Hyster-Yale Materials Handling, Inc.

Good morning, ladies and gentlemen, and welcome to the Hyster Yale Materials Handling Q4 and Full Year 2023 Earnings Analyst Conference Call. At this time, I'll enter the listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 28, 2024. I would now like to turn the conference over to Ms. Christina Kimetko. Thank you. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for High Street Yale's 2023 fourth quarter earnings call. I'm Christina Kimetko, and I'm responsible for investor relations. Yesterday evening, we published our fourth quarter and full year 2023 results and filed our 10-K. These documents are available on the High Street Yale website. We are recording this webcast, and a replay will be on our website later this afternoon. The replay will remain available for approximately 12 months. I'd like to remind you that our remarks today, including answers to any questions, will include comments related to expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forward-looking statements due to a wide range of risks and uncertainties that are described in our earnings release 10-K and other SEC filings. We may not update these forward-looking statements until our next quarterly earnings conference call. We will also be referencing numbers that may be considered non-GAAP. Those reconciliations are available in our earnings release on our website. Our presenters today are Al Rankin, Executive Chairman, Rajiv Prasad, President and Chief Executive Officer, and Scott Minder, our Senior Vice President, Chief Financial Officer, and Treasurer. With the formalities out of the way, let me turn the call over to Rajiv to begin.

Thanks, Christy, and good morning, everyone. We had an excellent fourth quarter. For the third consecutive quarter, we reported revenues of over a billion dollars. Fourth quarter operating profit improved 146% year over year, leading to a consolidated operating profit margin of 4.7%. This continued quarterly earnings growth to led to full year 2023 net income of $126 million, which is a $200 million increase over prior year. And that was after an additional expense of $9.6 million, or 47 cents per share, related to the equity component of the company's fourth quarter stock price appreciation. And if we add that to our performance,

published performance that would have been $1.90 a share for the quarter.

Our revenues grew modestly over both the previous quarter and the prior quarter, despite fourth quarter shipments decreasing compared to 2022 and third quarter 2023. The year-over-year decline was mainly due to large decreases in EMEA and JPEG shipments, while few American shipments drove the sequential decrease. The lower shipments were primarily due to the impact of product launch challenges and component supply issues, mainly in EMEA. The lower 2023 JPEG shipments were largely due to strong prior year deliveries. This led to regional dealer overstocking levels in Q4 of 2022. Despite some specific production challenges, we still shipped approximately 102,200 units in the full year of 2022. This represents the highest number of units we've shipped in a given year and compares with approximately 100,800 units in 2022. Ongoing skilled labor challenges in many of our factories impeded progress on planned production rate increases and shipments during both the quarter and the full year. Our 2024 production and shipment rates are expected to improve in all regions compared to 2023. We anticipate an increased production cadence on new products and lingering components and labor constraints to dissipate. We remain focused on maintaining a full production pipeline across our facilities. In general, 2023's global economy outpaced market estimates from early last year. Our core lift truck market remains strong and above pre-pandemic levels in most regions. However, external factors continue to create uncertainty in the global economic outlook. This includes ongoing geopolitical instability, most recently evidenced by tensions in the Middle East. These factors, coupled with robust industry volumes between 2020 and 2022, created a decline in global market activity across full year 2023, particularly in EMEA. The latest publicly available lift truck market data shows that global third quarter 2023 booking activities decreased compared with strong 2022 levels. Declines occurred in all major geographies except China and India. Our internal estimates suggest that quarter four 2023 global lift truck market bookings also decreased compared with prior year. We estimate that the rate of decline slowed in the MEA but accelerated somewhat in America's. With the fourth quarter decline, full-year 2023 market estimates show a double-digit decrease from robust 2022 levels. In 2024, the global lift-track market is expected to stabilize and be comparable to 2022 levels. Within 2024, market volume should remain strong, with a first-half booking decline offset by a second-half increase. Looking at Heist to Yale, we continue to prioritize orders with strong margins given our extended backlog position. This focus combined with a broader decline in market demand resulted in an 8% decrease in Lyft truck fourth quarter 2023 bookings compared with the third quarter bookings decline 20% from stronger prior year levels. These decreases were largely seen in the America's markets. For 2024, we expect full-year bookings to increase versus 2023. Anticipated market share gains in each 2024 quarter are driving this improvement within a flat global market overall. Market share gains are expected largely because of our emerging technology solutions for warehouse-related markets. Our technology solutions business had very strong 2023 growth rates. We expect to build on that momentum in 2024. As we head into 2024, we expect to be price competitive in the marketplace. We'll look to maintain targeted bookings margin as our backlog levels are reduced. Reduced booking contributed to lower backlog levels in the fourth quarter. From year end 2022, our extended backlog has decreased by 23% to its lowest level since early 2021. Plan 2024 production increases combined with an anticipated market decline in the first half of the year should allow us to further reduce extended lead times and backlog levels. This will help us bring our backlog closer to pre-pandemic levels in 2024. Given current expectations, our lead times and backlogs will likely remain above optimal levels on certain product lines for an extended period. Some areas, such as our warehouse trucks, are expected to return to normal lead times and backlog levels within 2024. At the end of the fourth quarter, our backlog value was approximately 3.3 billion. This represents approximately 10 months of revenue and should serve as a cushion for the business if bookings decline more than anticipated. It's worth noting that global industry cancellations, which can impact backlog levels, trended up modestly in 2023 than prior year rates. However, our cancellation rate remains substantially below the industry average. The trip to the higher average unit price and margins in our backlog continued in the fourth quarter. This was largely due to our focus on booking orders at strong margins and benefits from prior year pricing initiatives to offset inflation. Our average sales price per backlog unit increased 16% over the prior year and 2% over the third quarter. Q4 2023 average booking prices, on the other hand, decreased compared with third quarter 2023 and prior year as expected. We continue to make progress on expanding our market share in the warehouse market. Warehouse trucks are generally lower priced and have shorter lead times. Additional sales in this market segment increase the opportunity to sell advanced technology solutions. These can greatly enhance the value of the truck for the customer and to Heister Yale. We continue to balance our pricing and booking rates with production lead times on a line-by-line basis, maximizing profitable growth and free cash flow while we continue to make progress on our strategic objectives. Material and freight cost projections are a significant factor for setting our backlog pricing. In 2023, material cost decreased modestly. In 2024, material costs are generally expected to stabilize, and labor costs are projected to increase moderately. As a result of geopolitical unrest, we expect elevated freight costs throughout 2024, particularly in the first half of the year. In this context, our strong price-to-cost ratio is expected to continue in the first half of 2024 as we shift higher price backlog units. This combined with an anticipated increase in unit volume is expected to lead to higher gross margins and improved operating profit in the first half of the year compared with 2023. Tariff exemptions are set to expire in late May 2024. This combined with shipment of trucks ordered in 2024 is more competitive pricing environment, and the mixed effect of increased warehouse product shipments are likely to temper unit margins in the second half of the year. For the full year, gross profit margins should be comparable to 2023 levels. We'll work to reduce the impact from externally driven factors through improved manufacturing productivity and ongoing expense control. We'll continue to monitor labor and material costs closely, as well as the impacts from tariffs and competition, and we'll adjust forward pricing accordingly. Before I turn the call over to Scott, I'll comment on our working capital levels and cash flow. We continue to improve our cash flow throughout the year. We've made progress on reducing working capital, specifically our inventory levels. However, our inventory Levels remain higher than we would like, largely due to lingering production challenges I mentioned earlier. We'll continue to focus on an efficient and consistent flow of material, building more units with on-hand inventory. These actions should significantly reduce excess inventory levels across 2024. I'm pleased to report that we've already seen some additional progress in January 2024. We've made significant progress reducing potential supply chain and labor constraints that can still cause isolated production shortfalls and increase inventory. Our efforts extend to our dealer partners who carefully balance order and delivery timing with their customers' needs. Together, we expect significant improvement throughout 2024. We're committed to further cash flow improvements. This is a key deliverable for me and for all of our business leaders. It is also an area closely monitored by our board. Now I'll turn the call over to Scott to cover our quarterly financial and 2024 outlook in more detail.

Thanks, Rajiv. Good morning, everyone. I'll start by echoing Rajiv's positive comments around our strong fourth quarter and full year results as well as the pace of improvement in our business. Once again, our quarterly revenues topped $1 billion, increasing by 4% or $42 million versus the prior year. Consolidated revenue growth was mainly due to a 5% increase in lift truck sales due to the favorable effect of previously implemented price increases in all regions, a favorable sales mix shift toward higher priced, higher capacity trucks, increased part sales used to service our growing installed unit base, and a favorable currency effect of $18 million, primarily in Europe. These benefits were partly offset by lower shipments in all three regions. In Q4, we shipped 23,600 units, down 8% sequentially and 16% versus the prior year. Q4 unit bookings were 16,700 and were lower than both prior periods. These declines were within healthy but lower markets in our major geographies. As a result of solid production output and lower booking levels, our backlog decreased to 78,400 units with a value of roughly $3.3 billion. This decrease helps improve lead times and overall customer satisfaction. For the full year, we reported revenue of $4.1 billion, marking a 16% improvement over 2022. All three businesses contributed to this increase. Overall, our year-over-year growth significantly outpaced global GDP growth. Moving to earnings, our consolidated fourth quarter operating profit increased by 146% to nearly $49 million. This resulted in a 4.7% operating profit margin and a nearly 70% incremental margin as our year-over-year operating profit improvement outpaced our quarterly revenue growth rate. Full-year operating profit was $209 million, improving nearly $250 million versus the prior year. Operating profit margin for the full year was 5.1%. Q4 net income was $25 million, or $1.43 per share. This compares to prior year net income of roughly $8 million and 44 cents per share. Fourth quarter results included a $10 million or approximately $8 million after tax of an additional incentive compensation expense related to the equity component of the company's fourth quarter stock price appreciation. This reduced our fourth quarter earnings per share by 47 cents. For the full year, the company generated $7.24 of earnings per share compared to a loss in 2022. For some additional perspective, I'll discuss our results by business. The lift truck business generated $982 million of revenue in Q4, growing by $44 million year over year. Operating profit of $54 million expanded by $27 million over the same time period. The 62% incremental margin led to a 5.5% operating profit margin, demonstrating growth with this disciplined execution. Significant product margin increases in the Americas and EMEA were the principal drivers. Product margins benefited from a favorable price to cost ratio, largely due to prior price increases implemented to offset inflation, along with more recently moderated material costs, as well as a favorable mix shift toward higher margin products, mainly in the Americas, and a shift to higher margin sales channels. Lift truck's Q4 profit growth was tempered by higher employee-related expenses, including elevated incentive compensation attributable to strong 2023 results and stock price appreciations. We remain vigilant over our day-to-day expenses and continue to seek more efficient ways to leverage our assets as the business grows. Turning to Balzoni, the business reported revenues of $87 million, $5 million lower than prior year. Operating profit increased to $2.6 million from $2.0 million in the prior year. 2022's operating profit included a $2.4 million loss on sale of a business. Excluding the effect of that sale, operating profit decreased year over year due to higher operating expenses, including incentive compensation, as the business continues to position itself for growth. Balzoni's product margins improved over the prior year, while gross profit dollars were comparable. Price increases implemented in prior years, along with favorable currency movements, were offset by a mixed shift to lower margin products and reduced sales volumes. At Nuvera, Q4 2023's operating loss was less than prior year, primarily due to lower product development costs as a result of receiving a new U.S. government funding to support fuel cell R&D expenses. Fourth quarter revenue declined versus prior year due to fewer engine shipments. Looking ahead to 2024, we expect lift truck revenue and operating profit to increase over 2023 levels. First half 2024 operating profit is projected to improve significantly over prior year, largely due to anticipated higher unit volumes and an ongoing favorable price-to-cost ratio despite anticipated higher freight costs. Second half 2024 operating profit rates are expected to moderate compared to the first half due to the anticipated expiration of Section 301 tariff exemptions and the mixed effect from increased warehouse product volumes. The latter aligns with our strategy to increase market share in this important sales channel. I'll take a moment to recap the tariff situation for context on how it applies to Hyster Yale today. In 2018, the U.S. government enacted tariffs on certain products imported from China. Subsequently, exemptions were applied for and provided for on some of these tariffs. These exemptions have been extended multiple times. It is expected that in May 2024, these exemptions will expire. If that occurs, the company will be required to pay the full tariff, immediately increasing our material costs. We continue to argue that these exemptions are warranted and should remain in place while we work to reduce their impact on our product margins over time. Moving to Balzoni, 2024 revenues are anticipated to increase modestly compared to 2023. Higher attachment volumes will be partially offset by lower legacy product sales to the lift truck business as they begin to phase out production of these components. Operating profit is expected to improve year over year as higher product margins and anticipated manufacturing efficiency gains should more than offset higher material and operating costs. At Nuvera, we're focused on increasing customer product demonstrations in bookings in 2024. as well as expanding our presence in Europe and China. Orders from current customers are booked and are expected to result in higher year-over-year sales in 2024. These increased sales coupled with higher development costs related largely to Nuvera's new more powerful 125 kilowatt engine should produce operating results comparable to 2023. Longer term, increasing engine demonstrations should significantly strengthen the foundation for continued fuel cell engine technology adoption and improve financial returns. At the consolidated level, we expect 2024 operating profit to increase. We anticipate net income to be comparable to strong 2023 levels due to a higher projected income tax rate in 2024. The expected higher tax rate results from fully utilizing our U.S. net operating losses in 2023 combined with the impact from ongoing capitalization of R&D costs for tax purposes in 2024. The U.S. Congress is currently debating an important tax law change that could reverse the ruling to capitalize R&D costs, thus treating them as a period expense. If this occurs, the company's tax outlook would likely change materially. Overall, we anticipate continued strong product margins to drive year-over-year profit growth in the first half of the year. This is due to shipments of fixed-price backlog units, partially reduced by the impact from higher freight costs. The anticipated expiration of tariff exemptions and shipments of orders placed in 2024's more competitive pricing environment will likely temper second half results. We'll continue to focus on ways to efficiently manage our production levels, along with ongoing component, labor, and overhead costs. We'll adjust as needed during the year. In 2023, we made substantial progress toward our long-term goals. Our 16% year-over-year revenue growth rate significantly outpaced global GDP growth rates, and we achieved a greater than 20% ROTC or return on total capital employed. We also made significant progress toward our 7% operating profit margin goal. At our November 2023 investor day, we established a working capital target at 15% of sales. We improved our performance on this metric in 2023, but more work is required to achieve our long-term objectives. We expect further progress on our financial goals in 2024, and we're working to make these results more sustainable over time. We also made progress on another critical metric, cash generation. The company generated cash flow from operations of almost $46 million in Q4, and we used that cash to reduce net debt by $17 million, or 4%, compared to third quarter levels. This increased cash comes from higher profits and our ongoing efforts to improve working capital efficiency. For the full year, we generated cash from operations of $151 million. This compares to $41 million in full year 2022. We ended 2023 with $79 million of cash on hand and approximately $270 million of unused borrowing capacity. As a result of our significant profitability and lower debt balances, our financial leverage as measured by debt to total capital, was 56%. This marks a 500 basis point improvement versus Q3. As we generate additional cash, we expect further leverage reductions and opportunities for accretive capital deployment. We continue to push for working capital reductions, specifically through lower inventories. Q4 2023 days inventory outstanding, or DIO, decreased by one day versus third quarter levels. We remain focused on improving inventory efficiency as production rates increase. We're deploying technology tools to help us maximize the use of on-hand inventory, ultimately reducing excess inventory levels. While supply and labor constraints can cause intermittent challenges, we anticipate significant inventory improvements in 2024. 2023 capital expenditures were $35 million compared to an initial projection of $65 million. We maintain strict capital discipline in 2023 due to ongoing economic uncertainty. Capital expenditures are anticipated to rise to $87 million in 2024. This significant increase compares to restrained 2023 levels and includes a return to investing for business growth and network efficiency. Similar to 2023, we'll keep a close eye on economic conditions and adjust our spending accordingly. In summary, we're making solid progress in our objectives. Our financial results clearly show it. We'll continue to focus on things we can control and leverage our process discipline to effectively work through the things that are beyond our control. Now, I'll turn the call back to Rajiv to discuss the progress we've made on our core strategies and programs. Rajiv? Thanks, Scott.

We held our investor day in part of November where I explain our vision is to transform the way material moves from port to home. We plan to do this through two customer promises. First, by providing optimized product solutions, and second, by providing exceptional customer care. Our strategic initiatives and supporting key projects will drive success on these two promises. In 2024, we'll invest in and execute on our core strategies that support long-term profitable growth and sustainable cash generation. I'll provide a few updates on these key projects at each business. The Lyft truck business' primary strategic focus remains on launching its modular and scalable products globally. This business is also working on several other key projects to increase and enhance lift truck electrification, increase the adoption rate for our advanced lift truck technologies, and expand global sourcing options for our container handlers using both our Nijmegen, the Netherlands, and Fuyang China production facilities. We're making solid progress on these programs. Over the last two years, we launched our modular scalable two to three ton internal combustion engine lift trucks. in EMEA and America's market. Production of these key products is accelerating and we expect to launch these products in the JPEG market during the first quarter of 2024. We're making similar enhancements to the two to three ton electric truck platform and expect these products to launch globally over 24 and 25. The modular scalable product platform is expected to enhance the business in several ways. First, by reducing cost and working capital levels as our supply chains shrink and move closer to our core factories. Second, by helping to optimize our worldwide manufacturing footprint. And finally, by increasing sales volume by providing customers with a more customizable product that better meets their needs. On electrification, we now have two big truck electric, big truck in third-party testing, a fuel cell container handler currently operating at the Port of Los Angeles and a fuel stacker in the Port of Valencia, Spain. We anticipate delivering two new electrified fuel cell products, a terminal tractor and an empty container handler to a customer in Hamburg, Germany in 2024. Our big truck group is also actively exploring additional electrification projects within the European Union and the United States. In lift truck business, the lift truck business has key projects focused on increasing demand for our on-truck technologies by applying next generation advancements to its operator assist system and automated lift truck solutions. During the third quarter, we entered into a joint development agreement with a leading technology service provider to enhance our robotic software technology for vehicle automation. Finally, dual-source production and supply chain for our container handlers will help the company better meet the needs of the global market. This should provide customers with time-efficient delivery for economically viable trucks. Bolzoni continues to work on streamlining and strengthening its operation as a single integrated operating entity. The company is focused on increasing its America's attachment business while also strengthening its ability to serve key industries and customers across global markets. As part of this effort, Bolzoni is working to expand its broad industry sales coverage, breaking into new markets and regions. They're currently expanding their product offerings and support capabilities for the recycling and port-related areas. Navarra continues to focus on placing 45- and 60-kilowatt fuel cell production engines for demonstrations into niche heavy-duty vehicle applications where battery-only electrification does not fully meet the market's need. These applications are more likely to have near-term fuel cell adoption potential. Niveira is also developing a new larger 125 kilowatt fuel cell engine for even heavier duty applications, which is projected to be available in 2025. We've announced several projects with various third parties to test Niveira engines in targeted applications beyond the high-step port equipment I covered earlier. In January, Nuvera announced a joint project with Eleanor Energy for maritime zero-emission energy solutions. Nuvera also expects to have additional products in test application in China, India, and in Germany by mid-2024. Additionally, Nuvera is working with customers to launch modular fuel cell power generators for stationary and mobile applications over the next two years. These initiatives are top priorities, and I'm pleased with the progress we have seen so far. Now I'll turn the call over to Al for closing remarks.

Al? Thanks, Rajiv. In closing, I'd like to note that the company's significantly improved 2023 results are due not only to our global team's ongoing execution of its strategic initiatives, but also the actions taken to offset external headwinds and improve business resiliency. Our results continue to affect a healthy backlog and demand for our products and solutions. These actions should better position our company for substantial profitable growth over the longer term. Our mature lift truck and Bolzoni businesses are the foundation for a strong profitable business. while we believe that the Nuvera fuel cell business has substantial growth prospects in future years. I want to emphasize a point that Rajiv made earlier. Our 2023 full-year net income is $200 million higher than a year ago. The team has done an outstanding job moving the business forward and laying the foundation for sustainable profitability over the long term. As customer demand and supply chains return to pre-pandemic norms, we are likely to experience short-term cyclicality in our markets. However, I'm confident that we have a sound plan for long-term growth, profitability, and cash generation in our core businesses. In addition, we expect that the Newvera fuel cell business in the longer term will be a major growth contributor for HysterGale. I firmly believe we have the right team and business structure in place to execute our strategic programs, to deliver strong 2024 performance, to achieve our long-term financial goals, and to provide differentiated total shareholder returns over time. We covered all of this in detail during our November 2023 Investor Day. If you haven't had an opportunity to view those materials, I'd encourage you to listen to the replay or review the event transcript, both of which are available on our website.

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

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press the star followed by the two. Your first question comes from the line of Ted Jackson from Northland. Please go ahead.

Good morning and congratulations on a fabulous fiscal 2023. I have a really long list of questions, so I'm just going to ask a few of them. But before I get into my questions, one thing, just clarity, what did you say your CapEx forecast was for 2024?

Ted, we said that would be $87 million.

That's a tremendous jump. I mean, can you kind of walk through what's pushing that to be up so much? And is that like the normal level on a longer term basis?

Yes, I'll take that. So if you look at our, typically, if you look at our average expense in capital projects, it's If you go back a few years, it's been running around between $40 and $50 million. But over the last two or three years, while we had this spike in working capital and we needed to moderate our expenditures, we also moderated both CAPEX and OPEX. And that continued through 2023. But there are projects. significant project as part of our growth strategy that have been held back a little bit. And so over the next two years, we want to catch up on that. So that is the main driver for the additional CapEx. It's around product development and also improving our operational footprint.

Let me pick up on the last and just say that There are some things that are not at all backward-looking. They're very forward-looking in terms of improving the performance of the business. And there are some programs that we think can have a major impact on our future profitability, which are going to be, we think, probably timely to really undertake at some point during 2024. So there are some special things in there that are likely to evolve and lead to that number at this point.

So you said this, you know, call it, you know, 80 to 90 million, that will go forward at least through 2025.

Yeah, I think it will be in that sort of neighborhood for two years, and then we'll come down to more normal kind of run rate. And it's really making up for the deficits over the last three years. Okay.

And then with all the changes with regards to taxes and stuff, given the current guidance, what do you see as your kind of pro forma normalized tax rate for 2024 and beyond?

So, Ted, I can take that. I think looking ahead, we expect our tax rate to be higher in 2024, primarily because we used up our net operating losses in 2023. And if the current R&D capitalization tax law remains in effect, we're going to see a negative impact from that. So we haven't quantified that yet. It's really going to depend on our R&D spend, but we do expect it to be higher than what I would call normalized. And given the countries that we operate in, we would expect somewhere between a 25% to 27% tax rate. But that's going to be negatively impacted, at least in 2024, due to R&D capitalization.

I want to make sure that everybody understands what's really happening there. Scott indicated we use tax laws carry forward, so that was a product of the past. This program is one that was put in place in tax changes that were made in relatively recent times. capitalization of research and development expenditures, which has never really been part of taxation of corporations ever until this time, began. What happens is instead of expensing it as we would normally do for five years, you keep putting it on the books and you get a very large amount and then you can start depreciating it. So there's a five-year period under this tax law, which was probably put in not because it was the right thing to do, but as a so-called pay-for in order to get others spending programs through Congress. So our hope is, and there is a bill that is currently circulating, and our hope is that this is going to go back to the way it's always been. I think that's pretty much an accurate way to put it, isn't it, Scott?

I would agree with that, Al.

But if it doesn't, so if it goes back... This is a really punitive, this is a very punitive law for a capital-intensive, all capital-intensive industries in the country. This is a unique situation for a heavy industry.

Well, I can't believe they did this because, I mean, Congress is such a thoughtful and well-run organization.

Absolutely. I agree with you.

But so just to make sure I understand, if the law is corrected, let's use that word, the tax rate would be 25 to 27 percent. But if it's not, you know, it's going to be higher than that. But you can't give any kind of guidance to how high it will be.

Well, yeah, Ted, what I would point you to is if you look at our R&D spend over the last couple of years and divide that into your forecast to pre-tax earnings. I mean, you can kind of back into what that would do to increase our tax rate. And so I would just point you to that, those disclosures, and that would help you inform your estimate.

Okay. And then I just ask one more question, and I have many more, but I'll step out of line and let other people get in. Just kind of going back into the quarter and kind of thinking about 2024, you know, if I look at your unit shipments in the fourth quarter, they were down sequentially. It's the first time you've seen units down in a fourth quarter since 2015. And it's only, and that would be only the second time you've ever seen it happen, at least in the data that, you know, is available on your site, which is extensive and very, very helpful. you know, that was driven by America's EMA. And I guess what I'm asking is, you know, kind of given the kind of seasonal nature, if you would, of your business with fourth quarter typically being stronger as well as the strength in your backlog, you know, what drove the unit decline in fourth quarter? And given that first quarter is typically a pretty weak quarter for you on a unit perspective, do we expect to see seasonal weakness on a unit shipment level in the first quarter that is normal?

No, I think what happened was, as we stated in our release, is we were in the middle of a number of product launches and, you know, some late issues happened particularly related to software on some of those launches. So trucks were on wheels. But we couldn't ship them because we had to correct these issues. So, you know, that happened towards the second half of the quarter. And as we sit here today, we've now mostly cleared all those trucks. So those were shipped instead of in December, they were shipped in January and early February.

So let me just elaborate on the point that Thunder was. Rajit's comment. We had a mighty good, from our point of view, mighty good fourth quarter. If we chipped those units in the fourth quarter, it only would have made them better. I suppose that would have been nice, but it certainly extends our backlog out. And if there is any kind of downturn in the market, we just got that much more coverage in the backlog to cover The very last couple of months of 2024, we don't have bookings and to build further in our backlogs for 2025. So there is a sort of a silver lining in all that, and it is more of a timing issue from our point of view.

But as we've guided, we expect strong in the first half of the year. Okay, and I am going to sneak in one more, then I'm going to get out of line because it's very similar to this.

Because it's a similar question with regards to aftermarket sales. You know, again, you know, kind of down in fourth quarter, typically a stronger quarter, you know, what was that, you know, what kind of made that happen and how do we think about that as it relates to first quarter and FY24?

Well, maybe I'll have a, you know, can I answer part of it and then maybe Scott can step in. But as we've said, we've started to see a bit of a slowdown in the market. And this is the trend we see, that as the market slows down a little bit, and again, it's coming from pretty high levels, then we see that reflected in the run times of the trucks. So the hours per week the trucks are being used, and then that proportionately impacts the amount of servicing that needs to be done, and therefore the past consumption. I think we expect to see, as we've said, a little bit of a slower first half from just some economic slowdown around the world. But then we expect that to return in the second half of the year.

Okay.

I'm not sure that was a hugely significant drop in any of that.

The only thing I would add to it is we've really done well on part sales the last couple of years, so it's a drop versus pretty significant volumes.

Yeah, that's a good point.

Mainly in Europe, I believe. And one thing to look at is how much Germany slows down, and that they're a big pot consumer for us.

Thank you. And your next question comes from the line of Chip Moore from Roth MKM.

Please proceed.

Good morning, everybody. Thanks for taking the question. Hi, Chip. Hey, Scott, you talked about being more competitive on pricing as backlogs starts to come down. And now you talked about some potential for short term cyclicality, maybe to come up, maybe expand on that. Any implications for margins into next year? You know, how should we think about the potential for some of these new modular and scalable platforms to help there? And then back to the CapEx increase, how should we think about those benefits rolling through?

Can you comment on the price-cost relationships? Sure. So I think, you know, if you look at our business, you know, we are very strong on the counterbalance side of the business and big truck. And, you know, our product range still needs to fill out using the scalable modular on the warehouse side. So we do expect So some of the warehouse where our lead times now are the shortest. And so we are being more competitive in the marketplace. So some margin compression on our warehouse business. But one thing we're seeing is the modular scalable for, you know, I'm thinking about more 2025, 2026 and going forward is a mechanism for us to, have elevated margins because we're able to really tune the trucks in with the right cost and the right price for the customer and therefore make our target margins all better. So we think that longer term, that strategy is really starting to work. Our warehouse trucks will with the same modular design with scalability will come out more in 2025 and 2026. So we'll see the same impact then. But in the meantime, we have to get through the period with the current set of products. A couple of things that I think are worth keeping in mind too.

We are seeing improvements on the cost side. It's hard to say how much they may go up and where. But we've had some fairly substantial cost reductions from the time in the last few months, and we're hopeful that some of those will continue. The second thing is that our competitors, in many cases, didn't move as rapidly to address increasing costs as we did, but increasingly they've caught up. So a lot's going to depend on what they decide to do in the marketplace as well. And I think we just want to be careful and thoughtful, but we're going to work very hard to keep our margins at very healthy levels. They've really, in some ways, been above our targets in recent times, and so we're talking about coming down to our target margins in certain cases rather than... than having our margins decrease below what we think they ought to be in the long term.

But the key thing to take away from this discussion is that we feel that the modular scalable design and our focus on our customers giving them the right solution has the potential for us to perform consistently above our target margin as the program matures over the next few years.

Got it.

That's a helpful color and maybe a follow-up on MixShift and ASPs. I think maybe there's been some unique dynamics around post-pandemic volumes for rental and heavy duty, for example. It looks like warehouses increasing in mix as you take some share. Any way to think about 2025 mix? Should that be more normalized or just how to think about a more normalized mix?

I think one thing we feel we're likely to see is an enhanced big truck volumes. There have been supplier difficulties, and in some ways we're more significant in our big truck business and in some of the other businesses. And our bookings have really been pretty strong recently in the big truck area. So that's a positive sign for mix as we look forward.

We haven't talked about 2025 yet, but if we think about it, we expect some of that second half of 2024 to continue, but then start to rise as we get into the rest of the year. But again, we're in the middle of modeling our financials for 2025, and I think we'll have a better idea of that

at the next quarter. Understood. That's very helpful.

I could ask another. On cancellations, you had some commentary there. I think you have some protective measures in place on the dealer side. Maybe just expand on what you're seeing there and touch on that.

Yeah, the majority of the cancellations we're seeing are from major accounts. And really what it is is you know, there was very bullish infrastructure build out by a number of our suppliers. And I think they've slowed down. They've also slowed down, you know, the opening of new facilities or expansion of facilities. And so that's what's been driving our cancellations. And it's really a mixture of small amount of cancellation, mostly deferrals to future timers,

They delay some of their projects. Very helpful. Appreciate it.

If I could just sneak one last one in on the Section 301 tariffs. Is there a way to think about how big that impact is if, you know, if we get another exemption, what kind of benefit you could see there?

Thanks. Yeah. I mean, I'll just think about it as about $2 million a month.

Perfect. Okay, I'll hop back in queue. Thanks.

Thank you.

And your next question comes from the line of friends, Von Heimer from Gabelli. Please proceed.

Hi, good morning, everyone. Just to, I don't know if I heard that correctly, did you say $10 million per month or $2 million per month on the Section 301?

Two.

Okay. If I'm thinking about the backlog and your ability to price I mean, clearly, it would appear that what you have flowing through to sales in the first half of the year is priced differently than what's going to be coming through in the back. Can you maybe talk about what you're anticipating there just from a pricing dynamic? And does this take into account Section 301 where you're going to potentially have to have some more negative pricing there?

I think we should be careful how you phrase it and how you talk about it. When we're talking about pricing, we're talking about the bookings that we booked this year. Many of those would be, the majority of those would be for 2025. Yeah.

So I think that's the, you know, I think we already have 10 months, 10 months of orders already for 2024. And our backlog is, you know, that $3.3 billion. And if you look at What we did in 2023 was $4.1 billion. So really, the way I would characterize it is that both for our big trucks and our counterbalance, we'll continue to have good pricing because we have long lead times still on those products. And on the warehouse side, we will be more around that target margin. to ensure that those production lines have the orders to support their production rates.

If I'm thinking about this just from a competitive standpoint, what does Section 301 impact more? Is it the warehouse side or is it on the big trucks?

No, it's actually mostly counterbalance.

Oh, really? Okay. Okay. Just one last one for me. On Nuvera, obviously you did a good job in your analyst day or investor day talking about the potential for that business. Since then, any changes to excitement from the marketplace? Any changes to how maybe the market is thinking about conventional electrification as it relates to some of your end markets?

Yeah, so we're obviously very focused on what market dynamics are taking place. The first thing I would say is hydrogen continues to be an issue. The availability of hydrogen as the fuel. With the trucks we're running at the ports, for instance, there's intermittent outage of hydrogen, and the team's working very closely with hydrogen producers to find the right solutions. But then we've also seen, you know, increase in interest both by end users and also by integrators of both stationary and mobile chargers. As our, you know, electricity network, you know, kind of certainly at times has hit its capacity. And as you've seen, there have been some outages. you know, there's more search for what a green backup power solution looks like. And actually, you know, some of the generated solutions that are being developed is actually for charging battery electric trucks, which is strange. But also for backup power for, you know, kind of remote work, but also backup power for, for instance, data centers, etc., So that's been increasing, and we've seen much more interest on the marine side. And then we continue in the port equipment is going to be very important because the ports are under a lot of pressure. They decarbonize. And then I think we'll see slower progress on the on-road solutions. I think initially they're focused with medium-duty trucks and batteries. I mean, we feel for at least a third of the Those solutions which are power hungry, which have auxiliary, you know, kind of devices that need to be powered while the truck is stationary, like a garbage disposal truck, they'll probably, batteries won't be good enough. We think longer term they're going to need fuel cells. So I think, but those markets probably are a little slower than we expected. But on the other hand, the generator,

uh market and the marine market and port are still very very active so we have very active programs in all of those areas to have marketable products and we'll be heading be saying quite a bit more of those about those very soon okay thank you very much thank you we have

Time for only one more question, and your last question comes from the line of Ted Jackson from Northland. Please go ahead.

Are you there, Ted? Hello?

Yes.

Sorry, I was on mute. I was on mute, so. Can we talk a little bit more about bookings and backlog? You know, I mean, so the company, understandably so, you know, given supply constraints and everything else under the sun has had, you know, this huge backlog that it's working down. So the book-to-bill has been below one for a long time. But when I listen to you and I talk about guidance, is it fair to assume that we'll be moving back towards, say, a book-to-bill, you know, call it one in the second half of 24?

Is that something that you see at this point? We don't see decrease in volume.

We just see a bit of margin compression on the warehouse trucks.

We're looking at greater volume of bookings in 24 than in 23, yes.

Right, with that strength being in the back half, correct?

That's right, Ted.

Right.

And so that's where I get into it.

So then, you know, kind of reading and cutting through those tea leaves that would be in the second half of the year, then we would be able to see kind of a book-to-bill number that would, you know, at least get back to one to where you're essentially, you know what I'm saying, like you're not eating through, you know, sort of on a general holistic level, you won't be eating through backlog anymore. Your backlog will be trending, you know, at, you know, let's just say...

I think if we achieve our booking target in 2024, our backlog ending 2024 will still be well above our desired level. On some of our most important lines like the big trucks and the larger counterbalance trucks and even our smaller counterbalance trucks, we don't see normalization of backlog until early 2026.

So, you know, so there'll still be, you know, over optimal backlog until then. Does that help? Okay.

Yeah, that does. And then a final question, because I know we're out of time. Hold on, I just had it written down and now I lost what it was I was going to ask you.

I can pick it up at another time.

Anyway, thanks again.

With that, we'll conclude our Q&A session. We thank you for participating. A replay of the call will be available later this morning. We'll also post a transcript on our website when it becomes available. If you have any questions, please feel free to reach out to me. My information is on the press release, and I hope you enjoy the rest of the day. I'll now turn it back to our operator to conclude the call. Thank you.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may all disconnect.