Hyster-Yale Materials Handling, Inc.

Good day and thank you for standing by and welcome to the Hyster Yale Q4 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Christina Kometko. Please go ahead. Good morning, everyone, and thanks for joining us this morning.

Welcome to our 2021 fourth quarter and full year earnings call. I'm Christina Kometko, and I am responsible for Investor Relations at High Street Yale. 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 published our 2021 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 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. 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 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. In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in our earnings release on our website. In a moment, I'll discuss our current 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. The 2021 calendar year was very challenging, more so than 2020, in fact. Our fourth quarter and full year results reflect the impact of those challenges. As you saw from the release we issued last night, our fourth quarter results, excluding some non-cash charges, were directionally in line with the outlook we provided last quarter. But still, due to the non-cash charges, which arose as a result of how this challenging environment has affected our nearer term forecasts, were lower than we anticipated. Well, Christy will discuss these specific charges and our financial results in detail in a moment. I will provide some high-level thoughts on our results. Lift truck market demand remained strong during the fourth quarter and continued to grow over 2020 levels, but as we expected, it decreased from the third quarter of 2021 as markets continued to moderate from the peaks achieved in the first half of the year. This year-over-year market growth, as well as share gains, resulted in strong lift truck bookings for the fourth quarter, which contributed to a new record lift truck backlog level and exceeded the historically high level achieved in the third quarter. Given these factors and as a result of production changes made in the fourth quarter, and despite the continuing supply chain challenges exacerbated by several critical component shortages, Our fourth quarter shipments were the strongest we've seen since the start of the pandemic. Last quarter, we indicated that we expected significant losses at the lift truck business in the fourth quarter of 2021 as a result of anticipated continuing supply chain constraints and significantly rising material and logistics costs, leading to margin contraction for trucks in our backlog. These challenges continued in the fourth quarter with only modest part shortages improvements and inflation continued to rise in the quarter but at a slightly lower rate of change. These factors along with the non-cash charges led to the substantial consolidated operating and net losses we reported for the consolidated company in the fourth quarter. Our teams continue to work diligently to obtain the components we need for production and to increase margins in our backlog and particularly for new orders. Further, given the record backlog levels, the opportunity for increased production as supply chain bottlenecks are resolved is high, as evidenced by the substantial increase in shipments in the fourth quarter of 2021. After Christy reviews the financial results for the quarter, Rajiv will provide more detail on these supply chain challenges, as well as provide an update on our business operations and strategic projects Ken will then discuss our outlook in this very challenging, but we believe, improving environment. Christine?

Thank you, Al. I'll start with high-level comments about the quarter and then discuss the individual segments. As Al mentioned, due to market-level changes in share gains, we had a 16.5% increase in lift truck bookings over the fourth quarter of 2020, but our bookings of 33,200 units in the fourth quarter decreased 10.5% from the third quarter. We ended the fourth quarter with a historically high backlog of 105,300 units. Our fourth quarter unit shipments increased 24.2% driven by our Americas and EMEA segments and our revenues increased 15.3% over the prior year fourth quarter. Higher unit shipments and parts volume in the lift truck business and at Bolzoni resulting from increased customer demand along with the favorable effect of price increases in the lift truck business were the primary drivers for the increase in our 2021 fourth quarter consolidated revenues to $829.7 million from $719.6 million in the prior year. Despite the higher revenues, we reported an operating loss of $107 million compared with operating profit of $13.7 million in the prior year. We recorded a non-cash goodwill impairment charge of $55.6 million in our JPEG segment because the continued disruption of supply chains and the resulting increased costs unfavorably affected our near-term forecast. The remaining operating loss was the result of several factors, a significant increase in material and freight costs of $68.6 million, net of price increases of $17.5 million, higher unfavorable manufacturing variances of $13.3 million, resulting from inefficiencies associated with component shortages, a shift in sales mix to lower margin lift trucks, an additional non-cash charge of $1.3 million to write down inventory at Newvera, and higher operating expenses, primarily due to the reinstatement of pre-pandemic compensation and benefits. Higher unit volumes, as well as the absence of $4.4 million of restructuring charges taken in the fourth quarter of 2020, partly offset the unfavorable factors contributing to the operating loss. Overall, we reported a consolidated net loss of $103.3 million compared with net income of $13.1 million in the prior year quarter due to the factors previously noted, as well as a $19.4 million non-cash charge to establish additional valuation allowances on certain U.S. and U.K. deferred tax assets, which Ken will discuss in more detail. Turning to the individual segment results, our lift truck business, excluding the goodwill impairment charge, reported an adjusted operating loss of $37.6 million compared to an operating profit of $24.4 million in the prior year quarter, primarily due to significant decrease in gross profit and higher operating expenses in the Americas segment, both resulting from the specific factors I noted in the discussion of our consolidated results. Our Americas division felt by far the greatest impact of production delays and higher costs, with EMEA experiencing the same difficulties but to a lesser extent. However, our JPEG segment reported an adjusted operating loss of $4 million, which was an improvement from the prior year operating loss of $6.9 million. The improvement in JPEG was due to lower operating expenses, partly offset by lower gross profit, resulting from higher material and freight costs and additional manufacturing costs. Balzoni's revenues for the fourth quarter increased 36.9% over the prior year quarter. Despite these higher revenues and a 9.3% improvement in gross profit, Bozoni reported an operating loss of $2.2 million compared with an operating loss of $1.3 million last year. The higher loss was due to an increase in operating expenses primarily from the reinstatement of pre-pandemic salaries and benefits that were suspended in 2020 and the absence of government subsidies received in 2020. Finally, in Newvera, revenue decreased to $200,000 in the fourth quarter from $1.1 million in the prior year due to fewer sales of fuel cell engines for lift truck battery box replacements. As a result of a $1.3 million unfavorable inventory charge, Newvera's operating loss increased to $11 million compared to $9.7 million in 2020. That completes the update of our financial results for the quarter. Now let me turn to Rajiv, who will provide an overview on our operations and our strategic projects.

Thanks, Christy. As Al indicated, the global lift-track market remains strong this quarter, increasing more than 15% over the prior year quarter. However, growth was at a more moderate pace than in the first nine months of the year. Compared with 2021 third quarter, the market increased only about 5% as a result of an increase in almost 19% in EMEA market and modest growth in JPEG, partly offset by 12.5% decrease in America's market. Our sales team continued to improve market share in this robust market environment and the market improvements over the prior year quarter. Combined with the share gain translates into an increase in the company's 2021 fourth quarter bookings and exceeded market growth. In 2022, we expect the global lift-track market to recede from the historical highs of 2021, but still be at higher than pre-pandemic levels. As a result of this market outlook, the lift-track business is anticipating a substantial decrease in bookings in 2022 compared with 2021, with the rate of decrease expected to moderate in the fourth quarter. Many industries, including our own, are experiencing a significant increase in demand as markets recover, and this is causing significant stress on our global supply chain. Our supply chain group has continued to work diligently to address the challenges related to component shortages caused by supply constraints and logistic challenges, which only modestly improved in the fourth quarter. These challenges arose due to the lack of shipping container availability from Asia, congestion at U.S. ports, and a shortage of truck available to move the goods once they were received at U.S. ports. All these factors have limited our receipts of component parts when scheduled. We have put significant effort into securing component parts by using different shipping methods and vendors. limited availability of alternative shipping methods and the build-to-order highly configurable nature of our trucks has meant that alternative vendors that can provide the necessary component parts are very limited, with the result that countering these constraints successfully has been very difficult. Nonetheless, as a result of measures we put in to counteract these challenges, our fourth quarter unit shipments increased to above pre-pandemic levels as we successfully slotted orders that were able to be fully built and shipped. Despite the increase in fourth quarter shipments, Booking's net of shipments in the quarter added to an already historical high backlog level, and delivery lead times continued to increase. Our most significant issue right now is managing margins in our record backlog, and especially on new orders. At our lift truck business, we have implemented price increases several times over the course of 2021 and again at the beginning of 2022 to address the effects of material and freight cost inflation. But many of the orders in our backlog slotted for production in the first nine months of 2022 do not reflect the full effect of all the price increases. As a result, We expect to continue to experience very low margins in the first quarter of 2022 due to the lack between these when unit price increases went into effect and when revenue is realized as the units are shipped. Importantly, the lift truck sales team is pricing new bookings at close to target margins based on expected future costs at the time of production. As a result, margins are expected to increase over the successive 2022 quarters with much stronger margins in the fourth quarter when the higher margin already booked trucks at improved margins and trucks anticipated to be booked are expected to be produced and shipped. Now let me update you on our strategic initiatives which are laid out in more detail in our earnings release. At a high level, the lift truck business Primary focus continues to be on introducing new modular and scalable products and transforming our sales approach by using an industry-focused approach to meet our customers' needs. Bolzoni continues to work on streamlining and strengthening its operation while increasing its America's business and expanding its sales, marketing, and product support capabilities. And Nuvera continues to focus on ramping up demonstration, quotes, and bookings of its 45 and 60 kilowatt engines. Overall, we continue to believe that we have the right strategies in place for long-term growth once we can achieve resolution of component shortages and relative stabilization of material and freight costs. I will now turn the call over to Ken for an update on future quarters and liquidity. Ken? Thanks, Rajiv.

As you've heard from both Al and Rajiv, during 2021, we have experienced production and shipment levels which are far lower than our objectives due to continued supply chain logistic constraints, component shortages, and we've also been faced with higher material and freight costs. The results stemming from these challenges contributed to our need to book in the fourth quarter an additional $19.4 million to evaluation allowance against our U.S. and U.K. deferred tax assets, which Christy mentioned in her remarks. In total for the 2021 year, we increased our valuation allowance by $58.6 million based upon a review of our recent operations, including cumulative U.S. and U.K. pre-tax losses, lack of available tax planning strategies, and declining near-term forecasts due to material and freight inflation, along with supply and logistics constraints. Due to these factors, the required accounting evidence no longer supported realization for certain of our U.S. and U.K. deferred tax assets and the accounting rules part of the company to record additional valuation allowance in the fourth quarter. We expect to continue to experience supply chain logistic constraints into the beginning of the third quarter of 2022, but they are anticipated to begin to moderate during the first half of the year. Nonetheless, we are expecting the positive shipment momentum from the end of 2021 to continue and for shipments to increase significantly over the course of 2021 given our robust backlog and actions we put in place to mitigate the impact of the supply chain constraints and shortages. Significant material cost inflation and higher freight costs, as well as the non-renewal of U.S. tariff exclusions, are expected to continue to affect the cost of components and freight negatively in 2022. More moderate cost increases are expected to continue in 2022, but there are some signs that suggest material costs have peaked. We will continue to work aggressively to manage supply chain and logistics cost, component availability, and tariff exclusions, and will continue to adjust our prices for all new orders accordingly. As a result of these factors, the core strategies discussed by Rajiv and the increased shipment volumes potential of the higher-priced lift trucks in our current backlog, as well as trucks still to be booked in 2022 as it progresses, we expect the lift truck business to have significant operating and net losses in the first quarter of 2022, moderate losses in the second quarter, profitability in the third quarter, and substantial operating profit and net income in the fourth quarter, with the improvements in the second half of the year expected at the lift truck business to more than offset the losses in the first half. Over this period, we are projecting relative stabilization of product and transportation costs and the continued expectation of improved component and logistics availability. We are also anticipating the continued introduction of additional modular and scalable product families and the continued implementation of cost-saving initiatives over this period and the longer term. As we bring costs, price, and production volumes in line over 2022, we expect our lift truck business to generate strong operating profit and net income in 2023. At Bolzoni, we expect the moderation of component shortages and the timing of pricing actions to permit improved returns, beginning with a moderate operating profit in the first quarter and continuing with improved operating profit in the reigning quarters of 2022. As a result, Bolzoni expects sizable operating profit and net income in 2022 compared with operating and net losses in 2021. Excluding the impact of inventory valuation, and fixed asset impairment charges taken in 2021. We expect moderately reduced losses at Nuvera in 2022 as a result of enhanced fuel cell engine shipments. On a consolidated basis, given the continued extensive component shortages, significant material and freight cost inflation, as well as continued losses at Nuvera, we expect to have a large net loss in the first quarter, a substantially reduced but still large net loss in the second quarter, Approximately break-even results in the third quarter and substantial net income in the fourth quarter of 2022, assuming reasonable resolution of component part shortages and relative stabilization of material and freight costs. I would note, however, that the consolidated fourth quarter net income is not expected to fully offset the consolidated losses generated in the first nine months. We are carefully managing our capital expenditures. operating expenses, and production plans for 2022 in a manner designed to protect liquidity. We have implemented a program of strict controls over operating expenses to reduce cash outflow, including delays in the timing of certain of our strategic program investments. While the company expects in time to make these capital expenditures and investments in the business, maintaining liquidity will continue to be a priority. Our ability to ship trucks was significantly constrained by part shortages of certain critical components, while the remaining components needed to build trucks were received and added to inventory, causing inventory levels to again increase substantially. We expect, based upon our recast of manufacturing production plans, to reduce inventory significantly by using current inventory to build trucks for which production has been significantly delayed due to critical parts shortages. At December 31st, 2021, We had cash on hand of $65.5 million and debt of $518.5 million, compared with cash on hand of $61.4 million and debt of $428 million at September 30th. And finally, cash on hand of $151.4 million and debt of $289 million at the end of 2020. As I mentioned before, we were fortunate to be able to refinance our revolving credit facility and expand our term loan facility in May to finance our production growth and related working capital needs during this challenging period. As of December 31st, we had unused borrowing capacity of approximately $165 million under our revolving credit facilities, compared with $245.9 million at September 30th and $266.4 million at December 31st, 2020. I'll now turn the call back over to Al.

As we look to 2022, we're continuing to be focused on managing effectively in this very challenging environment. We continue to execute our mid-term and long-term strategies. Our strategy for the long-term is clear and it is transformative. Our key projects, as well as the explicit objectives for the Lyft truck, Bolzoni, and Nuvera businesses support this long-term strategy. Further, expected improvement in near-term Prospects quarter by quarter over 2022 with substantial profit in the fourth quarter and in 2023 suggest significantly improving results despite continuing logistics challenges, as well as expected improving adoption rates for key fuel sale market segments. End markets are strong. We have a record lift truck backlog, a strong current booking environment, and we are working diligently to manage the supply chain headwinds. We are continuing to invest in innovative products and our key strategic projects to meet increased customer demand. Once these challenges are behind us, we believe we will deliver solid sales and earnings performance. We'll now turn to any questions you may have.

As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw a question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Steve Ferrazzotti from Sidoti & Company. Your line is open.

First question has to be a modeling question. I'm trying to think about, and you provided a pretty good outlook over the next few quarters, but specifically I'm trying to think about lift truck gross margin Q1, Q2, Q3, because what we don't know is what's sitting in backlog and how that rolls through and how it hits in terms of gross margin, because obviously we saw weaker this quarter sequentially. Given we're two months into the quarter, can you give us a sense on trends with lift truck gross margins?

What I would suggest that you do, given a little more time, is to read through the earnings release in great detail. because we described that process very clearly in the earnings release and in great detail, including the quarter by quarter progression. Basically, the near-term production has the lowest prices relative to the inflationary impact, and that occurs in the first quarter of the year. The margins improved because we put so many price increases in place. Inflation began to moderate. We started to not get ahead of it, but to begin to catch up. And then the new bookings we're putting in place have a significant impact in the fourth quarter. And those are pretty much at our target margins. So it's a very straightforward story driven by just what you focused on, which is the margins but let me divide it into two pieces what I really focused on in my comments are the adjusted standard margin what we call internally from an accounting point of view are adjusted standard margins now something else happens too at the gross margin level which is as our production picks up and as the supply chain problems become less have less of an impact on our factories our manufacturing variances go down as well. So when you put those two factors together, what it means is that our margin progression is, as we've outlined it in the release in some detail. So I think it's there.

Okay. Fair enough. Thank you. On deliveries, I was surprised how much they improved in Q4, given it's typically you're going to run into at least some holidays. And I know some companies, and it sounds like you weren't impacted by the Omicron variant. Trying to think about how much more you can pick up on the deliveries and why it improved so much in Q4.

I'd like to ask Rajiv to answer that. And I'd simply note that it depends enormously on the efforts that our supply chain people have made to reduce the impact of shortages.

I think the impact continued, but they did moderate. As you know now, Omicron wasn't as severe as the other variants prior to it. So we did have the issues we faced in the fourth quarter were around delivery through the port. Internal logistics, particularly we started to see a worsening logistics issues around trucks. and also a little bit around rails, which have somewhat continued into the current quarter. The main benefit was we have a large backlog of trucks. We also have quite a large, as you can see, working capital and inventory. And so the team did an excellent job of putting together trucks that we could build with the inventory we had while focusing on getting the materials that we're missing. We expect that to continue into the first quarter, the two quarters of 2022. It will ease as we go through the quarter, but our current planning is to try and maintain a flat production rate, focusing on really getting our efficiencies up so that we can ramp up the production in the second half of the year, and we expect the majority of the supply chain constraints to have eased significantly.

Great. Thanks for that.

You know, it's partly, as Rajiv suggested, the supply chain constraints that we've been facing, but we've also been working very closely with our suppliers to increase capacity so that we can produce at their capacity, so that we can produce at the levels that we want to produce at. So there are really two parallel processes going on, Rajiv, I think. One is to really deal with the shortage problems, which in the main is a small number of suppliers, and then to ensure that everybody's geared up for the increase in volumes that we produce. are in a position because of the backlog to produce, especially in the third and fourth quarters.

Great. Thanks for that. If I can squeeze one last one in. Rajiv, you mentioned the higher level of working capital. Just trying to think about trends and how quickly you're thinking the Tories start coming down, how quickly that can be a positive to cash flow. And then the $165 million in the unused revolver, it would seem based on your sort of guidance or outlook that that's more than ample liquidity. Would you agree with that?

I think Ken can add to this, but I think we sit well with liquidity. We feel good about where we are. In terms of the inventory, we do expect inventory to come down, especially as you measure it in days, because we're going through this transition. As I said, we'll have flat production rates initially in the year, and then we're going to ramp up. But what we're really focused on is managing the working capital days, which are above our normal run rates at the moment because we took inventory, seeking to produce more trucks to reduce our backlog and improve our lead times. Lead times, as we've stated in our release, is a challenge at the moment for our sales team. And so we will ramp up as quickly as we can, but our planning suggests right now that that's going to be the characteristics, a flat front half and a ramped up second half.

One thing to bear in mind is that we do have quite a bit of inventory that is on hand that is paid for because it came in in advance of our ability to actually assemble and build the product. The shortages prevented us from using the inventory in the way that we had anticipated. As we move through the first quarter and into the early part of the second quarter, we'll also get a bump in payables to help finance our working capital that we've depleted for the moment. It's kind of a double-barreled effect. One is on the inventory levels, as Rajiv described, and the other is related to the payables financing of some of that.

Yeah, thanks, Alan. And I think what I'd add to that is that in my section that we just covered, we have strict operating controls in place to enhance cash during the period. We also have reduced capital expenditures And you'll notice that when you review the K and as well as the earnings release in terms of we took capital expenditures down for the period and the investment in strategic programs. But we've left those critical programs in place and are continuing to fund those. You know, we have programs in working capital that we have as well, and we expect those to supplement that $165 million of availability in the revolvers that we have today. And then finally, Steve, I'd point out that we have commented for about a year or so that our production capacity globally is about 140,000 units. We sold 26,000 in the fourth quarter. So you can see that there is ability in our plants to ramp once our supply base can fill the parts that we need to be able to build that level of truck. We do need to produce more. We need to get the backlog. more in concert with the comments that Al and Rajiv made about the levels of the backlog and the lead times that we face.

Great. I appreciate all the color, folks. Thank you.

Your next question comes from the line of Chip Moore from EF Hutton. Your line is open.

Good morning. Thanks for taking the questions. I wanted to stay there. Actually, I was going to ask you, I appreciate the focus on liquidity here and some of the working capital dynamics. Maybe if you could expand a bit on where some of the delays in some of the strategic investments are. It sounds like they're not some of the higher profile programs, but maybe you can give us a little more color there.

They're frustrating, I will say that. We would much prefer not to be doing this because the programs are clear. We'd like to execute them, but we want to be very, very prudent during this period. And Rajiv, why don't you comment on the particularities of that?

So we've kept, you know, if I just go through our kind of large investments, you know, it's around product. It's around your operational and manufacturing capabilities. And the other ones are around ramping up the fuel cell capabilities. And we've kind of taken some reductions in each of those elements, and we've kept the most important products. The three areas that we've focused in on the product side has been our modular scalable platforms. You'll see those will continue to be launched in 2022 and 2023. The next one is electrification. We've launched some new large electric trucks. We'll continue to do that through 2022 and 2023. And then the other one is some of our advanced technologies, such as telemetry, our operator assist system, automation. And again, we've kept those going, but at a reduced rate than we had initially planned for each of those areas. In our manufacturing footprint, we're looking to optimize the whole complete footprint. We have delayed that program by a number of months, but we've kept that program fully intact. It's just a deferral of about nine months to manage our liquidity requirements.

I think the best way to think about it is not just in terms of the deferrals themselves, when do they come back and from if you think about our Forecasts by the time we reach the fourth quarter. It's our hope and expectation that we will be operating at a very profitable rate in our forklift truck business and in Bolzoni and We'll be making progress on bookings and shipments at New Vera, so by the time we get to the fourth quarter, we're in a position to pick up the programs that had been moderated kind of in the first three quarters. But, you know, we'll make those decisions as we get into the year and make sure that when we make sure that things are transpiring as we expect them to do, because it's been an uncertain year and last year and, you know, There is a lot still to be fully resolved, but, you know, we see a pretty clear picture as we look forward along those lines.

I do want to reiterate that, you know, although we've reduced the capital expenditure, you know, it's still at a significant rate. So it's not as if we've eliminated things. We've just prioritized.

Yeah, I would say that's a really important point, that the programs that have been slowed are the strategic programs And so you're talking about a big long-term impact but moderating for a few months. And we're not really doing anything from a near-term operational point of view that is damaging.

Got it. No, that's extremely helpful and makes a lot of sense. And then you do call out an expectation for strong results for the lift truck business anyways in 2023. Maybe you can expand on that a bit in terms of some of your thoughts and some of the key variables and how things set up there.

Well, again, I think we really outlined that in very great detail. We felt it was very important for all of our investors to have a clear understanding of the story because this is not a story of fundamental difficulties. This is the story of short-term, near-term problems with material cost and now we've got cost moderating. We also have taken, put in place programs that would ameliorate any unanticipated future cost increases if they are above the levels that we're forecasting. So we've been through this period and We certainly have put in place some additional provisions in our pricing to help protect us. It's been a long time since this country has faced inflation of the type that we're putting in place now. And so we're going back to measures that have been used in the past during those kinds of periods. But I think we describe it pretty carefully. You've got a backlog. Shipments ramp up. The supply chain capabilities support the ramp up. Margins improve quarter on quarter because the lowest margin trucks in the backlog are the earliest ones to be produced because the price increases didn't have their full impact on those. And so progressively as you get to the fourth quarter, margins keep rising and put us in the fourth quarter and in 2023 in a very good position. And it's important to mention that 2023, we wouldn't normally comment on that. But we've got, we're still booking at a very strong rate. So we think that 2023 is going to be a pretty good year.

Yeah, we still expect to exit 2022 with pretty high backlogs.

Got it. Okay, and maybe if I can get one last one in. I think you've mentioned expectations for enhanced shipments at Nuvera. If you just update us on quoting activity, potential for bookings, and maybe if you could tie that in with some of the newer solutions for the lift truck business focused on electrification.

Sure. So, you know, the whole program is being built around the Nuvera, you know, electrification strategy, and that's to essentially launch a set of port equipment trucks with fuel cells in them in 2023. Now, as the technology has been developed for those trucks, we have felt that there are other segments outside the lift truck industry that those same solutions can help, particularly on the commercial trucking side. And so what the team at Nuvera has done, working with with the Hysteo group is identified segments where those would be a good fit and also segments where fuel cell is really the only answer because battery-powered trucks couldn't do it. And as you could imagine, they're the higher-load trucks, trucks that have ancillary loads built into them. A good example could be a refuse truck, for instance. The team's done a great job of mapping those out, both in those segments out and who the key players are in each of those segments. And then we're reaching out to working with each of those segments, initially to put together demonstration vehicles and then assuming success, then move on to then productionizing it. So that's been the main path for driving it. Centered around what we're doing on the left truck business, but then building building that capability around the other adjacent segments that we feel could benefit from the same solution.

Got it. Sorry, maybe if I could sneak one last one in. You know, just given what's going on overseas in Europe, want to be cognizant of any risks there and how you're managing those. Thanks.

have put a team together to look at the entire situation and make sure that we're managing it in a comprehensive way appropriately. Frankly, the biggest issue for us is ensuring that we're in compliance with all of the laws and regulations that are coming out at such a speedy fashion. There's a lot of care that has to go into sourcing and shipments and so on and so forth in the context of the current situation. As to the financial situation, frankly, we've probably got more down payments and trucks for Russia than we do payments that are owed to us for trucks that we've shipped. So from a financial point of view, we're not in a burdensome period and of course we won't be shipping The one thing it does do that is worth noting is it gives us additional trucks to ship to other people, other customers that we might have shipped into Russia. Generally speaking, in this environment, we would expect to get fuller prices and better margins on those trucks than ones that have been in the backlog for a while that would have been going into Russia. So, you know, without getting into more detail than that, we're managing it very carefully, especially it's a mainly European team, but it also includes our operations in China and production locations in other areas as well. So that's kind of the broad overview of it.

Okay, that's very helpful. Appreciate it. Thanks.

Just a reminder, please limit one question to one follow-up. Your next question is from Brett Kearney from Gabelli Funds. Your line is open.

Hi, guys. Good morning. Thanks for taking my question.

Good morning. Good morning.

I was curious, you know, at this point, where kind of within the supply chain are the primary component constraints you're seeing? I know in past quarters you've called out... tires, motors, obviously electronics. Is it kind of on the microcontroller side there? If you could just help us think about the main pinch points at this point and then kind of which way those are trending more recently in your view.

Yeah, so I think if I look at the most recent issues we're having, electronics still continues to be a concern. And really just moving outside just microprocessors, we've had issues with drivers we use in our controllers. You know, we are starting to see some issues with capacitors and resistors. So it's starting to affect some of the ancillary components that are required to make these modules. I think we have a good handle on it, but it's an area of concern. The biggest immediate impact is coming from the other part of electrical system, which is the wiring system. You know, we're starting to see constraints with connectors, terminals, in fact, even some types of wires. Again, there's a huge amount of work going on working with suppliers of wiring harnesses to improve the situation. But those are there. And then there are some COVID kind of supplier infrastructure disruption-related issues around hoses and Things that you wouldn't normally expect to be impacted, but really that's been a different impact because these are generally manual labors used to assemble these systems, and they've been impacted by COVID. I think that those are the big ones at the moment. I think I would say that we're handling a handful, 10 suppliers or so, Whereas mid-last year, we were handling hundreds, and kind of late last year, we're in the 20 to 30 range. So things have improved, but there are still constraints in the system.

I would add to that only that our efforts are not just aimed at relieving some of those shortages. They're also aimed at... engineering design changes that are designed to allow us to use more readily available components or materials. It takes a little bit of time to do that, but we have, I think, made some significant inroads as a result of that. Some of them are less specialized components and but our engineering team has been able to rethink how to meet those needs with some more readily available components than the ones that we were sourcing. So that's an ongoing effort. It's all hands looking at these issues and trying to be as creative as possible in addressing them.

Great, that's very helpful. And then maybe just one follow-on. Nuvera, it sounds like product demonstrations progressing nicely. The team continues to, you know, come out with the next generation of new products and engines there. Curious, just given how dynamic and new that space is, how you all think about, you know, we've seen in some of these specific to hydrogen, just generally these new energy applications kind of different and more creative, you know, collaborations between organizations. Curious how you all think about potential partnerships and whether you would involve, you know, a strategic partner, obviously minority, you know, partnership into Nuvera Entity in order to kind of accelerate some of the avenues for growth that you've already identified and are going after.

Well, I think you've focused on a very important aspect of the development of opportunities for sales of our engines into these specialized segments that we've outlined in some detail in our previous materials. But I think it's also important to say that there are many ways to define partnerships. Some are simply cooperative efforts with individual players who are helping to provide components or assembly or customer applications of vehicles. Certainly, that's at one end of the spectrum. you know, to the extent that we see other kinds of partnerships at the right time that might fit in in terms of closer association, we will be open to that kind of consideration as well. All of it with the aim of putting us into a position to maximize our long-term value in the business. And I would emphasize that as we do this, the partners that we're working with tend to be a very sophisticated, very capable group of players. And they're the kind of people that we've traditionally done business with. These are not venture type activities in that sense. And we think there's enormous value to be gained in this overall fuel cell area by having the disciplines of a traditional established business in order to drive applications in these areas that Rajiv described earlier as needing a fuel cell in order to do the work that they have to do. Rajiv, do you want to elaborate on that a little bit? Sure.

In terms of partnership, we think collaboration is going to be very important moving forward in the hydrogen business, because it's not just about the fuel cell. You have to get a powertrain solution in place, and you also have to then provide the fuel system, whether that's hydrogen. It's going to be hydrogen, but there are many ways to produce hydrogen, and it needs to be the right way for the customer. So there is significant work going on collaborating with a wider group of

companies now you know will some of those form into associations they may do so and we're certainly open to it great that's very helpful thanks so much as you even know you know just one word if you don't in the in the earnings release we continue to emphasize that we think we're focusing on segments that are a relatively small number of segments where The duty cycle simply requires fuel cells in order to get the job done. Batteries alone really do not have the capability to provide the customer with a solution that the customer really needs and wants and will demand. These industries are going to have different adoption rates. The automobile industry is going to be different from the garbage truck business or other niche segments where if they're going to go green. A very good example where we have really tremendous strength is in ports. Rajiv, you might just talk about the collection of products and capabilities that would require fuel cells in order to serve the needs of ports.

Sure. As I said earlier, I think we have a plan to launch our laden container handler, empty container handlers. As we have stated, we have a partnership with a producer of terminal tractors that will also have a fuel cell solution. This group of products will be released in 2023 to support really strong input we're getting from port desires to go green. And so that's why we've prioritized this as a focus item for us.

But that's a good example of collaboration or what you might call partnership. And that's the sort of thing we expect to do in other segments of the market as well as in the port area where I suppose, Rajiv, you'd say it's most fully developed at this point.

Yeah.

Great. Thank you so much for all the insights

Thank you.

Your next question is from Richard. Join me from Longport Partners. Your line is open.

Good morning. In your goal of 140,000 units produced and 7% operating margin, what kind of results from Nuvera does that goal anticipate?

That's a goal from Nuvera.

That's a goal for the forklift truck business and the one for Bolzoni is quite similar to that one. That is not a goal for Nuvera. We think that three businesses need to be thought about and, if you will, valued in a very different way. Two of the businesses are mature, developed businesses, the attachment business, Bolzoni, and the lift truck business, Hyster Yield Group. And those are the companies that are aiming at the 7% and the utilization of capacity, which you're citing a forklift number in terms of that portion of the business. And we see really very significant progress toward those numbers. in the fourth quarter and in 2023. So as to Nuvera, the focus is really in building value by developing bookings in the segments that we've talked about and getting a track record of quality performance and reliability of our particularly right at the moment, are 45 and 60 kW engines. So we think that that will lead to the value there, and it's much less a question of 7% operating profit or thinking about it in that way. And I think that's kind of the best overview I can give you.

Okay.

Thank you.

This is the last question from Jeffrey Farkas from Arthur Asset Management. Your line is open.

All right, thank you. First of all, I guess on your backlog, can you just discuss how firm that is? There's definitely concern on the street with many equity analysts regarding overordering. Just talk a little bit about, number one, when someone places an order, are they putting down some type of a non-refundable deposit? And then at what point in time do they have – is it – yeah, just start with that.

There is a deposit program, but it's focused mainly around our dealer business. And, you know, we haven't seen any signs that – there's a lot of pre-buying or, if you will, ordering because the backlogs are long. I'm sure there's some of that. But whatever it is, it gives us the opportunity to ride through 2022. And we're, in some cases, booking into 2023 now. So we don't see any... nearer term issues, the concern that you have identified. Now there could be cases, particularly with certain kinds of customers, where they, we sit down and negotiate together because the lead times are long. And frankly, in some of those cases, given the margins, If they're dissatisfied, we've got plenty of customers to serve with better margins. So it's hard to determine whether that's a problem or an opportunity.

Yeah. I mean, we certainly haven't had any extensive cancellations to date. And, you know, we've had a pretty strong backlog throughout last year. You know, will there be any in the future? We don't think it's going to be material, but, you know, that's future looking and It's difficult to say. Our customers do give us a firm purchase order, and that's the way business in our industry is done.

That's why I say it's kind of negotiation because it's firm on our part. We have to deliver the price it was set in most cases and firm on their part to buy. Now, as a practical matter, you're always trying to work with your customers, and you sit down and you talk.

And I think I'd point out that the vast majority of our trucks are ordered for a customer for a specified application and are highly configured to that application. So it's difficult. It's not a commodity buy as much for those customers to simply pick up and go to somebody else. And across our industry, there are. long backlogs as well, so there isn't someone to go to that can immediately fill that opportunity if they would choose to move on. They're identified for a specific application in a specific location. A lot of our customers, particularly in North America, have lease contracts on their trucks, so there is a need to rotate those trucks out as they get close to lease term. So I think that gives us a lot of confidence in the quality of the backlog. And frankly, our experience over time has been that we haven't seen large changes or large cancellations in the backlog over 10, 20 years. Yeah.

I mean, the other thing we're noticing is the average age of the fleet in the field is increasing. So that goes along with what Ken is saying.

Great. And then on pricing, I guess, can you just give a sense of, you know, you've indicated there were a number of times that you've increased pricing last year. But in the sense of magnitude, how much are you increasing pricing? And it seems like you made mention of the contracts now are based upon an inflationary environment. So just to clarify, it seems like can you change pricing in that backlog to reflect any changes in your costs going forward? And if so, when was that implemented?

Well, I think the most important way to think about it is that all the evidence at the moment is that costs are moderating at these high levels. We're seeing some start to come down, but we're not going to forecast that. So we're looking forward really through the end of this year at what we think the costs are going to be. Our hope is that they're going to come in lower, but we are booking our trucks to the costs that we see through our forecasting models. What happened last year, of course, as you well know from many companies' experience, is that when demand exceeded supply, the prices went up a lot. And we didn't forecast prices going up that much. So what we don't see is prices coming way back down. We think there's enough tightness in the marketplace to sustain these higher prices for the time being, or at least that's our assumption for the moment. So that's kind of the dynamic of the situation, both as to the past and as to the future. Now, what we have done is to provide some protection for ourselves going forward so that if trucks are booked way out in the future and inflation indexes exceed certain expected levels, there's some opportunity to make some adjustments if they get way out of whack. So that's not a capability that we had before. As we indicated, the prices are an obligation on the part of both buyer and the seller. So that's in large measure how it works for us at the moment.

But that's been a recent implementation.

And that's very recent implementation. And And frankly, we'll have to see how long we need to keep that in place. It's a critical protective mechanism. It's not a desirable mechanism from our point of view. And there are certain kinds of bookings that have more flexibility to be repriced in a difficult environment than others. So it depends to a degree on who the customer is, and especially whether the end-use customer has been really involved in setting the price.

Great. I'll follow up with other questions, but thank you very much.

I will now turn the call back over to Al Rankin for closing remarks.

Well, I think we've had a good set of questions and we went into considerable detail in our earnings releases I indicated so that we would get a good thoughtful understanding out in the marketplace of two critical evolutionary changes that are occurring. One is the progress margins both the forklift truck business and Bolzoni over the next over the four quarters of 2022 and into 2023 and the other is the reduction bringing our working capital back to more normal levels by matching what comes in with what we actually need with our revised production schedule, which takes into account the pace at which we think suppliers can support our ramp up of production over the course of 2022. So that should help us to bring our working capital and our debt more in line with the needs, the kind of levels that we ought to have for the business on an ongoing basis. So those are my closing thoughts, and we thank you all for participating.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.