety of different customers and potential customers, we are being extremely focused on ensuring that our intellectual property is protected.

We believe that we're in a good position to do that and the approaches we're using are appropriate and protective.

Secondly, and perhaps even more importantly, the technology we have is broadly of interest because of some of the features that our particular technology has.

And so in addition to the heavier vehicle market, we also have extensive efforts going on in other markets, including the automobile market, that we think make bear fruit for us over time.

And this agreement we've signed also is -- it'll be our engine and our design engine, but we will be provided the stack, which is where, really, the most significant IP is, so we're protecting the IP by really keeping control of the manufacturer of the core component.

And the engine stack will be exempt from any tariffs going into China until you have your own facility there?

Excuse me, what was your question from tariff going (inaudible)

There are no tariffs in addition.

We would expect, particularly in the light of our Maximal acquisition, we have the ability now to have access to facilities that can -- and a critical mass of people, including our own emerging market development -- product development group that in the Hangzhou area that will allow us to control any manufacturing activities that we do in China and in the end, we will have manufacturing in China to be the best possible supplier to customers in that market.

But we'll do it off the back of our lift truck operations, which are now significantly enhanced by Maximal.

Great.

And just kind of one last one for me on Nuvera -- and I'm sorry I have to ask this question, it's just kind of important.

There was a big accident in the quarter at a major multinational.

Someone was operating a fuel cell-powered lift truck, not one of yours, of course, but in the end, there was somewhat -- there was a fatal accident.

And I'm just kind of wondering if you've gotten the sense, if that attitude has changed from some of the big multinationals in the last month or 2 towards the purchase of the fuel cell-powered lift truck just over some safety reasons and stuff like that?

I'd asked Colin to comment on that, but with the introductory comment that we are very knowledgeable about, or at least we are highly aware of the accident and it has -- our expectation is it that it has some characteristics which will not raise concerns in the minds of the customers that we've been working most closely with.

Colin?

Yes, as Al said, we have awareness of the conditions.

We don't want to comment on them, because obviously the investigation's still ongoing.

But our analysis is that the conditions that caused the accident are not prevalent in our trucks.

So we have different design characteristics.

As far as the reaction in the marketplace is concerned, we did lose a few prospects that we were working on.

But the bulk of the prospect bank is still active and alive and discussions are ongoing.

And there are no further questions at this time.

I will turn the call back over to our presenters for some closing remarks.

Thank you, everybody.

Do you have any closing comments?

No, no, closing comments.

No.

All right.

Thank you very much for joining us today.

And to listen to a playback of today's conference, you may call (800) 585-8367 and enter your conference ID# 4672709.

It will be available until August 8, 2018, at 11:59 p.m.

Eastern Time.

This concludes today's conference call.

You may now disconnect.