Hyster-Yale Materials Handling, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Hyster Yale fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press the star one in your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Christina Kmetko. Thank you. Please go ahead.

Good morning, everyone, and welcome to our 2020 Fourth Quarter Earnings Call. I am Christina Kmetko, and I am responsible for investor relations at Hysteria. Thank you for joining us this morning. Joining me on today's call are Al Rankin, Chairman and Chief Executive Officer, Rajiv Prasad, President, and Ken Schilling, our Senior Vice President and Chief Financial Officer. Yesterday evening, we issued our fourth quarter and full year 2020 results and filed our 10-K. Copies of our earnings release and 10-K are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.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 forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by 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-K and other filings we make 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. Also, certain amounts discussed during this call may be considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our earnings release and available on our website. In a moment, I'll discuss our fourth quarter results. But first, let me turn the call over to our chairman and CEO, Al Rankin, for some opening remarks. Al.

Good morning, everyone. Thank you for joining us today. There's no doubt that 2020 was one of the most unusual years in recent history. The global pandemic created very significant disruptions to our business and to the daily lives of us all. While many uncertainties regarding the pandemic remain, the availability of a number of vaccines provides us hope that we can get past this sometime in 2021. Until then, we will continue to focus on keeping our employees safe and limiting the spread of the virus while still serving our customers as effectively as possible. Throughout this uncertain time, our workforce around the world has remained focused and agile. My view is that our team has done a great job of navigating effectively a challenging and evolving environment to meet the needs of our customers, while delivering at the same time solid results in the fourth quarter and full-year results that were substantially stronger than we initially anticipated at the start of this pandemic. Christine will provide the financial details in a moment. but I have a few high-level comments first. Overall, in the fourth quarter, our business still felt the impact of the pandemic and the low bookings we experienced during the peak period of the pandemic-related shutdowns. We have been seeing improved market demand and increasing bookings, but at the same time, these improvements in the continuing effects of COVID-19 are creating challenges in other areas, especially including increasing costs and supply chain constraints. Despite these challenges, and primarily as a result of the cost containment actions we implemented in the first half of the year, our 2020 fourth quarter results were significantly higher than the prior year quarter, despite lower unit volumes. Benefits from these cost containment actions resulted in a decrease in operating expenses of $25 million in the fourth quarter and $72 million for the full year and that is at the high end of the savings range outlined last quarter. We also had lower provisions for estimated self-insurance claims during the quarter compared with last year. However, these lower expenses were offset by approximately $4.5 million of restructuring charges related to actions taken to make our global commercial operations more cost-effective. Ken will talk about this program further in his section. In this pandemic-altered work environment, the resiliency of our workforce has been impressive. Our workforce overcame significant headwinds this past year, including uncertain customer demand, supplier delivery interruptions, and workforce availability, among others. We greatly appreciate their efforts to remain positive, safe, and productive in the face of adversity while also minimizing costs. As a result, we believe our High Street Yale management team, global workforce, and our businesses are well positioned to manage through the remainder of this pandemic and come out of it in a very strong position. After Christy reviews the results for the quarter, Rajiv will discuss our business operations and our strategic projects. Ken will then talk about our outlook in this uncertain and evolving environment. Now let me turn the call over to Christy to cover the results for the quarter.

Thank you, Al. I'll start with the quarter highlights and then discuss the individual segments. Our fourth quarter consolidated revenues decreased to $719.6 million, down 13.8% from last year's fourth quarter, mainly due to lower shipments resulting from the continuing effects of very low bookings during the peak period of the global pandemic shutdowns as well as the pace of the subsequent market recovery. However, as Al mentioned, our consolidated operating profit increased significantly to $13.7 million from $8.1 million in the prior year fourth quarter. This improvement was primarily the result of lower operating expenses resulting from the cost containment actions previously implemented, partially offset by a 13.8% decrease in gross profit because of lower unit shipment volume. Net income increased to $13.1 million, or $0.78 per share, from $3.4 million, or $0.20 per share on the prior year quarter. At our lift truck business, High Street Yield Group's fourth quarter revenues decreased 14.3% to $683.9 million from $798.2 million in 2019, primarily because of fewer shipments in the Americas and EMEA segments. Consolidated shipments decreased by approximately 3,300 units due to fewer shipments in all but Class I electric counterbalance trucks in the Americas and JPIC, and Class III warehouse trucks in JPIC, as well as Class II warehouse trucks in EMEA. Najeeb will provide more detail about our bookings and shipments in a moment. Fourth quarter 2020 operating profit in the lift truck business increased 37.9% from the prior year quarter, mainly because of lower operating expenses in the Americas and EMEA, resulting from cost containment actions previously implemented and European government subsidies. This improvement was partially offset by a decrease in gross profit in all segments due to the lower unit volumes and mix of trucks sold, as well as higher operating expenses in our JPEC segment, primarily because of costs to restructure the JPEC operations for long-term efficiency and productivity and the ongoing transfer of production to High Street Yield Maximal. At the Balzoni segment, revenues decreased 21.5% and Balzoni reported an operating loss of $1.3 million compared with operating profit of $500,000 in the fourth quarter of 2019. The decreases in revenues and operating profit were due to lower sales volumes resulting from the decline in global economic activity subsequent to the pandemic-related shutdown. Finally, at Newvera, fourth quarter revenues increased modestly to $1.1 million, up from $1 million in the prior year, and the operating loss declined moderately to $9.7 million from $7.4 million in 2019. The improvement in results was due to the favorable effect of cost containment action. Those are the results for the quarter. Now let me turn this over to Rajiv, who will provide an update on our operations and our strategic projects.

Thank you, Christy. Let me start by saying that I could not be more proud of how our global team has performed over 2020 in light of the many challenges thrown their way by the COVID-19 pandemic. The hard work and disciplined execution shown by our global workforce has been exceptional as we continue to work through these challenges. Across the company, we focused on maintaining the safety of our employees and preventing the spread of the virus. And we have a good track record in doing that. However, the ongoing high volume of cases continue to create uncertainty and stress. It is as important as ever that we are diligent and maintain strong safety procedures, despite the pandemic fatigue we continue to experience as we reach the one-year mark of dealing with this pandemic. Let me reiterate, I'm very proud of our team for their ability to stay focused and effective in these uncertain times and for their effort to maintain the protocols we have established to keep our workforce and those around them safe. Moving on to our operations, as Al mentioned, lift truck market activity has been improving. Lift truck market grew faster than anticipated during the fourth quarter of 2020, with markets ending the quarter significantly higher than pre-pandemic levels. Excluding China, which increased 56% over the prior year fourth quarter, the global lift-track market increased 9.3% compared with the fourth quarter of 2019. Compared to the third quarter, the global lift-track market, including China, increased 11.4%. driven by a 28% increase in Americas, a 23% increase in EMEA, as well as a 19.7% increase in China. But in the JPEG region, the China increase was offset by the remainder of JPEG for an aggregate increase of 0.9%. The market improvements over the third quarter and additional large customer bookings translated into substantial increase in our 2020 fourth quarter back bookings, specifically in December in our primary market of Americas and EMEA. Despite the substantial increase in bookings, unit shipments were only moderately higher than 2020 third quarter and below the 2019 fourth quarter. Shipments were lower because of very low levels of booking during the peak periods of the pandemic-related shutdowns and lower production rates that were put in place to match market conditions. Since the shutdown earlier in the year, we have carefully increased production levels at our plants to align them more closely with anticipated levels of demand and target booking levels. Our focus on increasing production rates to meet accelerating market demand is based on building backlog first to ensure a stable base for future production the strong 2024 quarter booking led to a significant increase in backlog over the third quarter and a backlog level that has close to that was close to pre-pandemic level We expect increased bookings in 2021 because we anticipate that the market will continue to improve over pre-pandemic levels. And because of the strategic initiatives and projects we continue to pursue at each of our businesses to generate good, sound long-term financial return. However, definitive periods for achieving these financial returns are still uncertain due to both the timing of the full impact of our strategic projects and the timing of the moderating financial impact of the pandemic. Now let me spend just a few minutes talking about our strategic projects. Despite the potential volatility of near-term economic activity, we continue to execute our long-term strategy by advancing our key strategic initiatives. While essentially all the projects required to execute our initiatives continue to move forward in the context of COVID-19 pandemic, the pace of certain projects have been given greater emphasis than others to reduce near-term operating expenses and capital expenditures. In addition, certain accelerated projects have experienced delays as a result of the impact of pandemic-related challenges. We continue to introduce a number of new products, but our primary focus in the lift truck business is on a new set of modular, scalable product families covering both internal combustion engine and electric trucks. We have been focused on maintaining to the degree possible the timing of the introduction of the first of these products. the standard version of two to three ton internal combustion engine lift trucks for the EMEA market. This truck is now expected to be launched in the second quarter of 2021, a bit later than we mentioned last quarter. The launch of this new hard-of-the-line range of two to three ton counterbalance truck is expected to continue through 2021 and early part of 2022 in EMEA in America. We expect the modular nature of these new products to enhance our ability to meet customer needs at lower cost and with more application specificity, both at the industry level and at the individual customer level. In this rapidly changing environment, we have accelerated our effort to finalize and implement our industry strategies and our investments in industry-focused sales capabilities to support our dealers. Given the COVID-19 environment, we have also focused on enhancing our remote selling capabilities through technology and IT enhancements. Bolzoni continues to focus on its America's growth strategy by strengthening its ability to serve customers Industries in the North American market, by introducing a broader range of locally produced attachments with shorter lead times to service customer base, and through continuing to sell cylinders and various other components, produced intelligent Alabama plants. Bolzoni is also implementing its one-company, three-brands organizational approach to help streamline corporate operations and strengthen its North America and JPEG commercial operations. Nivera continues to focus on serving heavy-duty applications, particularly bus and truck applications, with its 45-kilowatt and 60-kilowatt engines, which were both released for sale during 2020. As a result of these milestones, Nuvera has accelerated the 45 kilowatt and 60 kilowatt engine commercialization operation for the global market and is focusing on ramping up bookings on these products in 2021. As Nuvera ramps up production of fuel cell stacks and engines and leverages partnership opportunities, Nuvera's objective is to reduce its losses and then achieve break-even. In the long term, Nevera is expected to contribute substantially to our overall earnings, as evidenced by a recent transaction involving technology that was created by Nevera. In January 2021, we sold part of this ownership interest for $15.7 million, recognizing a gain of $4.6 million. which will be reported in our first quarter 2021 results. The remaining interest is expected to be sold later this quarter. Overall, it is our intention to emerge stronger from this pandemic and to thrive as business conditions improve. We believe our prioritised strategic projects will put us in that position. I'll now turn the call over to Ken for an update. and our thoughts regarding future quarters and measures taken to enhance liquidity.

Thanks, Rajiv. While recent market and booking activities are strong and growth since the 2020 second quarter shutdowns have been better than expected, the level of future bookings and resulting shipments are still uncertain. Overall, we continue to operate on the assumption that the economic environment and markets will remain difficult in 2021 until the COVID-19 vaccinations and alternative therapies are more widely available in cases decreased to substantially lower levels. We're not able to control the macroeconomic factors that drive the demand for our products, but we are executing on actions that are within our control to keep our employees healthy as COVID-19 cases still remain high around the globe, and at the same time, moderating any resulting additional near-term financial impacts of the pandemic. Beginning in March of 2020, we put plans in place to mitigate the impact of declining markets and bookings and the consequential impact of reduced manufacturing activity from pandemic-related shutdowns by initiating cost reduction measures, which were designed to lower costs and enhance liquidity. These measures included spending and travel restrictions, significant reductions in temporary personnel, furloughs, suspension of incentive compensation, and profit sharing, benefit reductions, and salary reductions. We are encouraged to report that market and business conditions permitted us to reinstate pre-pandemic salaries, benefits, and incentive compensation programs effective January 1st of this year. The cost containment actions associated with hiring, use of contract and temporary employees, travel and meetings, as well as other discretionary spending are continuing. These measures are expected to remain in place until market and economic uncertainty dissipates and our results improve further, which we expect will occur over the course of 2021. As we can look to the future to prepare to return to a more normal pre-pandemic operation and expense levels, we performed an in-depth global review to re-establish a more cost-effective long-term cost structure. As a result of this review, In the fourth quarter of 2020, we recognized a restructuring charge of approximately $4.4 million, which Al previously mentioned. This charge was largely for severance, which we expect to pay in 2021. We anticipate incurring additional charges of approximately $1.4 million in 2021 for costs related to this restructuring. And we are estimating benefits from this restructuring of approximately $10.4 million annually beginning in the year 2022. As Rashid mentioned, we adjusted production levels at our manufacturing plants during 2020 to align them more closely with market demand and target bookings. Throughout the fourth quarter, we increased production moderately to adjust for improved market levels, but we've maintained our focus on establishing a strong, stable backlog level as the foundation for higher production rates in 2021 given market growth expectations and expected bookings and backlogs. barring any new widespread COVID-19-related shutdowns. However, some new or intensifying headwinds are expected to present significant challenges for us in 2021. We expect to contend with further pandemic-related global supply chain constraints, component shortages, shipping container availability, and higher freight costs, as well as the anticipated significant material cost inflation resulting from the increasing pace of the expected market recovery and the likelihood of non-renewal of U.S. tariff exclusions, which we have benefited from over the past 12 months. These items could affect both the cost of our products and our ability to ramp up production rates. We will continue to focus on carefully adjusting our production levels to match market and booking changes and supply availability by closely working with our suppliers to help ensure we have adequate component supply levels as production rate changes. We also anticipate that commodity costs will continue to rise as the year progresses. We continue to monitor potential future supply costs and tariffs closely and adjust our pricing accordingly. Given these factors, we expect operating profit and net income in the first quarter of 2021, excluding the gain from the sale of the company's 1H2 investment that Rajiv previously discussed, to be moderately lower than the 2020 fourth quarter and lower than the 2020 first quarter. The expected lower offering profit is due to a strong increase in commodity prices, which was resulting in anticipated increase in material costs, inefficiencies expected as a result of global supply chain constraints, and the reinstatement of incentive compensation and full salaries and benefits. We do anticipate a favorable currency impact based on current currency rates to partially offset these headwinds. Let me take a step back and explain that our expectations for 2021 first quarter are based on the most recent information we have available. But as the past short quarters have shown, the effect of the pandemic on the economic and lift truck market environments can change our expectations rapidly. Further shutdowns at plants or supplier shortages could occur. Lockdown measures are still in place in a number of European countries to mitigate the spread of COVID-19 virus. and similar actions could be taken by other countries. Other than the recent brief weather-related shutdowns in North America, we are not having to close any of our plants as a result of lockdown measures. But we're monitoring the situation at each plant and at a number of our suppliers based upon areas where COVID-19 cases are high. We are prepared to take further action if necessary to maintain the health and safety of our global workforce and to address production and supply chain issues which may develop. As a result, this pandemic-related uncertainty and its effect on our supply chain continue to limit our ability to forecast bookings and shipment levels beyond the first quarter of 2021. I would also like to note that our expected reported tax rate for 2021 will return to levels more comparable to 2019 reported tax rate than to what we experienced in 2020. Looking to the future in the context of an improved booking trend, we expect to increase our investment in working capital and other expenditures to support growth in our business. Capital expenditures were $51.7 million in 2020, and we are planning for capital expenditures of approximately $71 million in 2021. While we expect to make substantial additional investments in our business in 2021, maintaining liquidity has also continued to be a priority. At December 31st, our cash on hand was $151 and our debt was $289.2 million compared with cash on hand of $89.9 million and debt of $297.7 million at the end of the third quarter. In addition, as of December 31st, we had unused borrowing capacity of approximately $266.4 million under existing revolving credit facilities compared with $260 million at the end of the third quarter. I'd also like to point out for the 2020 full year, our consolidated cash flow for financing activities increased significantly to $123.2 million, up from $34.7 million in 2019. I'll now turn the call back over to Al.

Al, you might be on mute.

Before I ask for questions, I should note that Hyster Yale is very strong. We have an outstanding group of leaders and employees who have effectively managed production and supply chain complexities and kept Houston Yale on a positive path since the pandemic began. You can't let up as the pandemic is still with us, but I'm reassured by the strength and resilience of our people. and believe that we will deliver solid sales and earnings performance over the coming year and that our long-term strategies and prospects will have a very significant positive impact in the future we're now open for any questions you may have as a reminder to ask a question you'll need to press star 1 in your telephone to withdraw your question press the pound key

And our first question comes from the line of Steve Farzani from Sedati and Company. Your line is open. Good morning, everyone.

Thanks for the detailed commentary. I know you mentioned caution a lot on the call. The flip side is you had another second straight really strong quarter of bookings. Your backlog is back to pre-pandemic levels. I know there's a ramp to it, but how can we think about 2020, and it's like February, but how can we think about 2021 sales compared to pre-pandemic 2019 sales?

Let me just make an introductory comment, then I'm going to ask Rajiv to elaborate. You know, in Ken's remarks and Rajiv's and in mine and in yours, you referred to uncertainty and the difficulty of forecasting. We have the pandemic impact and in many ways it's changed the level of economic activity in terms of its impact on different segments of the economy. certain areas are seeing a significant ramp up in economic activity. And they're, everyone I think, or a broad variety of industries are concerned about the impact of the increasing volumes on different sectors of the supply chain. The ramp up that you were asking about is highly dependent on our ability to have in a timely way all of the components that are necessary to build all those trucks. And I think we're cautious about our ability to predict that. There are challenges out there. You've seen them in other industries. With that backdrop, I'd ask Reggie to make any further comments you'd like to make.

Thanks, Al. The only things I'd like to build on that are, you know, maybe I'll split this into two, you know, firstly around bookings and the next thing around our ability to build a truck with some of the constraints that Al talked about. In terms of bookings, the complexity in forecasting is, you know, how much of what we're seeing and what we saw at the end of the year is pent-up demand and how much is stable demand moving forward. um but you know as we start to look at 2021 to us you know it you know we're seeing good market size and increasing over 2020 and not that dissimilar to 2019. um so i think that's that's you know the booking side On the production side, we're seeing significant constraints in supply chain. And it's for the reasons that we've already discussed. There is demand, you know, is outstripping supply. And so people are put on some level of constraint in shipping components. Then we have some suppliers are having difficulty with COVID, and then there's the logistic challenges that we've talked about due to container availability and basic shipping line availability. So, you know, it's a complex environment, and that's what's making projecting difficult.

The only thing I'd add to that is that As Rajiv said, we're very encouraged by the bookings we're receiving, at least so far. Assuming that there's not a significant retrenchment due to sort of pent-up demand, I think that we'll be producing those trucks that are booked sooner or later. So they're in the system, they're going to be produced, and they're going to have an impact on the results, but it's very difficult to say when.

That's very helpful. Ken, in the past you've done a pretty good job of trying to quantify what you did last year in terms of the cost savings. um with the temporary cuts i'm just trying to get a sense of because you talked about some are back some are not there's also the restructuring do you have a sense of at least the percentage of the costs that are going to be backed in the earlier part of the year yeah i think uh the way i would characterize it is the largest portion of those cost savings programs were the ones that we have uh that we have brought back the salary incentive benefits uh

those types of programs were sizable. So they would represent a significant portion. But I don't want to underestimate the efforts that we're making to hold costs down. And, you know, I think you need to look back to trends back to 2019 in terms of cost to develop your own guidance on where you think expenses are going.

Ken, I will reiterate what Al said. We're seeing significant inflation and it's come on very quickly as demand has outstripped supply as Al said because of basically all the industries ramping up simultaneously.

I think I was trying to respond back to the, I thought this was about SDNA savings through our COVID programs. So my comments were limited to that. And I absolutely agree with what Regina is saying about cost of production.

Great. If I could just one more and just, If you could add a little bit of commentary on Nubera, one being, you know, if you're more positive given the new administration in the U.S., and then two, just with so much talk around fuel cell technology now, do you think, you know, you talked about China first, but do you think there are other markets you can start marketing your engines?

Yeah, I'll start that one off. Absolutely. You know, we talk about, you know, building our commercial operations, And we're doing that globally. We're seeing traction in China, of course, but also in some other countries in Asia, as well as in Europe. You know, we've seen Europe come on really strongly and start to think about fuel cells. And then America is slower, but recently we announced our collaboration with Capacity. But there are similar other discussions going on with Nuvera and other OEMs. One thing I would say is as we start to work with OEMs, the lead time between getting a business award and actually producing the truck, which is really the development time, can be significant. So we'll kind of give you more color on that as we start to get some of these businesses and we'll report out as many as we can.

It's helpful. Thanks so much for your time, everyone.

Your next question comes from the line of Gentry Klein from Cetus Capital. Your line is open.

Hi, thanks very much for the call. I was actually just about to ask a similar question on about geographies you're focused on for Newvera. I guess, given that you answered that, the only thing I just wanted to just state was that we believe Newvera is a tremendously valuable asset with proprietary technology and capabilities that provide a competitive advantage, even versus many of the publicly traded fuel cell companies. And we also believe that Newvera has a greater potential as a standalone entity

outside of heister yale so would therefore request that the company and the board focus on unlocking this significant value by exploring a divestiture a spin-off or sale of nuvera as soon as possible thank you i just comment that our board always actively thinks about the best way to build value for our shareholders and they certainly do that in the context of new vera But Nuvera is a young business. It needs a lot of sophisticated support and professionalism in order to build on its position so that it's durable over the long term. That's what we intend to do. We're certainly cognizant of some of the developments in the marketplace. But we're a very long-term player, and we want to develop the business in the best way possible over the long term. And I'd leave it at that.

Again, if you would like to ask a question, you press star 1 on your telephone keypad. And we have a question from the line of Michael Sesser from DWS. Your line is open.

Hi, Al, and thank you for the comments. I actually had a little bit of a follow-up to the previous question. I guess, you know, we're at a very interesting environment from a financial market perspective in that there's just so many of these special purpose acquisition vehicles seeking something exactly like what Nubera has to offer. And it just seems that you would get paid something far more than Nubera's true value if you were to take this opportunity to sell it, whereas this moment isn't going to last forever. I mean, it'll be gone. So it just seems like it's almost kind of dumb not to sell it, I guess.

You know, we're in the fuel cell business for the long term. One way or another, we think it's tremendous business, and we'll be attending to it in the way that the management and the board collectively think is the best way to manage the business for the long term. So, again, I'd leave it at that. Okay, thank you.

And there are no further questions at this time. I'll turn the call back over to Christina Kometko for some closing remarks.

Thank you, Al. Did you have anything you wanted to say further?

I have no further remarks to make at this point, Christy.

Okay. Thank you again, everyone, for joining us today. We do appreciate your interest, and if you do have any follow-up questions, please feel free to give me a call. My number is at the top of the earnings release. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call. A replay for today's call will be available approximately two hours following the completion of the call and expire on March 4th at midnight. To listen to a replay of today's call, please dial 800-585-8367 and enter conference ID 1692988. Thank you for participating. You may now disconnect.