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Hyster-Yale Materials Handling's (HY) CEO Al Rankin on Q2 2016 Results - Earnings Call Transcript

Hyster-Yale Materials Handling Incorporated (NYSE:TTI)

Q2 2016 Earnings Conference Call

August 08, 2016 01:00 PM ET

Executives

Christina Kmetko - IR Consultant

Al Rankin - Chairman, President & CEO

Colin Wilson - President & CEO, Hyster-Yale Group

Ken Schilling - SVP & CFO

Analysts

Mig Dobre - Robert W. Baird

Mike Shlisky - Seaport Global

Joe Mondillo - Sidoti & Company

Operator

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2016 Hyster-Yale Materials Handling Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Ms. Chris Kmetko. You may begin your conference.

Christina Kmetko

Thank you. Good morning, everyone and welcome to our 2016 second quarter earnings call. I am Christina Kmetko and I’m responsible for Investor Relations at Hyster-Yale. Joining me on today’s call are Al Rankin, Chairman, President & Chief Executive Officer of Hyster-Yale Materials Handling; Colin Wilson, President & Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President & Chief Financial Officer.

Early this morning, we published our second quarter 2016 results and filed our 2016 second quarter 10-Q. Copies of the earnings release and 10-Q are available on our Web site. Anyone who is not able to listen to today’s entire call, an archived version of this webcast will be on our Web site later this afternoon and available for approximately 12 months.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.

And 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 were 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 Web site.

Let me start by saying we completed the Bolzoni transaction, at the end of the second quarter we owned approximately 94% of Bolzoni’s outstanding shares. We acquired the remaining 6% in the first few days of July and Bolzoni was de-listed on July 06th. Our total cash acquisition price was €189 million or approximately $123.1 million. With the additional Bolzoni we now have three business segments, lift trucks, Bolzoni and Nuvera. I will provide the consolidated results and then discuss each one of the segments separately.

Our consolidated second quarter 2016 revenues were $645.6 million down from $658.7 million in the prior year quarter, and our net income decreased to $8.3 million or $0.51 per diluted share from $22.7 million or $1.39 per diluted share. The 2016 results include approximately $39 million in revenue and approximately $100,000 of net income from Bolzoni. Bolzoni results were affected by post acquisition expenses related to the purchase and amortization of intangibles. In addition, primarily as a results of the Bolzoni acquisition, second quarter consolidated net income includes acquisition cost totaling 2.9 million pre-tax as well as an additional tax expense of 1.6 million related to accumulated non-deductible acquisition cost. These acquisition cost have all been included in our Americas lift truck segment results.

Moving to our lift truck business, second quarter 2016 revenues were down almost 8% to $606.5 million from $658.3 million in the prior year quarter. We made solid gains in our warehouse strategic initiative but a 1,300 unit volume decrease driven by weak Brazil market performance and a wakening big truck market, as well as the shift in mix of products to lower price lift trucks drove the decline in revenue. Lift truck business’ net income decreased to $13.1 million from $26.2 million. The 50% decline in net income was the result of a substantial decrease in operating profit due primarily to lower volumes, higher SG&A expenses including the acquisition cost, and higher U.S. healthcare cost which affected both gross profit and SG&A.

Despite the decline in our results, we are seeing benefits from the implementation of our strategic initiatives and we continue make headway with certain target accounts. Our bookings were up 300 units from the prior year quarter, and our backlog of 33,500 units at the end of this quarter was up from 29,900 units at the end of the first quarter of 2016.

Looking at the individual geographic segments, Americas was the driver of the unit shipment decrease declining 1,300 units from the prior year. We continue to see strong unit shipments in Latin America but those were more than a offset by a substantial decrease in shipments in Brazil driven by an over 30% decline in the market in the first half of 2016 from already low levels, and the decrease in North America shipments of classes one, two and five trucks including the decline in big trucks as a result of a weakening big truck market. This decline in units as well as the shift in mix to lower price trucks and the unfavorable effect of deal-specific pricing in North America, were the main drivers of the decrease in the Americas revenues.

Operating profit also declined significantly in the Americas with both lower gross profit and higher SG&A expenses contributing. We continue to see benefits from material cost deflation and these benefits more than offset the impact of deal-specific pricing. However, the effective adverse mix can lower unit volumes that led to higher manufacturing variances, as well as a $3.1 million increase in U.S. healthcare costs during the 2016 second quarter resulted in the overall decline in gross profit. Selling, general and administrative expenses increased during the quarter primarily from acquisition related costs of 2.9 million, increased marketing-related expenses and higher U.S. healthcare costs partially offset by a decrease in incentive compensation estimates.

Europe realized benefits from an increase in shipments of higher margin products and lower SG&A costs in the second quarter, but these benefits were mostly offset by higher warranty related expenses of $2.5 million and unfavorable currency movements of $2.2 million. In our JAPIC segment, second quarter 2016 revenues declined on a 300 unit decrease and a shift in mix to lower price lift trucks while operating profit improved slightly on the absence of a bad debt write off taken in the prior year.

We continue to expect currency and the slowdown in several key markets including big trucks to negatively affect our 2016 segment results in the second half of the year, along with an anticipated shift in sales to lower priced, lower margin units. We expect these market conditions to result in a decline in overall unit shipments, revenues and operating profit in the Americas in the second half of '16 compared with the second half of '15. Expected benefits from favorable currency relationships based on current currency rates and anticipated improvements in Brazil's operating results as the economy there starts to improve and our cost reduction and product introduction programs mature are expected to be more than offset by unfavorable manufacturing variances, lower pricing of products, higher employee-related operating expenses and increased professional fees. In addition, net income in the second half of 2015 included the unfavorable effect of a $7.5 million valuation allowance adjustment related to Brazil.

We expect the Europe, Middle East and Africa market to grow modestly in the second half of 2015 as the increases in Eastern and Western Europe are expected to be partially offset by a decline in the Middle East and Africa market. Despite these anticipated market conditions, we expect unit and parts revenues to grow more favorably than the overall EMEA market in the second half of 2016, primarily in the fourth quarter as a result of anticipated market share improvements. Nevertheless, we expect operating profit in this segment to decrease substantially in the second half of the year compared with 2015. As I discussed before, EMEA had currency hedges in place that mitigated the unfavorable effect of the strengthening U.S. dollar during 2015. As these hedges expire, increased U.S. dollar-based cost will be incurred.

As a result, the strong U.S. dollar's expected to have a larger unfavorable impact on results in the second half of 2016. These unfavorable net currency movements and anticipated shift in sales mix to lower margin products and lower pricing of products are expected to drive the decline in EMEA's operating profit. Finally, we expect the JAPIC market to decline modestly in the second half of the year compared with the second half of 2015 due to lower demand in China mostly offset by modest growth in the other JAPIC markets. However as a result of the continued execution of our strategic initiative, we expect shipments in the second half of 2016 as well as unit and parts revenues and operating profit to increase compared with the second half of 2015 primarily in the fourth quarter.

To summarize our overall lift truck business outlook, we're expecting global markets in the second half to be comparable with second half of 2015. Market growth in EMEA is expected to be offset by declines in the Americas market. Despite these market conditions and because of our success in winning new business at large customer accounts, we expect unit shipments and part sales to increase in the remainder of 2016 compared to the 2015. But a shift in mix to lower priced products is expected to mostly offset this increase resulting in revenues for the second half of ’16 to be comparable to the second half of 2015.

We also expect operating profit and net income in the second half of 2016 and in the third quarter in particular to be lower than comparable periods in 2015, because we expect the increases in units and parts volume being more than offset by an anticipated shift in sales mix to lift trucks with lower average profit margins, higher operating expenses and unfavorable manufacturing variances. I would also like to note that just last week, we received a favorable tax ruling which is expected to result in the release of an approximately $3 million to 3.5 million valuation allowance previously applied against the Company’s Italian deferred tax assets. Finally, we expect cash flow before financing activities in the lift truck business to be positive but decline substantially in the second half of ’16 compared with the second half of ’15.

Turning to Bolzoni, as I explained earlier, Bolzoni had revenues of approximately $39 million and net income of approximately $100,000 in the second quarter, included in net income of 1.9 million of post-acquisition expenses, related to the purchase and the amortization of intangibles. With the Bolzoni acquisition now complete, we can focus on identifying additional opportunities for Bolzoni to increase revenue and profitability.

Bolzoni will continue to operate at the standalone business with its own management team and Board of Directors to ensure that the integrity of OEM dealer and customer information is maintained, but we will work to implement cost reduction and sales enhancement programs to continue to grow the business. Bolzoni’s primary market is attachments with Class 1 and Class 5 products. The majority of Bolzoni’s revenues as generated in the EMEA market, primarily Eastern and Western Europe, the solid secondary presence in North America. In this context, we expect Bolzoni’s revenues in the second of 2016 to be comparable to the revenues of €69.2 million reported by Bolzoni in the second half of 2015.

Excluding the immediate cost of the acquisition, estimated integration cost and non-recurring purchase accounting adjustments, the addition of Bolzoni is expected to continue to be accretive to consolidated earnings. The implementation of anticipated cost reductions and sales enhancement programs are expected to generate gradual growth in Bolzoni’s operating profit and net income. We’ll probably expect Bolzoni’s net income to gradually increase in the third and fourth quarters of ’16 compared with the second quarter of 2016 as programs are implemented.

Finally, our Nuvera business continues to make progress towards the commercialization of its products. Nuvera reported revenues of $200,000 and operating loss of 8.3 million and a net loss of 4.9 million for the second quarter of 2016 compared with revenues of 400,000 and operating loss of 5.9 million and a net loss of 3.5 million in the second quarter of 2015. Nuvera’s operating and net losses increased in the 2016 second quarter primarily because of higher operating cost largely due to an increase in headcount for the start-up of production, continued product development and increased marketing cost as Nuvera began transitioning from product development to commercialization and production of its PowerEdge units.

We continue to believe that the fuel-cell market for lift trucks has significant growth potential and excellent prospects and we continue to see strong interest from our customers, dealers and potential partners regarding Nuvera’s products. Early stages of production of Nuvera’s PowerEdge units began in late 2015 and shipments of the first Class 1 and Class 3 PowerEdge units began in early July 2016. We expect Nuvera to begin shipping Class 2 products later in the third quarter of 2016. This progress towards full commercialization is expected to continue throughout the remainder of 2016 and in 2017.

Production is ramping up for sales of additional PowerEdge units and negotiations for several large orders are nearing completion and several successful customer demonstrations have been completed. As a result, we expect Nuvera to generate modest PowerEdge unit revenues in the second half of 2016 with new unit sales expected to grow gradually over the third and fourth quarters as production accelerates.

Nuvera expects to continue to focus on commercializing its fuel-cell technology by expanding its product line and integrating its technology into the Hyster and Yale lift truck product ranges. As part of this process, we expect Nuvera to increase its focus on reducing manufacturing cost per unit as production increases and greater economies of scale are achieved. As part of the process of ramping up production and transitioning from product development to commercialization engineering, employee-related and marketing expenses are expected to reach moderately higher levels in the second half of 2016 than in the second half of 2015.

As a result, we expect Nuvera to generate an operating loss in the second half of 2016 of approximately $14 million to $16 million. Nuvera’s objective is to reach a quarterly breakeven operating profit by the end of 2017 or early ’18 on a run rate of approximately 700 PowerEdge and 10 PowerTap units per quarter at target margin. Nuvera is also exploring a number of partnerships and OEM supply opportunities which will be complementary to its core operating plans that may result in higher short-term costs, but which could potentially accelerate achievement of breakeven results.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mig Dobre from Robert Baird. Your line is open.

Mig Dobre

First question is maybe a clarification on guidance. So if I look at your commentary from this quarter and compare it to last quarter, it seems like, at least on the revenue line, you're more or less unchanged. But where the change is occurring is on a margin side and operating income. If I remember correctly, last quarter you were talking about improvements anticipated in the second half of the year as a result of that pretty healthy backlog. Now we're expecting the second half of the year to be much more challenged, in the third quarter in particular. So, I guess I'm wondering what changed here in the last three months to drive this wedge in current versus prior outlook?

Al Rankin

I think to pause for a minute, I think the revenue we see now in all likelihood as we suggested declining to some degree and that really takes down the operating profit and I think said quite clearly that the mix products that are being sold is significantly adverse to what we have had. There are certain segments of the big truck market particularly in the U.S. that have and in Asia that have slowed down very dramatically, but those trucks are large sales volumes and they generate a great deal of margin. Some of the larger counter balanced trucks that are not classified as big trucks are in industries that have become much slower as a result of a lot of the commodities, industries forces that are at work that you are well aware of, steel and many other industries. There is a lot of maturity out there at this...


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