Hyster-Yale Materials Handling, Inc. (NYSE:HY) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Ladies and gentlemen, welcome to the Hyster-Yale Materials Handling 2023 First Quarter’s Earnings Call. My name is Glen, and I’ll be the moderator for today’s call. [Operator Instructions]. I will now hand you over to your host, Christina Kmetko, to begin. Christi, please go ahead.

Christina Kmetko: Thank you. Good morning, everyone and thanks for joining us today. Welcome to our 2023 first quarter earnings call. I’m Christina Kmetko, and I’m responsible for Investor Relations at Hyster-Yale. Joining me on today’s call are Al Rankin, Chairman and Chief Executive Officer; Rajiv Prasad, President; and Scott Minder, our Senior Vice President, Chief Financial Officer and Treasurer. Yesterday evening, we published our first quarter 2023 results and filed our 10-Q, both of which are available on our website. Today’s call is being recorded and webcast. The webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements.

These statements are subject to several risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. These risks include, among others, matters that we’ve described in our earnings release issued last night and in our 10-Q and other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. With the formalities out of the way, I’ll turn the call over to Rajiv.

Rajiv K. Prasad: Thanks, Christi and good morning, everyone. I’ll start by providing the operational perspective and some color commentary on our market. Scott would follow with detailed financial results and outlook, and I will close the call with a strategic perspective and take us into Q&A. We had a very strong first quarter. I mentioned on our last quarterly call that we expected to build on our fourth quarter 2022’s momentum, and we did. In fact, we did better than we expected in the first quarter. While Scott will cover the financial details, I’ll share some highlights from my perspective. Revenue and consolidated operating profit increased very significantly over 2022’s first quarter results. Our first quarter profits were driven by improving product margins from more favorable material costs and a strong mix of products and parts.

These positive changes more than offset the negative impact from unfavorable currency movements and ongoing supply chain constraints. Third-party component shortages and related production impacts remain a headwind, but have moderated compared to prior year. Our first quarter unit shipments increased more than 5% from first quarter 2022, primarily as a result of fewer component shortages. However, our factories experienced multiple production setbacks due to ongoing skilled labor availability issues, particularly in the Americas, coupled with shortages of specific components primarily in Europe. These challenges resulted in our plants falling short of the planned production rate increased targets. Looking ahead, we are planning for an improving production cadence in the Americas, but labor challenges could alter those plans.

In Europe, specific component supply constraints and to a lesser extent labor challenges, are likely to negatively impact their production rates in the second quarter. As these issues abate, we expect production and shipment rates to increase rapidly. For the full year 2023, we anticipate very strong production and shipment volumes, which we expect to exceed 2022 levels despite the ongoing production challenges. In the first quarter, material and labor costs continued to increase compared to prior year levels, primarily in EMEA, but the rate of increase slowed substantially. Forward economic indicators suggest more moderate 2023 cost inflation trends. As previously shared, we’ve implemented multiple price increases over the past two years to offset persistent inflation.

We’ve gained ground in the Americas, and we expect this moderating cost inflation to help drive increased margins, particularly in EMEA. We’ll continue to monitor our material and labor costs closely, including the potential impacts from tariffs and we’ll adjust pricing as needed to maintain momentum towards our long-term unit margin goals. Shifting to our global market expectations, demand for lift trucks remained strong. The latest available data shows that fourth quarter 2022 market volumes were down significantly from the peak levels reached in the first quarter of 2022. Our internal market estimates indicate that the decline seen in the last three 2022 quarters continued in the first quarter of 2023 across all geographic regions. These declines appear to be more moderate than initially anticipated, reflecting more resilient global demand across a variety of industries and markets.

Looking ahead, we expect the broad Lift Truck market to decrease in each of the remaining 2023 quarters compared to the prior year quarter. Despite these declines, market should remain strong when compared to pre-pandemic standards in all regions, except EMEA. Lift truck bookings decreased significantly in the first quarter compared to robust prior-year levels. Several factors contributed to the decline. First, the global market declined compared to record high prior-year levels. Second, we remain focused on booking orders with solid margins. And lastly, because of our inventory lead time caused by our high backlog level. Substantially, booking increased modestly — Sequentially, bookings increased modestly compared to the fourth quarter, largely led by the Americas.

Looking forward, we expect the lower year-over-year booking trend to continue due to slowing global economic activity in 2023 and a return to more normalized market levels. We’ll remain focused on booking higher-margin orders. As the year progresses, we’ll work to balance our booking rates and production lead times on a line-by-line basis to maximize profitable growth. With the combination of increasing production and lower bookings, we reduced our backlog by an additional 3% from fourth quarter 2022, but it still remains well above historic levels. Our continued diligence over booking margins along with building our shipping — building out and shipping older lower margin units has led to higher average unit margins in our remaining backlog.

Our efforts are paying off. In the first quarter, the average sales price for our backlog unit increased by nearly 34% year-over-year and about 2% sequentially. We expect these positive margin trends to continue in 2023 and into 2024 as we produce the remaining aged backlog units over the next few quarters. While global economic signals and mix regarding the likelihood and depth of a recession, our current backlog of higher margin trucks extends through 2023 production schedules and into 2024. This provides a shock absorber if bookings declined more sharply than expected in 2023. I’ll summarize my comments by saying we expect higher production and shipment rates over the next several quarters, largely due to improving component and labor availability.

We remain focused on mitigating the impacts of our continuing supply chain and manufacturing challenges. Our teams are working closely with our suppliers to obtain what’s needed for production when it’s needed. As our planned production rates increase across 2023, we expect the higher unit price and margin built into our backlog to support the continued improvement in our financial results. Ongoing discipline over bookings, margins and cost structures will support this profitability improvement trend over the longer term. We expect our unit backlog and extended lead times to decrease across 2023, but remain above preferred levels. While we work towards our desired backlog levels and lead times, we remain focused on profitability and cash generation.

Before I turn the call over to Scott, I’d like to highlight a significant recent announcement. In March, we launched a new brand identity for our Yale business. Our Yale brand has had a solid position in the warehouse segment, while our Hyster brand has had a strong position in industrial and port segments. This reflects a core marketplace differentiation between the two brands, and one now being enhanced by new technology. As a result, we have rebranded Yale as Yale Lift Truck Technologies. This new identity and new logo emphasize our focus on solving the toughest labor, safety, and productivity challenges in the fast-paced, fast-growing warehouse markets. Yale Lift Truck Technologies will couple technology integration with a customer-focused philosophy designed specifically to address the customer’s application need.

I’d like to thank the team that steered this project from concept through the launch and at the — through launch at the recent ProMat trade show. It was a job well done. Now I’ll turn the call over to Scott to update you on our financial results and provide our financial outlook. Scott?

Scott A. Minder: Thanks, Rajiv. I’ll start with high-level comments on our consolidated financial results and then add some additional perspective on our three businesses. In the first quarter, we reported consolidated revenues of nearly $1 billion. This was an increase of 21% or $172 million over the prior year. This growth was driven by a 22% increase in Lift Truck sales, significantly outpacing the 5% shipment growth rate over the same period. Compared to the fourth quarter, revenues increased modestly despite lower shipments. This increase was largely due to higher prices and added parts volumes. Bookings increased nearly 7% sequentially, topping 22,000 units, but were below the 25,200 units shipped in the first quarter 2023.

As a result, our backlog dropped by 13% to 99,200 units at the end of the first quarter 2023. This compared to historically high prior year levels, versus year-end 2022, our backlog decreased by 3%. Moving to earnings, the company reported a consolidated operating profit of roughly $43 million for the first quarter. This compares to an operating loss of $18 million in the first quarter of 2022. We earned a net income of $26.6 million for the first quarter versus a net loss of $25 million in the prior year. On a per share basis, first quarter 2023 earnings were $1.55 versus an earnings loss of $1.48 in the prior year. Now let’s take a deeper look at the financial results by business. Lift Truck generated an operating profit of $47.8 million in the first quarter on sales of nearly $980 million.

This better-than-expected performance resulted in a 5% operating profit margin. This compared to an operating loss of $10.7 million in the prior year. The substantial improvement was largely due to price increases that exceeded material and freight inflation in the quarter. This positive first quarter price-to-cost ratio helps to offset accumulated net inflation from 2020 and 2021. Improved sales mix, higher parts volumes, and increased fleet revenues also helped drive the favorable comparison. Lift Truck’s first quarter operating profit improved despite $5 million of unfavorable foreign currency effects and higher employee-related costs. The Lift Truck business remains vigilant over its cost, holding year-over-year cost increases to 12%, while revenues increased by almost 22%.

As Rajiv mentioned, despite a steady clearing of lower priced backlog units over the past several quarters, our first quarter production included a large number of units booked prior to the 2021 and 2022 price increases. These units acted as a drag on our first quarter margin expansion. We expect production of these lower margin units to decline significantly in the coming quarters as we work through the remaining aged backlog units. Turning to Bolzoni. The business reported an operating profit of $4.4 million in the first quarter, more than double the prior year’s profit. This significant improvement was driven by price increase benefits combined with higher sales volumes and lower material, freight, and manufacturing costs. For Nuvera, the first quarter 2023’s operating loss increased by $2 million year-over-year to approximately $10 million.

Elevated product development costs, including those for the larger 125-kilowatt engine and higher employee-related costs accounted for the increased loss. As you can see, we’ve had a strong start to 2023. As we look ahead, we expect our robust backlog to support increased year-over-year revenues in a substantial operating profit for the full year. This aligns with the commentary from our last earnings call, and Rajiv offered support for this outlook earlier. In summary, we expect fewer components shortages and increased manufacturing efficiencies, leading to higher Lift Truck and attachment production and shipments, lower material and freight inflation rates and the ongoing benefits from our cost savings programs and pricing discipline to counter any additional inflation.

Finally, our strategic programs, which Al will touch on in a moment, should further enhance margins as they mature. As Rajiv pointed out, our first quarter 2023 operating profit increased by more than we anticipated. As a result, we expect second quarter operating profit to decrease from the first quarter, but remain significantly above fourth quarter 2022 levels. The expected sequential decline is partly due to an anticipated mix shift toward lower margin sales channels. Looking across 2023, we expect second half operating profit to be comparable to the first half of the year. Moving to Bolzoni. We anticipate moderating supply chain challenges in 2023 and increased pricing to offset any additional input cost inflation. As a result, Bolzoni’s margins should improve and the business will likely generate significantly higher operating profits in 2023 compared to 2022.

Finally, Nuvera continues to ramp up product demonstrations and bookings. Sales are expected to increase in the second half of 2023 due to booked orders from current customers. Anticipated sales growth benefits are likely to be offset by higher costs. As a result, 2023’s full year operating loss should be in line with 2022’s level. Taking a longer-term view, these product demonstrations provide real-world testing opportunities and lay the foundation for future technology adoption and improved financial returns. Before I hand the call over to Al, I’ll cover a few balance sheet items. As of March 31st, the company had net debt of $496 million, including $65 million of cash. This compared to net debt of $494 million, including $59 million of cash at the end of 2022.

We finished the first quarter with available borrowing capacity of approximately $186 million, slightly above year-end 2022 levels. Financial leverage measured by debt to total capital reduced by 400 basis points versus the fourth quarter, mainly due to our robust first quarter profitability. I’ll conclude my comments with a few thoughts on working capital, where we remain focused on improving inventory efficiency as our production rates increase. Last quarter, I discussed our efforts to use on-hand inventory to build trucks. As a result, our raw material and component parts inventory decreased by more than 9% in the first quarter compared with year end 2022 levels. Despite that improvement, total inventories increased by 7% over the same time period, mainly due to increased finished goods inventory.

This was a result of elevated production levels late in the quarter, leading to a high number of completed trucks left in shipping. Lastly, the assumptions underpinning our outlook, particularly production rates, are highly sensitive to events that impact global supply chains. We’re focusing on the things that we can control, and we’re prepared to manage the things that we can’t control. We keep you updated as 2023 unfolds. Now I’ll turn the call over to Al to give his strategic perspective. Al?

Alfred M. Rankin, Jr.: As you heard from Rajiv and Scott, we had a strong start to the year, and we’re making progress operationally and financially. Our first quarter earnings reflect the improving profit quality of our robust backlog, and we continue to have solid bookings despite softening market conditions. Looking forward, we’re nearing completion of the build-out of lower priced, lower margin backlog units held over from prior periods. We expect continued margin expansion, particularly in EMEA as we move through our backlog, and we expect a substantial 2023 profitability. However, I would add a word of caution. While the year started strong and we’ve maintained our positive full year outlook, there continue to be uncertainties in some areas.

Those include particularly fragile EMEA supply chains, the potential for more stubborn cost inflation than expected, especially for labor and the possibility of cost increases for some critical components. Overall, we’re proceeding carefully for the remainder of 2023 and are thinking about our profitability expectations in that context. Scott mentioned our liquidity situation and I’d like to add my perspective on that as well. We’re laser-focused on increasing our cash flows and maintaining adequate liquidity with ongoing action plans to improve future results. Our efforts to reduce inventory and generate cash are progressing, albeit at a slower pace than we’d like. However, they are expected to show substantial progress in the second half of this year as production rates increase.

Inventory levels do remain elevated due to manufacturing inefficiencies caused by component shortages, largely in prior periods. We’re making significant efforts to maximize the use of on-hand inventory, coupled with purchasing materials at rates below our expected production rates. Results from these actions are evident in the declining material and component inventory that Scott mentioned. However, as noted earlier, overall inventory levels are still up due to temporarily elevated finished goods inventory. We’ve got very capable people from around the world focused on how to make the most units in the shortest amount of time while maximizing the use of on-hand materials. We’re collaborating with our suppliers to minimize disruptions and ensure an efficient and consistent flow of materials.

Supply constraints continue to be an issue periodically, but we expect continued improvement as 2023 progresses. We’re also working closely with our dealer partners to balance order delivery timing with their customer’s delivery needs. It’s a complex global challenge, but our teams are focused on it, and we’re making progress. While we pursue these working capital reductions, particularly inventory, we’re committed to enhancing our cash flows by maintaining discipline over our cash expenditures. We do anticipate higher full year 2023 capital expenditures compared to the significantly restrained 2022 levels. But these projected spending increases are necessary to adequately maintain our facilities and fund growth through our product development programs.

Our planned spending is more heavily weighted toward the second half of the year. This was clearly evident in the fourth quarter since outlays or 5% of the anticipated full year spend. We’ll continue to monitor our financial and cash progress and increase our capital funds accordingly. However, we do continue to expect a significant increase in cash flow before financing activities in 2023 compared to 2022. Executing our core strategies remains a key focus area. We’re continuing to invest for long-term profitable growth over time, we’re seeing solid progress toward our 7% operating profit margin goals at both the Lift Truck and the Bolzoni businesses as we return to more normalized operating conditions. We expect this to continue in 2023 as we execute the projects underlying our core strategies.

Hyster-Yale strategies remain generally as we have described them in the past, but I want to provide a few key updates for each business. The Lift Truck business’s primary strategic focus continues to be on launching its new modular and scalable products globally as well as projects geared toward truck electrification and implementing advanced technology capabilities. We’re transforming our sales process around an industry-focused approach that better meets our customer’s needs, and we continue to work to enhance our independent dealer capabilities. We continue to make progress on these programs, which include the Yale rebranding effort Rajiv mentioned earlier. Our initial set of modular scalable lift trucks were introduced in the EMEA and Americas markets in 2022, and we expect to introduce them to the JAPIC markets in mid-2023.

The hydrogen fuel cell powered container handler, which uses Nuvera fuel cell engines, now being tested in the Port of Los Angeles, continues to perform well. The Lift Truck business is also developing an electrified fuel cell reach stacker, which is expected to be delivered to the Port of Valencia, Spain in the first half of 2023 for testing. And the Lift Truck business in Nuvera are working jointly with a large German customer to provide two Hyster electric container handling vehicles. These vehicles include the first ever empty container handler powered by Nuvera fuel cell technology and the first Hyster terminal tractor in Europe. The terminal tractor is expected to be delivered to that customer for testing in mid-2023. Our big truck group is also exploring options for other electrified products — projects within the European Union.

Beyond the Lift Truck business, Bolzoni continues to work on streamlining and strengthening its operations as a single integrated operating entity. Bolzoni is also focused on increasing its revenues in the Americas while enhancing its ability to serve key attachment industries and customers in all global markets. In conjunction with this, Bolzoni is working to expand its broad industry sales, marketing, and product support capabilities. Nuvera continues to focus on placing a 45-kilowatt and 60-kilowatt fuel cell engines in niche heavy-duty vehicle applications where battery-only products do not provide an adequate solution. These applications are expected to provide near-term fuel cell adoption potential. Nuvera is also focusing on developing a heavy-duty 125-kilowatt engine, which is capable of operating in more power demanding applications.

In 2022, Nuvera announced several projects with third-parties who are testing or planning to test Nuvera engines and heavy-duty applications. Additionally, Nuvera is ready to launch two new products, a 360 kilowatt and a 470 kilowatt fuel cell power generator, which offer a modular zero emission power solution for commercial and industrial stationary applications. Finally, Nuvera is shifting its sales and marketing efforts to emphasize a more solution-based approach. In summary, our first quarter results extended the momentum we generated in the fourth quarter of 2022. We expect the remainder of 2023 to continue this progress, but we have more work to do on our key strategic programs to achieve our longer-term goals. In summary, we believe we have in place the right business structure with the right core strategies to achieve our strategic and financial goals over time.

We’ll now turn to any questions you may have.

Q&A Session

Operator: Thank you. [Operator Instructions]. We have our first question comes from Steve Ferazani from Sidoti.

Operator: Thank you Steve. We have our next question comes from Chip Moore from EF Hutton. Chip, your line is now open.

Operator: Thank you. [Operator Instructions]. Our next question comes from Brett Kearney from Gabelli and company. Brett, your line is now open.

Operator: Thank you Brett. We have no more further questions on the line.

Christina Kmetko: Okay. With that, we’ll conclude our Q&A session, and we’ll close with a few final reminders. A replay of our call will be available online later this morning. We’ll also post a transcript on the Investor Relations website when it becomes available. And if you have any questions, please reach out to me. You can reach me at the phone number on the press release. I hope you enjoy the rest of your day, and I’ll turn the call back to Glen to conclude the call.

Operator: Thank you. If you have missed any part of this call or would like to hear again, a recording will be ready shortly. Thank you for joining today’s call. Have a lovely day.