Hyster-Yale Materials Handling, Inc. (NYSE:HY) Q4 2022 Earnings Call Transcript

Hyster-Yale Materials Handling, Inc. (NYSE:HY) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Hello everyone, and welcome to the Hyster-Yale Fourth Quarter 2022 and Full Year Earnings Conference Call. My name is Bruno and I’ll be operating your call today. I will now hand over to your host, Christina Kmetko. Please go ahead.

Christina Kmetko: Thank you. Good morning, everyone, and thanks for joining us today. Welcome to our 2022 fourth quarter and full year 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 2022 fourth quarter and full year results and filed our 10-K, 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 have 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 Prasad: Thank you, Christie, and good morning, everyone. I’ll start by giving you the operational perspective and I’ll also provide some color commentary on our markets. As you’ll hear, we’ve made significant progress in the past quarter and we expect this positive trend to continue in 2023. Scott will provide you with the detailed financial results and Al will close the call with his strategic perspective and take us into the Q&A. While Scott will give you the financial pluses and minuses, I’d like to point out that for the first time since 2021 second quarter reported both quarterly operating profit and quarterly net income at the consolidated level. Our fourth quarter profits exceeded the expectations we laid out at our call are largely due to higher volume, ongoing cost discipline, and improved product margins driven by higher pricing.

Those efforts more than offset the negative impact from supply chain shortages and the effect of unfavorable currency movement. Our ability to obtain necessary components and their related production impact has been the significant topic this year, so I’ll start there. Our unit shipments increased nearly 11% sequentially and we’re modestly higher than the fourth quarter 2021. These increased shipping rates are due to fewer component shortages and less overall supply chain disruption than in previous quarters, with the America seeing the largest improvements. While the America’s challenges have moderated significant production constraints, continuing Europe. Sourcing difficulties for certain critical components as well as large labor shortages in some skilled production jobs remain a concern.

As a result, while fourth quarter 2022 shipments grew capacity utilization levels in Europe and the U.S. fell short of plan, we continue to expect to increase our production rate as these labor issues abate. However, despite the production disruptions in 2022, we’ve produced about 6,000 more units year-over-year, exceeding 100,000 in annual shipment for only the second time in our history. Looking ahead, we expect to build on fourth quarter’s momentum. Full year 2023, production and shipment volumes are expected to exceed 2022 levels. Our backlog is at a very high level and bookings continue at sound levels. These anticipated improvements are largely due to increased component availability and reduce global supply volatility. As a result, we believe that our substantial unit backlog and lengthy lead times will decrease towards more competitive levels.

In the fourth quarter, cost pressures remained elevated. This was most acute in the EMEA, where cost inflation occurred later in 2022 and remains more significant in part due to the ongoing supply uncertainties around the Russia, Ukraine conflicts. In contrast, inflation rates in Americas and JAPIC have slowed significantly. Forward economic indicators suggest more moderate 2023 cost inflation trends, absent any unforeseen shocks. As we’ve shared in previous quarters, we’ve implemented multiple price increases over the last two years to offset persistent inflation. We are gaining ground and looking ahead, we expect the combination of our higher price backlogs and moderating cost inflation trend to create margin uplift through 2023 and into 2024.

However, we’ll continue to monitor our material and labor costs closely including the potential impact from tariffs and will adjust pricing as needed to maintain progress towards our long-term unit margin goals. Now, I’ll share my views on the global markets. Demand for Lift Truck remains strong but has moderated around the globe. While external fourth quarter market data is not yet available, our internal estimates indicate that the global Lift Truck market declined in the quarters across all geographic regions compared to fourth quarter 2021. Using the same data, global market volumes improved versus the third quarter due to progress in the EMEA. Looking ahead, we expect the Lift Truck market to decrease in each 2023 quarter when compared to 2022.

Despite these declines, markets should remain above pre-pandemic levels, even in the context of broad recessionary concerns. Lift Truck bookings decreased in the fourth quarter compared to a robust prior year. Several factors contributed to the drop. First, the global market declined compared to record levels. Second, we continue to book €“ focus on booking orders with solid margins, and lastly, because of lead times beyond our normal levels. Sequentially bookings increased modestly versus the third quarter of 2022, largely due to a seasonal rebound in EMEA and better than expected conditions in Americas. Looking forward to our full year 2023, we expect lower year-over-year booking trend to continue due to slowing economic activity combined with a continued focus on booking orders with higher margins.

As the year progresses, we’ll work to balance our booking rates and decrease production lead times on a line by line basis. Although, increased production rates and lower bookings have decreased our backlog by about 10% since its peak in first quarter of 2022. It remains well above our historical averages. As we noted last quarter, increased order selectivity and higher production rate have led to higher average unit price and margins in our backlog. Said differently, we’ve been producing the oldest and lowest margin units and adding booking and shipping units with much improved economics with each passing quarter to quantify this benefit, the average sales price of a backlog unit increased by nearly 35% year-over-year and almost 7% sequentially.

As we continue to work towards through our backlog in 2023, the majority of the remaining lower margin units price in prior years are expected to be produced in the first half of the year. As a result, average unit margins are expected to improve in 2023 and early 2024. As we evolve further into our extended backlog. Beyond this baseline perspective, we are considering various economic scenarios over the next 12 months to 24 months including the potential for a global or significant regional recession as part of our planning process. Our current backlog of higher margin trucks extends through 2023 and into 2024. This should provide a shock absorber against any recession related market downturn. Helping to sustain our business through a recession is worth noting as part of this analysis that our current order cancellation rate is quite low by historical standards, reflecting the underlying need for new replacement Lift Truck and the sound value proposition we provide to our customers, we expect this demand trend to continue.

I’ll summarize my comments by saying we remain focused on mitigating the impacts from our supply chain challenges. Our teams are working closely with our suppliers to obtain what’s needed for production when it’s needed. As we increase production rates across 2023, we believe the higher unit prices and margins baked into our backlog should provide a significant operating profit improvement. Ongoing order bookings discipline will support this profitability trend over the longer term. As our higher shipments can increase and the market decline drives lower booking, we expect our backlog to contract and reduce lead times back to normal life levels. This process will take time and will remain focused on profitability and cash generation throughout.

Now, I’ll turn the call over to Scott to update you on the financial results and provide our financial outlook.

Scott Minder: Thanks, Rajiv. As Rajiv mentioned, we add a solid quarter, returning to profitability and ahead of our expectations. I’ll start with some high level comments on our consolidated financial results and then add perspective on the three individual businesses. In the fourth quarter, our consolidated revenues of $985 million were a quarterly record. They increased almost 19% or more than $155 million year-over-year. This growth was due to a roughly 20% increase in the lift truck business, which significantly outpaced its 1.5% shipment growth over the same period. I’ll give some additional lift truck details in a moment. Versus the third quarter, shipments increased nearly 11% while bookings remained flat around 21,000 units.

Overall, our backlog dropped by nearly 6% and ended the year at 102,100 units down almost 9% from its peak level in the second quarter 2022. Looking at profitability, the company reported a consolidated operating profit of roughly $20 million for the fourth quarter. This compared to an operating loss of $107 million in the fourth quarter 2021. The 2021 operating loss included non-cash goodwill impairment charge of about $56 million related to the lift truck business in Asia. We reported net income of $7.6 million for the fourth quarter 2022 compared with a net loss of $103 million in the prior year. In addition to the prior year’s goodwill impairment, the 2021 net loss included a $19 million charge to establish valuation allowances on deferred tax assets.

Now let’s look at the results in more detail. Our lift truck business generated an operating profit of $27 million in the fourth quarter, which was ahead of our expectations. This compared to an operating loss of $93 million in the prior year. Excluding the impairment charge I mentioned earlier, the substantial improvement was largely due to increased prices in excess of material and freight inflation in the quarter. This favorable price, the cost ratio helps to compensate for inflation in excess of our prices for units booked in 2020 and 2021. Higher unit and parts volumes along with increased fleet revenues also help to drive the favorable comparison. The lift truck business’s fourth quarter operating profit improved substantially year-over-year despite a $16 million increase in manufacturing costs caused by component shortage related inefficiencies, higher labor related costs, and $10 million of unfavorable foreign currency impacts.

As Rajiv mentioned, despite continued progress on clearing lower margin products, production of units booked prior to more recent price increases acted as a drag on our fourth quarter margins. We expect production of these lower margin units to reduce significantly in the coming quarters. Turning to Bolzoni, in the fourth quarter, the business reported an operating profit of $2 million versus a loss of roughly $2 million in the prior year. The benefits from price increases and lower material and manufacturing costs more than offset the negative impact from lower sales volumes, primarily related to components used by our lift truck business. A loss of $2.4 million on the sale of a subsidiary and unfavorable currency movements also negatively impacted the quarter.

Nuvera, the fourth quarter 2022’s operating loss of about $9 million decreased by 15% compared to the prior year’s loss of $11 million. 2021’s operating loss included a $1.2 million charge to reduce inventory values. Excluding the prior year charge, increased revenues and improved margin drove the modest year-on-year improvement. We exited 2022 at the high profit quarter of the year. As we look ahead, we expect to build on that progress in 2023. These improvements are supported by what you’ve heard from Rajiv, fewer part shortages and increased manufacturing efficiencies as component shortages moderate, leading to increased lift truck and attachment production and shipments. Lower inflation rates and the ongoing benefits from our cost savings program and discipline sequential price increases to counter inflation.

Our strategic programs, which Al will touch on in a moment, should further enhance margins as they mature. As a result of these improvements, lift truck business expects a significant year-over-year increase in revenues and to generate a substantial operating profit in 2023. We expect lift trucks 2023 quarterly operating profit to build on 2022’s fourth quarter while following its normal seasonal pattern. Moving to Bolzoni, we anticipate continued moderation in component shortages, increased customer demand and further pricing gains in 2023. As a result, Bolzoni is expected to improve margins and generate higher operating profit in 2023 compared to 2022. Finally, as Nuvera continues to ramp up product demonstrations and bookings, we expect the benefits from sales growth to be offset by higher costs.

As a result, the anticipated 2023 operating loss is expected to be roughly in line with 2022’s level. Taking a longer-term view, these demonstrations provide testing opportunities and live applications and lay the foundation for future technology adoption and improved financial returns at Nuvera in the years to come. Before I hand the call over to Al, I’ll quickly cover the balance sheet results. In 2022, we generated positive cash flow before financing activities of $5 million versus a nearly $280 million use of cash in 2022. That’s a big improvement, but more is required. As of year-end, the company had cash on hand of $59 million and total debt of $553 million. This compared to cash on hand of $69 million and total debt of $545 million at the end of third quarter.

While our net debt showed a modest increase sequentially year end levels were below the peak reached in June of 2022. We ended the quarter with available borrowing capacity of approximately $183 million versus $191 million at the end of the third quarter. Our leverage ratio measured by debt to total capital reduced by 900 basis points versus the third quarter, mainly due to our return to profitability. As production ramps up using components already on hand, we expect inventory to decline throughout 2023, resulting in a significant reduction in inventory days on hand by year end. Assumptions underpinning our outlook, particularly production rates are highly sensitive to events that could impact global supply chains. However, we’re focused on controlling the things that we can and we’re better prepared to manage the things that are outside of our control.

We’ll keep you updated as 2023 unfolds. Now I’ll turn the call over to Al to give his strategic perspective. Al?

Al Rankin: As you just heard from Rajiv and Scott, we’re making progress operationally and financially. Our fourth quarter earnings reflected the improving profit quality of the robust backlog for which we are now producing trucks and we continue to have solid bookings despite softening market conditions. Looking forward, we expect continued gains from building more, higher margin backlog units. We believe this will lead to substantial consolidated operating profit and net income in 2023 with the quarter’s building on the fourth quarter of last year as Scott indicated. The steps we’ve taken to improve profitability to date are producing tangible results. They’re evident in our fourth quarter results and even more so in our 2023 outlook.

Our efforts to reduce inventory and generate cash are progressing, albeit at a slower pace. We’re laser focused on increasing our cash flows and maintaining adequate liquidity with ongoing action plans to improve future results. We’ve already made progress in the first quarter of 2023 to date. We expect these improved results to accelerate, particularly in the second half of the year. To achieve our objectives, we’re working intensely to reduce inventory levels as our supply chain becomes more consistent and our production rates gradually increase. We’ve got very capable people from around the company focused on how to make the most units in the shortest amount of time, while maximizing the use of on-hand materials and reducing manufacturing inefficiencies.

We’re collaborating with our suppliers to minimize disruptions and ensure and efficient and consistent flow of materials. We’re working closely with our dealer partners to balance order timing with their customer’s delivery needs. It’s a complex global Hyster-Yale Lift Truck challenge, but our teams are focused on it and we’re making progress as we are operationally at Bolzoni and Nuvera as well. While we pursue working capital reductions, we’ll maintain discipline over our cash flows. We anticipate higher 2023 capital expenditures compared to the significantly restrained 2022 levels, particularly in the second half of the year. The projected spending increases are necessary to ensure that we adequately maintain our facilities and reasonably invest in projects that enhance our long-term profitable growth opportunities.

As a result of these actions, we expect a significant increase in cash flow before financing activities in 2023 compared with 2022. Despite the near-term headwinds, we’ll remain focused on executing our core strategies and will continue to invest for long-term profitable growth over time. Our strategic initiatives remain consistent, but I want to provide a few key updates for each business. The Lift Truck business is primary strategic focus continues to be on introducing its new modular and scalable products, as well as projects geared toward truck electrification and providing technology advancements. We’re also focused on transforming our sales process by using an industry focused approach to meeting our customer’s needs. Progress on these key initiatives continues.

The initial modular scalable products are currently being introduced in the Americas, and we expect to introduce them in the JAPIC markets in mid-2023. Last quarter, I indicated that our first hydrogen fuel cell powered container handler using Nuvera fuel cell engines had started its pilot phase in the port of Los Angeles. After successfully performing in lighter applications, this truck has advanced to more difficult applications and continues to perform well. The Lift Truck business also is 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. The Lift Truck business and Nuvera are working jointly with Hamburger Hafen und Logistik AG 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 the customer for testing in mid-2023. Beyond the Lift Truck business, Bolzoni continues to work on streamlining and strengthening its operations. They’re increasing their revenues in the Americas while also enhancing their ability to serve key attachment industries and customers in all global markets. In conjunction with this, they’re working to expand their broad industry sales, marketing, and product support capabilities. Nuvera continues to focus on ramping up demonstrations and increasing bookings for its 45kW and 60kW engines. They’re also developing a heavy duty 125kW engine capable of operating and more power demanding applications.

In 2022, Nuvera announced several projects with various third parties were testing or planning to test Nuvera engines in heavy duty applications. In addition Nuvera is ready to launch two new products, a 360kW and a 460kW fuel cell powered generator, which offer a modular zero emission power solution for commercial and industrial applications. In summary, we’ve come through a difficult year. We ended 2022 on a high note. We’re focused on controlling the things. We focused then on controlling the things we could, including particularly our cost structures and our prices. And we worked diligently to manage the external factors that we couldn’t control. Our return to profitability in the fourth quarter represents a significant milestone and our business recovery plan.

We have innovative products and we’ve built deep customer relationships. These provide a strong foundation for our business. We’re encouraged by our progress, but believe that there’s more work ahead. We’re poised for more significant business improvements as a result of work in 2021 and 2022. We expect continued progress on our key strategic programs in 2023, and we’ve got the right business structure with the core strategies in place to achieve our long-term financial goals over time. We’ll now turn to any questions you may have.

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Q&A Session

Operator: Our first question is from Chip Moore from EF Hutton. Chip, your line is now open. Please go ahead.

Chip Moore: Good morning. Thanks for taking the question and congrats on all the progress this quarter. Wanted to ask about your commentary around operating profits improving from Q4 each quarter in 2023. Can you maybe speak to the cadence of that improvement as you worked through the last of the lower margin backlog that you’ve got? I think you talked about maybe finishing that up on the first half. And there’s a follow-up. What are you factoring in for Europe as well?

Al Rankin: Well, let me just comment on the quarterly cadence. As you point out, we had a good fourth quarter. I think we see every indication at the fourth quarter can €“ level can continue. The first quarter we’re very encouraged with and we see after the first quarter continuing improvements over the course of the quarters. During the year some of the quarters of considerable significance but recognizing also that our third quarter is always seasonally lower quarter than other quarters in the year or at least the surrounding second and fourth quarter. So we’re very encouraged with the progression. We see it moving in the right direction. To get a second of Europe. Maybe you’d comment on Europe, Rajiv.

Rajiv Prasad: Yes, so Europe continues. As I said in my remarks, the Europe continues to have some constraint supply chain issues. We’re working through those. We expect through the year for Europe volume to increase. We’ve got plants have a €“ in a gradual increase of that volume as we’ve discussed with our supply chain. That’s where €“ that’s the way we feel the markets can evolve. So gradual increase I think in both markets in terms of volume. I think as Al said, the margins, I think will again, said in our remarks where in the first half of the year will be mostly through the bookings from prior years and at a good margin. So we expect that to flow through both in Europe and in North America.

Al Rankin: Yes, I think, we had pretty good margins. They adjusted standard margin level in the fourth quarter. And I think we see them getting better as we look through the year. But as Rajiv said, there still are some laggard low margin trucks in the first half. On the other hand, there were quite a few of those trucks in the fourth quarter. So just to put that in perspective. I think another dynamic to really focus on is that on the one hand we will be increasing our production levels in a moderate way over the course of the year. We think that is in line with a pace that our suppliers can work constructively with. And in that context as the year progresses, we’re certainly hoping and expecting that our suppliers will resolve their supply problems and be able to supply components on a much more timely basis.

That should allow us to become significantly more efficient in our manufacturing operations than we have been in the fourth quarter and that we expect to be in the first part of the year. So there are a lot of things that are moving in the right direction where we’re continuing to work closely with our supply base to make sure that their capabilities are what we need, and the environment for doing that is improving. It’s improving because suppliers are solving their own shortage problems. And I think to some degree it’s improving because excess demand in the system is moving €“ is moderating. And so that gives the suppliers more capability to serve our needs and to work us through this period of our extended backlogs perhaps in the context of a more moderate economic prospects and growth or even potential for decline in some areas of the world as we look through 2023.