Hyster-Yale, Inc. (HY) Earnings Call Transcript & Summary

Everyone, this is Matt Fields. I cover high-yield industrials for Bank of America. Welcome back to the 2020 Leveraged Finance Virtual Conference. It's my pleasure to welcome Hyster-Yale Group back to our conference. We appreciate their participation. From the company, we have Ken Schilling, Chief Financial Officer; Brian Frentzko, the Treasurer; and Christie Kmetko, who is in Investor Relations. So Ken, without further ado, please feel free to take it away.

Thank you so much. First off, I'd like to thank Bank of America for inviting us to be a participant in the Leveraged Finance Conference. We've done so, obviously, in the more beautiful Boca Raton than the Cleveland, Ohio that I sit in today, but I know we're all managing through COVID and these virtual conferences are now part of our life as well. If you look at our safe harbor on Page 2, I think you've seen everyone else give you one before. So I don't think there's anything different in ours than anyone else's. When you look at our business, we've got really 3 core businesses. We're one of the leading lift truck companies in the world producing under the Hyster-Yale brand names predominantly. We do have some other brand names as well, but those are the global brands that are well-known and well-sold. We own a business that manufactures and sells attachments under the Bolzoni, Meyer and Auramo brands. And those are attachments that go in forklift trucks predominantly, the forks, the clamps and other things. They typically touch the customers' product and are very important in terms of the customers' psyche on what they need to do and how they get it done with regard to moving their particular products around. And then finally, our third segment of our business is our smallest by far, but it's very, very visible. We're in the development stage of growing a fuel cell engine company in our Nuvera business to provide fuel cell engine options to vehicle manufacturers as well as to stationary power generation where appropriate. So those are kind of our 3 businesses. But as you move on to Page 4, what you really identify is that the vast majority of our sales revenue is generally in the Lift Truck business. You can see the 3 columns there. And Nuvera just has a small amount of sales at this point as it's in product development phase and commercialization phase of those products. When you look at the pie chart on the left, you're going to notice that those percentages don't really fit with the columns on the right. Bolzoni does sell a significant portion of its components to Hyster-Yale to put in lift trucks, and as a result -- either as components or attachments. And as a result, a significant portion of Bolzoni's revenue as shown in the column on the right is eliminated when you get to the consolidated numbers, and that's why Bolzoni drops to 4.7% in the pie chart on the left. We have a steady net income and EBITDA contribution over the last 12 months out of Lift Truck and Bolzoni. Our returns have dropped as a result of the COVID event, but we've managed our net debt and tried to keep cash on our balance sheet where appropriate. Actually, our debt and liquidity at the end of the third quarter is better, is in a more favorable position than where we were at the beginning of this COVID event at the end of the first quarter. And of course, our employee base is predominantly located in our Lift Truck and to a lesser extent, in our Attachment business. Nuvera's losses, we'll talk about that a little bit later, but Nuvera is really focused on getting a product commercialized and sold in the marketplace. And when that happens, we will have a book of business, a product that we can sell at an appropriate industrial margin. And that will then begin to offset the SG&A costs we have for engineering and product development that are really kind of the ongoing cost inside of the Nuvera organization. When you move on to Page 5, what you're going to see is the forklift trucks that we sell. What it really shows you is kind of the wide stretch of forklift truck models we offer. The smallest truck, if you look at the section and -- with yellow trucks at the top, you'll notice there's a pallet truck almost in the center at the top. And the smallest version of that, that we manufacture close for about $3,000 without the battery. The largest truck that we sell in that range is the reach stacker in the far right corner, and that lifts a 52-ton laden container 7-high 2-deep to stack it in a port or other container storage facility. So that's really the product breadth when you look at it. So our average sales value really varies greatly depending upon what type of truck and what type of lifting capacity you need. We produce everything from Class 1, 2 and 3 electric-powered trucks to Class 4 and 5, which have internal combustion engines. Even with internal combustion engines, you're going to see differences in terms of fuel source or in the electric trucks, differences in terms of sources of electricity to run those trucks. The schedule of the trucks at the bottom is a pictorial representation of the lift trucks we make in China at our Maximal plant that have applications predominantly in the light-duty applications that are common in the developing world. When you look at Page 6 of our presentation, this is really what I think separates Hyster-Yale from a lot of folks. We really produce trucks that are designed and are built to order for the customer's application. And by being able to customize the truck for the particular customer's application, either by power source at the top, which we spent a little time talking about, we talked about forklift truck models on the previous page; to solution applications where it makes sense for a truck to have this particular application for the customer's product; to the attachments that you need to either move, for example, on the far left, that's a paper roll clamp. Right below it would be a clamp that would be able to lift white goods, appliances without damaging them by just being able to squeeze just enough to lift them, but not enough to damage them. Multipallet handlers are where you're going to see a lot of beverage facilities, for example, able to have a forklift truck move 2 or 3 pallets of bottled water, for example, at the same time with a single truck. And you can see other applications of attachments across the way. When you drop down to the bottom right on this slide, what you're really seeing is the different ways that we can create kind of the small connected ecosystem around a forklift truck, whether it's a customer portal for the information we can collect via telemetry off our trucks, to service and service integration and automation where we have fleet services for forklift trucks under contract, then we can manage based upon the hours and the use on the truck to understand what repairs and what maintenance need to be made at what point in the truck's life cycle at that customer. And then of course, we have integrated solutions of using hydrogen fuel cells. We have the battery box replacements as one of the options. That's in the upper left-hand corner, you can see a picture of one. Although a number of the electric truck models, you'll see a battery that's black and green in the truck that really represents a battery box replacement. And then finally, we're also focused on telematics, telemetry implementations, not only one-way, but two-way telemetry to not only receive information from the truck, but also to send information to the truck or update the software on the truck on a remote basis. Of course, automation is going to be a big driver in our industry and the way forward, and we've got a slide a little later on to talk about that in a little more detail. When you look at the global lift truck market, we can see the bottoming of the market in 2009 with the great recession and the kind of steady long-term growth in the market that peaked in -- actually, the last 12 months has been the peak of 1,540. That just really happened with the third quarter with a very strong China sales. If you look at this on a more regional basis, 2018 would have been the peak and 2019 and 2020 have fallen off peak. And you can kind of see that in the 4 bar charts on the far right side of the chart. You see Q1 and Q2 of this year are down in comparison to Q4 and Q3 of this -- Q4 of last year and Q3 of this year. But when you really look at it, it's really a tale of geographies. Americas and Europe were following kind of a similar trend. Americas had a down quarter in the first quarter from an industry perspective. Europe kind of held its own, but both were affected quite dramatically by COVID in the second quarter, but then saw recovery begin to occur in the third quarter. JAPIC, because of the size of the China market, really kind of dominates the pattern or the trend here. And while we still see many countries in Southeast Asia and Australia continue to have COVID restrictions that are limiting the market, the growth of the China market coming out of their first quarter COVID event where they opened up in the second quarter and obviously are continuing to see -- continue to see strong growth in the third quarter, it was really a dramatic growth story, but again, those are trucks that are not necessarily the trucks that we compete with or we intend to produce. The bottom left-hand corner, I think that's an interesting chart from probably our key North American market, and what it shows you is kind of the trend line over time of the growth in the market. When we typically hit the upper limit, the blue line, that's typically when we see a peak in market. And typically, when we get close to or at the red line, that tends to be the market trough, and we see recovery soon to follow after that. So we're kind of in this confusing stage where we've seen the peak in the kind of '18 period. We're now in a period of kind of volatile ranges that have dropped now below the mean, below the trend line, but have not quite hit the bottom red line in the lower limit. You look at lift truck unit class shipments. We shipped trucks based upon geographies. You can see how important the China market is on its own. It's now 38% of the market over the last 12 months. When you see industry by class, obviously Class 1, 2 and 3 are the electric trucks. Class 4 and 5 are the internal combustion trucks. And not only has the kind of systemic shift away from ICE and towards electric trucks have changed that mix, but also the customers that were most impacted by the COVID event were more of the industrial Class 4 and 5 truck users, while the consumer goods, the grocery stores, the Amazon, the Walmarts, they continue to sell goods on a regular consistent basis, and in fact, some saw increases, which then caused demand for those product categories to stay stable or actually to -- for some customers to actually increase. When you look at revenue by class, and what this is really meant to show is that why we continue to see the shift away from internal combustion trucks in 4 and 5, because they represent the largest trucks by capacity and the highest average sales value or sales -- average sales price, they really represent still the majority of the revenue dollars being spent in our industry because of their participation -- sole participation at the very high capacity lifting levels. And -- but that's, of course, continues to change. The bottom set of pie charts is our company. It's close to the same representation of the industry. We're obviously much more Americas and European-centric than the global market, although we have made investments in China recently that expect to help us participate in the -- those developing markets more readily. Our mix shift is even more towards Class 4 and 5 because of our historical strength in the ICE market. And of course, that also translates into higher revenue in those ICE products, predominantly based upon our strong participation in the biggest lift trucks being used in the industry. So now how did COVID, on Page, 9 affect Hyster-Yale? We saw significant declines in economic activity from shutdowns of our customers, of our dealers, of our suppliers as well as our plants in some countries that were required to be shut down, predominantly in Europe and in Brazil. Our U.S. plants, for the most part, stayed open, but obviously, the ability to ship product and have product accepted and received by customers was a bit impaired. Shipments decreased versus the third quarter of 2019 and in the third quarter, but we did see a step change as we moved out of the Q2-restricted period into the Q3, obviously, COVID careful, but pandemic-related reduced lower production rates that were based upon the Q2 bookings that we were able to produce in Q3. Bookings in Q3, which is our focus of forecasting our volumes for Q4, were up and comparable to 2019's third quarter, but up substantially compared to the prior quarter. We continue to manage our backlog and shipments carefully and balance those, so our lead times and production rates really match the market. We saw those strong bookings in Q3 of 2020 really lead to a modest increase over the backlog in Q2 of -- where we finished out Q2. We expect the booking activities to really help us as we grow through this period, but there's still a lot of uncertainty as we see COVID spikes and hospitalizations and ICU rates begin to climb. And we -- while we are able and comfortable giving a forecast for Q4 when we put out our forecast in our earnings release, we still believe that there's a lot of uncertainty to really give an accurate view of 2021 in any kind of detail. When you look at the actions we took to combat COVID, we limited employees' exposure as our first course of action. Many of us continue to work remotely. We're practical. And we -- in our plants, we have to have people show up. We've obviously done the appropriate social distancing and hygiene and all the efforts that we can take to keep our employee base as safe as we can make the -- those environments. We carefully manage our shipments. We match the market. And we're focused on being able to be flexible to adjust production levels quickly to match the market changes. So if we see a COVID recurrence that causes a decline, we're going to be able to adjust to it, but we're also working with our suppliers to help make sure that we have the adequate component supply that if the market really begins to take off, we're in a position to match the market. We implemented cost containment actions. Those are targeted to achieve somewhere between $60 million to $75 million in full year 2020 compared to 2019. We have achieved already $47 million of that year-to-date at the end of the third quarter. We reduced base salaries. Our directors took cuts. We scheduled work furloughs at the plants. We suspended all of our incentive plans, our 401(k) contributions, our profit sharing plans. And we really restricted spending on travel, on discretionary spending as well as hiring freezes and a mitigation -- elimination of contract and temporary workers where appropriate. We really focused on liquidity and managed through this cycle, I think, incredibly well. I'm very proud of our team. Our working capital management was outstanding. We did defer some capital expenditures, and you'll see that a little bit later when we talk about CapEx, but working capital is really a strong point for us. And as I pointed out earlier, we ended up coming out of Q3 stronger from a liquidity and availability perspective than we left Q1. So I think that's a testament to our ability to manage through this type of event. These are our strategic programs on Page 11. We clearly are focused on our modular program as well as -- which is really the vast majority -- or the majority of the Lift Truck capital expenditures that we'll show you in a couple of slides. That required us to manage some plant footprint optimization. We are getting some new low-intensity products as a dividend from our investment in the Maximal business in China a couple of years ago. And those products are being introduced not only in the developing world, but also in the developed world where our light-duty truck is the right truck for the right -- for that customer's application. We're focused on expanding our warehouse range to be absolutely competitive with all of the players in the industry. We're electrifying more of our ICE products because we see that as a systemic shift not only in time, but also as restrictions on ICE engines become more and more complex and more expensive, electric trucks in those applications are becoming -- going to become more of a better fit. And to that point, the way to replace the power and the service cycle on an ICE truck is really to move to an integrated fuel cell solution. And that was one of the reasons why we had the fit of bringing Nuvera as part of our group in 2014 when we acquired Nuvera in an acquisition to be a good fit for the forklift truck business as well. We saw that as one of the primary powertrain changes that would apply to our trucks going forward. We have commercial operation focuses on direct selling. We have initiated some digital sales and service initiatives that were accelerated because of the COVID event. At Bolzoni, we're really focused on 1 company, 3 brands. We're expanding our North America footprint and producing more of the attachment products in North America rather than having long lead times of importing them either from Asia or from Europe. We have an industry focus. And we're also expanding JAPIC, and in particular, the Silver-Line products, which are standard products for attachments to be an alternative to the red Bolzoni products that are the premium product offerings that Bolzoni offers in the attachment range. And Nuvera, we talked a little bit about. It's really being refocused as a fuel cell engine company. We want to be the OEM provider of fuel cell engine options to vehicle and others that need a fuel cell power alternative that might be static in terms of backup power, but again, because of the architecture and design of the Nuvera fuel cell stack, we believe it's an excellent fit for vehicles as well. And we're really working to expand and get certification of our 60-kilowatt engine so that we can begin to produce and sell that on an order book that would allow us to produce a product at a margin that would begin to offset the SG&A costs in the Nuvera line. Moving on to Page 12. You can see our CapEx. We began the year at a very robust capital expenditure level of about $90 million. Today, we track at about a $44 million depreciation and amortization burn, so that's virtually a double of our D&A burn. That has now dropped down to roughly about a $60 million spend is our forecast for 2020. We still have that sizable investment in the modular truck program. We did have some IT spend, which was -- some was dropped from our budget, but we did add the direct selling and the digital selling, remote selling IT initiatives to be able to sell product during this COVID period in a more effective way. We reduced, obviously, the Nuvera CapEx as a result of the timing of the acceptance in China of the fuel cell engines that we can sell to OEMs, predominantly bus OEMs. And of course, Bolzoni is still working forward with this program to enhance its ability to produce in North America. That's driving the capital expenditures for Bolzoni. When you think about liquidity and where we've used our cash, we really focused on our investment in our business. We now have, coming into the quarter, virtually have not used any of our capacity on our ABL. It was paid down at the end of the third quarter. And what -- the only use against it is, obviously, letters of credit. So we have the full range of our ABL back available to us. We have made investments in the Lift Truck company, I showed you that on the CapEx side, but we have been able to drive a lot of working capital out of the business. And frankly, we'll need it when the market recovers to be able to restore working capital back to the balance sheet to allow us to meet customer demand when markets recover. We are investing in the Attachment business, as I described, and we're investing in our fuel cell business. But we have retained our dividend to our shareholders. We didn't raise it this year in light of COVID, but we held it constant with the level that we came out of 2020 -- 2019 with in 2020. This slide on Page 14 is our presentation of the results for the quarter. You can see the trends here. I just would focus that our strategic programs continue to move forward in light of COVID, but the pace has been prioritized to really pull forward the really key programs and we had to delay some others that we still really believe in. Having said that, I think this is really a valuation slide on Page 15. We're talking about the need to really think about our business as 2 different types of businesses. We have kind of a mature industrial cyclical business in the Lift Truck and Attachment business that you can value using traditional methods, but our fuel cell business, because we don't have that revenue line established yet, you really need to think about it from a developing technology business. And of course, the fuel cell industry now is a very hot area in the -- in many circles and such, it really requires its own valuation, separate in part from the industrials. Having said that, I think I've left a few minutes here for any questions. Is there any questions that we'd like to address -- or we can address for you today?

Yes. Thanks, Ken. I think just sort of a brief overview maybe of some of your end markets, sort of relative strength of your primary end markets maybe between kind of industrial manufacturers, distribution centers, maybe like Amazon warehouses, just a little bit of color on what you're seeing there.

Yes. We really sell to everybody. And if it isn't something that comes to us through a pipe, through the internet, it's something that's been moved by a forklift truck. Everything you've touched, everything you've really interacted with. So we really are a good barometer of just basic economic activity as a result. So we do have a strong participation with retailers, internet and brick-and-mortar. Some of the home improvement stores are some of our largest customers. Each of those stores has between 6 and 7 forklift trucks per store, and you can just begin to count the number of stores they have across the country. Similarly, Walmart, Target, other retailers as well, we provide forklift trucks, too. And we also do a lot of business with the internet fulfillment and the 3PL business as well. So I think we really cover the broad range. People think of forklift trucks as tied to an industrial cycle. The vast majority -- or the majority of our forklift trucks are really sold outside of industrial -- out of the industrial industries. They're an important customer base to us, but they're not the -- they're not where the majority of our revenues are generated.

Okay. And then maybe regionally, sort of differentiating between the Americas, EMEA and JAPIC at this point.

Yes. Strategically, we have a different position in our home market of North America. We're very much a leading company and drive the industry in many ways. Our product offerings are very broad. Our dealer network of independent exclusive to us as well as exclusive to the territory dealerships that we use is unique in the industry. So in many ways, our strength is really in North America due to us and our strong dealer network. We have a very strong presence all across the Western Hemisphere as well. In Europe, we compete against some strong regional players -- I'm sorry, I should say, some strong players that are headquartered in Europe. Those being companies like KION and Jungheinrich. Toyota also has a strong presence pretty much all across the globe through their Toyota brand as well as BT and Raymond. So I think from that perspective, those are our primary competitors. But in Europe, we have to match up with those players, and we don't play in the same level of the market as we do in North America. And of course, in the developing world and in Asia, in particular, in China, for the most part, those are markets that our product fit isn't the best. And the market demand for our products isn't really the same. We tend to make sure we take care of our western and Japanese multinationals that have plants in the developing world and beyond with the same type of product, the same type of quality, but our participation there is going to change as we're able to take advantage of our Maximal acquisition and really bring those low-intensity trucks that are the dominant truck being used in the developing world to bear through our dealer network. So I think that's really kind of the dynamic I'd give you on the market itself.

That's helpful. And then your Slide 15 kind of really touches on this, that you've got 2 different real types of businesses here. You've got the Lift Truck and Attachment business that sort of commands one type of valuation, and then you've got Nuvera, which commands kind of a totally different type of valuation. Given what we've seen in the market about how there's been IPOs of sort of start-ups, companies that don't make money, there's been a huge buildup in SPACs and other ways to monetize kind of early-stage unprofitable companies, does it really make sense for Hyster-Yale to own Nuvera in its current structure?

Yes. I think what I'd say is that we're cognizant of what's going on in the market. We're at a stage where we have a product that's well-developed, that's on the brink of being commercialized. We have an addressable market, in particular, in China with buses that is going to be relatively robust for a period of time. I think we need to get those steps behind us and evaluate our strategic options once we have achieved that. That will end credence to the technology and to the direction that we've taken. When we started Nuvera, we had a very broad view of participating across the hydrogen spectrum from supply to fuel cell engines to BBRs. And what we've done over the period of time since we acquired it in 2014 is really refocus its energy on its core strength, which is its fuel cell stack design and fuel cell engine design, and we think that is really the strategic strength of the company and where we need to focus it. Once we get that, once we're able to take advantage of that strategic strength, we think we can then work through which alternatives are the best for us as a company. Remember, I said that we believe fuel cell engines are going to be the future of many applications for forklift trucks, including integral fuel cell-powered engines, fuel cell-powered forklift trucks. So I think this is, no matter what, there's going to be a fuel cell application in the Lift Truck business that we would need some supplier for as well. And whether that ownership is done differently, that's an issue to be decided in the future.

So too early to think about monetizing even a small portion of the business?

I think we would consider all of the strategic options available to the company as they come available to the company.

Okay. That's fair. Last question, I think we're a couple of minutes over. Your term loan is not imminent. It's 2023, but it sort of gets late early out here to paraphrase, I think it was Yogi Berra. How do you plan on -- what's the plan to refinance that? Is secured for secured kind of the most obvious option? Would you consider coming to the unsecured high-yield market?

Well, I think what we've learned through this situation with COVID as well as through the great recession is that it's important for us to have the flexibility of the types of Term Loan B and ABL financing vehicles that we have today. And so I think we've got the right fit for the types and the structure. Now what we need to do is to look at it and say, when in market timing is it the right time for us to consider that. We do have a little bit of time to consider, but I agree with you, it gets late early. And we're keeping our eye on markets as well.

Okay. Great. That's very helpful. Thanks for a great summary and the questions there. We're a few minutes over, so I'm going to wrap it up. But please, everybody, join me in thanking Ken and the rest of the team from Hyster-Yale Group. Thanks very much, and have a great day, everybody.

Thank you for letting us participate. Bye now.