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

Hey, everyone. Welcome to the 2021 Virtual Bank of America Leveraged Finance Conference. It's my pleasure to introduce you all. And my name is Matthew Fields. I cover High Yield, Metals & Mining and Industrial companies. And it's my pleasure to kick off our conference with Hyster-Yale Materials Handling. And presenting from the company this morning is Ken Schilling, Senior Vice President and CFO. I think, Ken, you've got some slides prepared and happy to go through those with you now.

Thank you, Matt, and thank you to Bank of America for allowing us to participate in this year's conference. Christy, if you could put the deck up?

And the deck is up.

Oh, I'm sorry. It doesn't show on my screen. Sorry about that. So I'll go along with my screen here, and I'll queue you on the slides. So -- and our second slide, of course, is our safe harbor warning or disclosure. You can read that your leisure. On slide 3, we're at Hyster-Yale at a glance. The Americas is the largest segment in our business. That's the lift truck business with the 64% of our revenue. We have a significant presence in Europe at 23% of our revenue. Then JAPIC, Bolzoni and Nuvera, which has very, very little revenue at this point, round out the rest of our revenue stream. When you look at the segment information on the right side of this slide, don't try to add it up. There are eliminations for the items, in particular, that lift truck buys from Bolzoni, which provides us some significant major components to some of our live truck assemblies. You can see that the operating profit for the last 12 months is predominantly being generated at lift truck, but at a severely depressed level. We'll be talking about that as we go through the deck. Our net income and our net income at Bolzoni are also being affected by the trends in the market. Nuvera is a start-up kind of technology development-company. Sorry, guys, its 7:30 in the morning. I've only had a cup of coffee. It has some one-off items we'll talk about a little bit later on. You can see the EBITDA numbers on the next row, our return on total capital employed. We do have a net debt position in 2 of our companies. Bolzoni doesn't carry any debt. And we have about 6,700 -- 7,700 employees globally. So if you want to go to the next slide, Christy. Slide 4; when you look at our product breadth in our lift truck business, you can see we stretch from Class 1 to Class 5. Class 1 to 3 are electric driven trucks primarily driven by batteries, although increasingly by lithium-ion batteries or by hydrogen powered battery box replacements. When you look at Class 4 and Class 5, those vehicles are powered by internal combustion engines. The smallest truck in our line is the one almost dead center. We are the top of the slide called an end rider in Class 3, pretty much a stand behind, walk behind truck that you twist the lever and it moves forward and lifts a pallet, carries it to where an individual needs it. The largest truck in our series is a big truck, called the Reach Stack around the far right. That can lift a fully loaded 40-foot container, 7 containers high, 2 rows deep and is pretty much operated on a 24/7 basis in the port facilities that it resides. The red trucks that are at the bottom are produced by our Hyster-Yale Maximal unit and branded under the Maximal brand. That's why they're read. And so you get a sense of we've got a very broad range of trucks that range from $3,000 for that and Rider to nearly a $1 million average sales price for that ReachStacker. Moving on to slide 5, you can see that the variation in our products are also enhanced by different power options. We talked about a little bit about that on the previous slide when you considered the power options Class 1, 2 and 3 versus those used in Class 4 and 5. On the Solutions side, at the bottom, you can see how varied the application of forklift trucks are in the industry and can be modified for specific applications. And a lot of that modification occurs through the attachments that are on the far -- they're on the upper right-hand quadrant of this schedule. And those attachments that you're seeing there are produced by our Bolzoni segment. And they really are the items that -- or the equipment that gets closest to and actually touches our customers' products; another reason why Bolzoni was important to us to understand the customer story. And then finally, we've got -- we have developed a smart connected ecosystem of different IT systems and service offerings that circle around a forklift truck sale, whether it's providing information through telemetry, having a service and maintenance contracts, including fleet services and then providing integrated solutions through hydrogen fuel cells, attachments and automation, which is, we think, a big deal going forward. Christy, if you move on to slide 6, please? We're now going to talk a little bit about the forklift truck market. And you can see in the upper left-hand quadrant that the forklift truck market from the Great Recession in 2009 has grown significantly. And even the COVID year of 2020 was an increase over the prior years, reaching 1.6 million units. But for the last 12 months we are really on quite a pace to exceed even those levels at a 2.3 million unit forklift truck market on the last 12 months. A good portion of that is being driven by the important North American market, at least very important for our company because of our market presence. You can see the last 3 quarterly dots on that trendline far exceeded the upper limit of what we consider the growth quarter for the North American market. I could talk you through the 4 charts on the right, but I'll leave you to go back and think about the differences in the geographic industries. Christy, do you want to move on to the next slide? This is really the core of our messaging today is to understand how we have been affected by supplier component volume shortages, the logistic delays and capacity constraints in the logistics channel. And those have also been enhanced as a challenge to us by the component cost inflation due to commodity price increases as well as the increasing premium freight costs, both for containers and for expediting our components to get them to our plants. Our real challenge is that we have quite a bit of inventory to build trucks, but it's only 95% complete. We are missing certain key components that suppliers, either because of logistics challenges, commodity shortages or labor shortages have not been able to keep up with the increase in demand that we're seeing in the forklift truck market. And that's causing us a significant distortion in the number of trucks we can build compared to the number of trucks we schedule to build. We have seen the nonrenewal of U.S. tariff exemptions or exclusions by the Biden administration. The Trump administration put a 25% tariff on Chinese forklift trucks, but more importantly, for us, components that we import from China, we were able to apply for exclusions for approximately half of it under the Trump administration. The Biden administration to-date has not yet provided for a tariff exclusion or components that you can't source locally. And then finally, the timing of price increases has significantly affected us even more importantly on the go-forward because we book trucks that we couldn't build in the window that we expected when we had a view as to the cost of those components at that point in time. Since those trucks in our backlog have now been moved forward in time when we will build them in a period of higher cost inflation, our margins have been significantly impacted. And that's the story in a nutshell. And we'll unpack that as we go through the next couple of slides. Christy, if you can move on to the next slide, please? Here's the representation of those numbers. Those events that I spoke about on the previous slide, you can see a number of those trends there. I will note that we had an increase in consolidated revenues by nearly 15% over the prior year quarter, but those other issues related to material costs, logistics costs and the inability to ramp our plants at an efficient level have really affected our ability to perform. We did have some onetime items in the third quarter close. We took a $4.8 million reduction in inventory at our Nuvera sub, and we also took a $10 million fixed asset impairment charge at Nuvera. We have made certain investments in both inventory and equipment to coincide with the ramp-up of fuel cell engine production in China, and that was pre-COVID. Once COVID hit, the Chinese government didn't move forward at the expected pace in the installation of hydrogen refueling capacity in China, and that reduced the demand for hydrogen powered buses, in particular, in the Chinese market. We have made these investments and made the commitment to buy the inventory. Since we don't have the current bookings on our -- we don't have current bookings or orders to support those levels of investment, the accounting rules required us to take a write down, even though the vast majority of that inventory and the fixed assets that we're impairing are usable and apply to our core product lines. We also took a $3.8 million charge for our U.S. valuation allowance. If you understand those rules, what you really need to look at is your 3-year cumulative loss position. And with the forecast of the margin compression that we expected for the remainder of 2020, our 3-year period, including the COVID year for 2020, had moved in the U.S. to a cumulative loss. We also looked at our forecast for the next year's 3-year look back and came to the same conclusion. This really put us in a position on the accounting rules that we needed to provide a full valuation allowance. It's kind of like a reserve against your asset. None of the assets have gone away. None of the inventory and the fixed assets in Nuvera had not gone away. These are not cash charges, they are accounting reserves. Christy, do you want to go on to the next slide? So now, having seen the market, having heard our story about cost compression and the other challenges we're facing and the one-off items that you may need to think about as you calibrate the results of our company. I think you'd want to now understand our outlook. And we expect a continued strong market and booking volume. But we expect them to decrease from the peaks you've seen in Q4 of 2020 and full year 2022 are expected to recede from those 2021 historical highs, high amounts. But both periods are expected to remain significantly higher than the pre-pandemic levels. Bookings in Q4 of 2021 decreased substantially from Q3 2020 -- or we expect them to decrease and a decline in succeeding 2022 quarters versus 2021 quarters, but we expect to have share gains as we move through this period as well. The significant operating and net of losses are expected in Q4 and in the first half of 2022, at both the consolidated company and in the Lift Truck segment, and that's due to those component shortages due to the supply chain constraints, the material and freight inflation and costs associated with the reinstatement of pre-pandemic salaries and benefits. And of course, we continue to fund the operating losses of Nuvera as it continues to launch its fuel cell engine offering to the market. Bolzoni, we expect to see an increase in operating profit and net income in the fourth quarter of 2021 versus 2020 and the first months of 2021. And Nuvera is focused on ramping up demonstrations, providing quotes and ultimately getting bookings for its 45 and 60 kilowatt engine offerings. And we expect to see moderately reducing losses in 2022 from the expected enhancement in fuel cell engine shipments. The Lift Truck segment and the consolidated results are expected to return to an operating profit in the second half of 2020, assuming the resolution of component shortages and hopefully a stabilization in the cost in the market. Now when you move on to the next slide, slide 10, our target economics view of the company, and this is the lift truck company in the chart. We talk to people for a number of years about this chart. We hold ourselves to it. Our goal is to get to a 7% operating profit. And actually, for the last 12 months, we're only at 1.1%. That 4.1% margin variance is really a relatively recent event. We were actually at or slightly above our margin percentage in that period not very long ago. But because of the material cost inflation, logistics inflation, the inability to raise the prices of the trucks we have booked in backlog as well as the tariffs and the tariff -- the elimination of tariff exclusions have caused this 4.1% loss of operating profit. And we expect to obviously close the gap on cost versus price because we're offering prices today that are targeted to not only absorb the current level of inflation, both freight and material, but also future material inflation and freight inflation into the period that we're booking trucks to, which is almost really a year forward. We're beginning to fill our plants, and that's showing in the volume variance percentage. It's now at 1.8% of a headwind. We would expect as we're able to ramp our plants that percent would go down as well and we move closer to the target. Well, we're going to talk a little bit about our strategic projects. We've got a modular product offering, automation solutions, and we have an industry strategy focused in our Lift Truck business. I'm going to go through those quickly. Our Modular Truck program is really a concept where we're able to scale up and scale down our forklift truck to the needs of the customer and use common components across different capacities to be able to increase our buy of similar components. And components, such as hydraulic pumps would have identical mountings, identical hydraulic connections, identical electrical connections, even though they may be at different capacities, different power potentials for those offerings. And by being able to mix and match components, we're able to tailor the truck to the customers' requirements. When you move on to page 13, you can see automation products. And if you look at our full deck or in the past, we've clearly identified the significant cost that an operator represents to the use of a forklift truck. And it's somewhere around 70% -- a little less than 70% of the cost on an operating basis. So being able to take that operator off the truck is a significant savings. We do have partner solutions with Balyo and JBT today. We are beginning to trial our own modular, scalable, internally developed automation solution in trucks during 2022. And we expect that this will become a bigger -- a more significant portion of the forklift truck industry as we move forward. I think you've heard really the story on slide 14, where we're really focused on the customers' requirements and their toughest problems to be solved. And we have an evolution of a sales transformation process that identifies those and finds the solution to really be able to solve those customers' problems and in the process, really become a trusted partner of our customers rather than our situation being a transactional relationship. Now, we're going to move on to Bolzoni on slide 15. We've listed out our core strategies. Really, I'm going to just kind of note a couple. We have a significant growth strategy for the North American market to match up Bolzoni's attachment capacity to the strength of the Hyster-Yale brands in North America. We have a line of -- a silver line of attachments that provides more of a standard product rather than a premium product that Bolzoni has been known -- is really known to offer. And they have a significant OEM relationship with not only Hyster-Yale, but more importantly, with our competitors in the field as customers and competitors look for Bolzoni's poly in their attachments. Moving on to slide 16 on Nuvera, we have really -- this is the journey that Nuvera is making in terms of identifying those customers that can make the transition from an internal combustion engine vehicle application to a electrified drivetrain, then subsequently powered by a hydrogen fuel cell powered unit to continuously charge lithium-ion batteries to keep that vehicle on the road and having higher uptime than simply a lithium-ion EV vehicle would provide. We're focused on vehicles that are either fleet vehicles that return to the same place every day, buses, garbage trucks, delivery vans. And then also vehicles that never leave a location, port equipment and forklift trucks are 2 very good examples. So Nuvera continues to work this process and looking for getting their fuel cell engines specified or selected as the preferred power option for those vehicles. And you can see this kind of evolution here on slide 17 of the product platforms. Today, we will sell a fuel cell stack to a highly capable vehicle manufacturer, but we really think that the majority of the fleet vehicle providers or customers that we're seeking are really either going to need an L2 or an L1 system to be able to install in a vehicle. And you can see there's a Hyster ReachStacker in the L3 level. We currently have a program to electrify the drivetrain of our port equipment to then use that fuel cell engine in L2 to trickle charge that battery set so that ReachStacker can stay productive and only have to take a short break to refuel the hydrogen tanks on it rather than a long break to recharge the full lithium-ion battery stack, which is continuously charged by the fuel cell engine. And that's really a core strategy for the Hyster-Yale Group as we continue to see regulation that limits the carbon emissions that our vehicles and particularly these port equipment vehicles provide. We're focused on providing a solution that the regulators will accept and require those port operators to convert. And then finally, let's start talking about the company at a higher level on page 18. We have a focus on liquidity. We have unused borrowing capacity at the end of the third quarter of 246 and $61 million of cash. We have certain cost containment actions that remain in place, in particular, as a result of the margin compression we're suffering at the forklift truck business. We are continuing to make the important strategic investments during this period of time, and we are continuing to pay our annual dividend to our shareholders, but we don't forecast any share buyback program on the current horizon. And with that, I would take any questions. Matt?

Thanks Ken. That's a great overview. Appreciate that. So I think my first question basically will be -- you talk about kind of the -- you have 95% of kind of what you need to build a lot of these trucks, but you're missing some key components. What are the key components or materials that you're missing for a lot of the lift trucks?

Yes. The issue is varied by the supplier. We've got about 5 or 6 that we're significantly focused on and actually embedded in their businesses to help them solve the problems to get us the components. We have a situation with an electrical component supplier that cannot get a certain grade of copper that we need for an application. And we're looking to improve their ability to produce that product, which is needed in every forklift truck in our Class 1, 4 and 5 range in the 1 ton to 8 ton capacity offering. So it's a very significant component that's limiting our production. We're working through respecking the grade of copper that can be used. We're also looking at alternative designs that would allow us to have a higher production volume from this key supplier. So that's one issue that we're working through, and we think we have a solution for. Another one relates to labor. It's actually a U.S. component supplier that we use in our 4 and 5 internal combustion engine vehicles. And we are actually in their plant, learning how to operate their equipment. Their issue is they've had labor issues with regard to an amount of COVID that has been present in their workforce. They haven't been able to hire locally. And so we're doing is we're actually packing up their assembly line after we've learned how to operate it, and we're going to produce their product -- finish their products, I should say, in our plant, once they've done the initial preparation of that component or final assembly. And by doing that, we're going to be able to increase production. So you can see we're going to pretty significant levels to be able to reach out to the supply base and solve their problems so we can solve our own. Logistics is obviously on everyone's mind, components that have a significant number of logistic steps. If you think about a complex component, and currently, we don't have a significant issue with engines, but it's a good example. An engine has many components to it that have been sourced from many sub-suppliers. Each of those sub-suppliers had a logistic step to get that component to that engine manufacturer. You can imagine that there are steps before those subcomponent suppliers as well. Every one of those logistics steps is taking more time. Every one of those logistics steps that fails and only one needs to fail will slow up the production of those components. So logistics, labor and material commodity restraints are really some of our biggest challenges.

Understood, understood. Fairly common story in our industrial universe. You talked about some -- you're expecting net and operating losses through the first half of 2022 and you mentioned kind of some mitigation efforts on costs and procurement expenses. Can you just sort of walk us through what are some of those mitigation efforts? How are you trying to kind of control those cost pressures that you're seeing?

Yes. We obviously are trying to utilize the container capacity we have available to us and committed to us in the most efficient way. We're looking at the components that take up a lot of space and can we resource those more domestically, even if they cost more to be able to free up more container space. There's other actions that we're taking on the production side. We're obviously holding our cost in check as best we can both from an operating perspective. And we're looking to try to run our plants in the most efficient way by being able to reschedule them to match -- the slowest supplier's ability to produce is really what we need to staff and manage our plants to and ramp from that point forward as that slowest supplier, that laggard supplier is able to be -- able to ramp up production. So it's about being smart in running our facility. And then also, we're continuing to move forward with the really core strategic programs like the modular scalable forklift truck, and that will be introduced across a number of capacity ranges in 2022. But other projects, we're slowing them down to make sure that we can match their spend to our ability to afford.

Okay. Thanks very much. That's helpful. Maybe just 2 more quick ones. You mentioned that you're not sort of skimping on investment for future projects. You noted some priority projects across the 3 business lines. Your CapEx has historically been about $40 million to $50 million in that range. Can we expect to see a similar range going forward despite kind of the tougher operating environment or will that be higher or lower over the next 4 quarters?

Yes. I don't think we've given an estimate for the CapEx expenditure for 2022 in a previous deck. Our forecast is in the 10-Q, really talks more about the expenditures that we expect to make over the remainder of the year. I think I'd have to defer that question in terms of giving a number to the 10-Q -- I'm sorry, the 10-K that will come out after the beginning of the year where that will be disclosed. Our goal, of course, is to balance our spend, manage our liquidity but there are these key programs that I expect that would go forward.

Okay. That's fair enough. And then last one for me. I think we're sort of at the time. But you obviously tapped your revolver in 3Q to fund the operating loss -- that kept the operating loss. You're expecting some more losses. Do you expect that you have enough liquidity for the next 9 to 12 months? Do you think you need to tap the capital markets for additional revolver availability, maybe a bond offering to sort of bridge the next 12 months? How do you think about liquidity?

Yes. I think our first goal, of course, is to get that significant amount of inventory that we have 95% of the components matched, so we can build it out and reduce that balls of inventory. And if you look at our financial statements, you can call it out. It's not hard to see. We need to get inventory back to the appropriate days. That will free up some cash flow. You're right about the operating losses over the next -- over this quarter and the next 2 quarters. And we do need to keep our eye on it. Obviously, the trends that we know about have been included in the analysis we've done. But as we incorporate future trends and determine that we need additional liquidity, we'll obviously reach out and do the right things. We don't have that answer yet because I don't know what the level of material inflation we expect to see. If you track anything like hot-rolled steel prices, you see that they have stepped up 8 or 9x in a row significantly over months' end. But if you look at it most recently, it's beginning to plateau and maybe taper. So the trend in those commodity costs will really drive where we end up as we build trucks that have a fixed price in the backlog compared to the material price inflation that we're suffering.

Okay, great. That's very helpful. I think we're over the time here. So please join me in thanking Ken Schilling and the team from Hyster-Yale. We appreciate having you at our conference. And hopefully, we see you next year in BOCA.

Thank you, Matt.

Thanks very much.