Ladies and gentlemen, thank you for standing by, and welcome to the Hyster-Yale Q1 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Christina Kmetko. Please go ahead.

Thank you. Good morning, everyone, and welcome to our 2021 first quarter earnings call. I am Christina Kmetko, and I'm responsible for Investor Relations at Hyster-Yale. Thank you for joining us this morning. Joining me on today's call are Al Rankin, Chairman and Chief Executive Officer; Rajiv Prasad, President of Hyster-Yale Materials Handling; and Ken Schilling, our Senior Vice President and Chief Financial Officer. Yesterday evening we published our first quarter 2021 results and filed our 10-Q. This information is available on our website. If anyone is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

Thanks, Christie, and good morning everyone. Results for our first quarter of 2021 are very mixed. On the one hand, bookings were extraordinarily strong, with the forklift truck backlog at record levels, and as a result, prospects for the future are bright. On the other hand, supply chain disruptions had a major impact on production and material costs, which significantly reduced our first quarter earnings. In the fourth quarter of 2020, Hyster-Yale was seeing improving market demand and increasing bookings and was optimistic about 2021 prospects. Then the market demand and the bookings improvements we saw in the fourth quarter actually increased during the 2021 first quarter, generating demand for forklift truck products that was significantly higher than we had forecasted. While this demand has provided us with a record backlog, Hyster’s global supply chain, which also had to ramp up production, has struggled to ramp up its suppliers and their capacity. This slow and erratic ramp-up, exacerbated by continuing pandemic-related supplier labor shortages and cost increases and logistics constraints, has led to significant component shortages and material and freight cost inflation. This has had a significant effect on Hyster-Yale in the first quarter. As a result of these factors, our first quarter shipments were substantially lower than we had expected, particularly in our Americas division, where receiving components needed to build certain trucks on schedule was very challenging. This resulted in earnings that were significantly lower than both the 2020 fourth quarter and the first quarter. While these results were not what we had planned or expected, our team is working diligently to obtain the components we need. Given our very high backlog, the opportunity for increased production is high as supply chain bottlenecks are resolved.

Thank you, Al. I'll start with the quarter highlights and then discuss the individual segments. As Al mentioned, our unit bookings in the first quarter increased significantly, 48.8% over the fourth quarter of 2020. We ended the quarter with a historically high backlog of 50,700 units. Our EMEA and JAPIC segments saw significant increases in unit shipments over the first quarter of 2020, but these higher shipments were more than offset by a substantial decrease in unit shipments in the Americas because of supply chain constraints and component shortages resulting from the broad and rapid increase in demand as the economy recovers. Rajiv will provide detail about our bookings and shipments in a moment. The lower shipments in the Americas were the primary driver for the 6.8% decline in the 2020 first quarter consolidated revenues to $732.2 million from $785.7 million in the first quarter of 2020. Lower unit revenues were partly offset by favorable currency movements, mainly in our EMEA and JAPIC lift truck segments and at Bolzoni. As a result of the lower unit volume, along with the resulting increase in manufacturing variances and higher material inflation and freight costs, primarily in the lift truck business in Bolzoni, our consolidated operating profit decreased to $3.1 million from $20.2 million in the prior year first quarter. The decrease was partially offset by lower operating expenses, despite the add-back of $9 million of incentive compensations that was suspended in 2020. Our consolidated net income decreased to $5.6 million or $0.33 per share from $15.3 million or $0.91 per share. The operating profit decline was moderated by a $4.6 million gain on the sale of Nuvera's investment in preferred shares of 1H2, as well as gains from favorable changes to market values of other equity investments. In our Lift Truck business, our first quarter operating profit decreased $2.2 million from $28 million in the prior year quarter, mainly as a result of the specific factors I noted in the discussion of our consolidated results. At Bolzoni, revenues for the first quarter of 2021 decreased 9.6%, and operating profit decreased to $8,000 from $2.7 million in the prior year first quarter.

Thank you, Christie. Let me first start by saying that the global team has performed very well in this challenging quarter. Our sales team has effectively executed our strategy by generating significant bookings in the strong market and increasing our market share. Our supply chain and manufacturing groups have worked diligently to address the challenges related to supply constraints and logistic challenges, our largest issues in the quarter. As Al mentioned, lift truck market activity surged this quarter. The lift truck market grew significantly faster than anticipated during the 2021 first quarter, with the market ending the quarter substantially higher than pre-pandemic levels. Excluding China, where the market increased more than 130% over the 2020 first quarter when China was most affected by pandemic-related shutdowns, the global lift truck market increased 46% compared with the first quarter of 2020. Compared to the 2020 fourth quarter, the global lift truck market, including China, increased 20%, driven by a 24% increase in EMEA, just under the 24% increase in the Americas, and almost an 18% increase in China. The significantly accelerated global demand over the 2020 fourth quarter and our share gain programs translated into a substantial increase in our first quarter bookings, with market share improvements in Americas, EMEA, Asia, and India markets, resulting in a record backlog. Despite the substantial increase in bookings, our unit shipments were only moderately higher than the 2020 fourth quarter and were lower than the 2020 first quarter. The shipment increase over the fourth quarter was because of substantially higher bookings in the third and fourth quarter of 2020. However, shipments were lower than a year ago because of the lower production rate that we put in place to match component availability and backlog.

Thanks, Rajiv. While recent market and booking activities are strong and growth has been better than expected, the pace of increasing shipments remains uncertain. Overall, we continue to operate on the assumption that the economic and market environment will remain difficult in 2021 until supply chain issues are fully resolved and COVID-19 vaccinations are fully implemented. Early in 2020, we put plans in place to mitigate the impact of declining markets and bookings, and the consequential impact of reduced manufacturing activity from pandemic-related shutdowns by initiating cost reduction measures. These measures included spending and travel restrictions, significant reductions in temporary personnel, furloughs, salary reductions, and suspension of other benefits, including incentive compensation. Effective January 1, 2021, we reinstated pre-pandemic salaries, benefits and incentive compensation programs. The other cost containment actions are continuing and are expected to remain in place until market and economic uncertainty dissipates, and our results further improve, which we expect will occur over the course of 2021.

I will conclude by noting that our strategy for the longer term is clear and transformative. Our key projects, as well as the explicit objectives for the Hyster-Yale Group, Bolzoni, and Nuvera businesses, support this long-term strategy. But near-term prospects are uncertain as a result of a number of abnormal and largely external influences as we've discussed, specifically the direct impact of the COVID-19 pandemic on some markets, suppliers' manufacturing levels around the world, and logistics issues, which collectively create supply and cost challenges, as well as the adoption rates for key fuel cell 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 to meet increased customer demand. As a result, we believe future increased shipment opportunities are very significant. However, it is difficult for us to forecast when these increases will occur given the supply and logistics difficulties. Nevertheless, when these challenges are mitigated, we believe we will deliver solid sales and earnings performance and that our long-term strategies and prospects will have a very significant impact as we look forward. Before I open up the call for questions, I would like to note that we will be holding a virtual Investor Day later this month on May 25. The press release will be issued shortly with a registration link for that event. We encourage you to join us as Rajiv, Ken and I, along with other members of our senior management team, provide further information on our strategic roadmap to deliver long-term shareholder value. We will now turn to any questions you may have.

And your first question is from the line of Steve Ferazani. Please go ahead, sir.

I think you covered a lot of topics this morning. In fact, you did a great job of giving an overview, and these were issues you talked about and came up this quarter; you talked extensively about it last quarter. But I'm curious; didn't things get a lot tougher in March and April? Did you see the supply chain constraints become more challenging as Q1 went on?

Rajiv, you want to take that?

Sure. Thanks, Al. So I think as the situation progressed through the quarter, if I look at what we planned to build versus what we've built, I think we had impacts really throughout the quarter. It didn't accelerate in any way. In fact, if anything, the visibility to our supply chain as we sit here is at the best level over that time. Still, we still have a significant number of challenges. I believe, you know, February and March were the toughest months. April eased up a little bit. And I think we're, as I said, we still have challenges with - as you can imagine, India is tough, Eastern Europe is tough from a supply chain point of view, but we are working through those issues.

Could you just say a little bit about the process that you were using to track components and to try to break through these bottlenecks and give investors a flavor for the process that we're using?

Sure. Thanks, Al. Yeah, so what we're using is a kind of war room type environment - a virtual war room, where we've got every component and every supplier. We have a supply chain team tracking each one and getting commitments from suppliers if they can hit our projected demand. And wherever we have concerns, we are actively working with them. I think you can imagine from what's already been in the news, we had issues around microprocessors and had issues around resins, but then there were some - those were kind of general concerns and we used a lot of that in our craft, but also we had concerns with specific suppliers, and we individually work through them one at a time. To give you a sense for it, in February, we were probably chasing around 7,000 key issues which improved in March to maybe low 2,000 to 3,000, and now we are chasing down hundreds of issues. So hopefully that gives you a sense that visibility is better, the supply chain is recovering, but we have some very specific issues, the largest of which for us is India right now.

I might add to that, at the same time, we're beginning the process of working with all of our suppliers to help them break bottlenecks, help them increase their own capacity as we look forward. Because as we noted a number of times, we have a record backlog, and we want to serve our customers as effectively as we can. So getting an increase in our suppliers' capacity is a priority in the sort of middle term, the last half of the year, in particular, while the immediate near-term focus is the component-by-component process that Rajiv just described.

Okay. Is it different for Bolzoni? I note that Bolzoni had a pretty nice sequential improvement. Are they not - and I know it's less complex equipment. Are they faced with not the same challenges or is it more to do with what they were coming off of in 4Q?

Let me just give you an overview of that again as was the case for Hyster-Yale Group. We were hoping for much better results in the first quarter than we actually achieved. So absent the concerns that affect supply and particularly material cost increases, we think we would have done much better in Bolzoni. I think that's the best way to answer your questions.

No, it's fair. It's helpful. When we think about, you mentioned the massive backlog, how sticky is that backlog? It looks like you have certainly at minimum two quarters of revenue without taking any additional bookings. So if you start pushing some of this out, how confident are you that backlog holds?

Go ahead, Rajiv.

Sure. Yeah, I think we have definitely put in place lead times. Our customers understand the lead times that we are working with. I think we have reinforced that. We have seen some pull-ahead of orders, mainly due to the inflation that our customers are seeing. So I expect that the majority - the vast majority of the backlog we have is very sticky. In fact, customers were consciously making those decisions, knowing our backlog, knowing our lead times, and also knowing the challenges that are in the market that they themselves are feeling as well, especially in the industrial side of the market.

Just to emphasize, first of all, the backlog is not all immediately shippable. Some of those orders are for the full year in many cases. So they will spread out over a period of time. That's one point. The other is, if we were the only supplier in the industry that had these bottlenecks and who had the inability to make the shipments, we might be under quite a bit more competitive pressure and substitution pressure than we are. I think it's important to keep in mind that the factors we're discussing affect other competitors of ours also, and even more generally, the industry as a whole is significantly affected by supply chain issues. You read pretty much every day right now about the chip problems that are affecting the automotive industry or causing production shortfalls in the automotive industry. So this is a fairly broad-based set of circumstances that are going on in the economy as we look at it.

And then you mentioned the potential for some price increases. What's your sense on customer feedback to that? How much are you going to be able to offset potential material price increases? Can you pass all of the material price cost increases through, or are you trying to get a partial passing through?

I'd really focus on Ken's comment. Ultimately, we expect to have a full pass-through. We have target margins. We think they're reasonable, and we think they are competitive. The issue here is that we have a backlog, which in general, as Ken pointed out, has locked-in prices, and material costs are going up in a way that we can't really recapture through price increases. We've tried to work with our suppliers to moderate the cost of price increases. Just to take an example, not very long ago, and in general, over time, steel prices have been somewhere around what Rajiv reported, $500 a ton; they are actually at - in the spot market right now, $1,500 a ton. That's never happened before to my knowledge. There are pressures that I think everybody is feeling, and I think there's going to be a considerable ripple of inflationary cost pressures in the economy. Now eventually, those bottlenecks are going to get broken. But there is a real surge in demand as a result of government programs, delayed consumption, and consumer behavior, all of that is creating an environment that's pretty unprecedented in terms of the rapid increase in economic activity that's going on.

I wanted to touch on, you mentioned at the end, the tariff exclusions. Should we think about that impact similar to the last time around, or have you been able to find other sources for components or materials that made less of an impact?

Let me comment on the tariff exclusions first. The Biden administration has changed the rules on tariff exclusions. It's very concerning to us. The Trump administration recognized that there were certain components that were not available in other locations, and they recognized that the impact on prices in the United States could be very high as a result of certain kinds of tariffs. So they had an exclusion process which certainly wasn't perfect, but it provided some substantial relief to blanket tariff increases. At this point, the new administration has not put any process in place for tariff exclusions, and we have no idea what their future plans may be. In fact, we're not sure they do either at this point. It's a serious situation. I think there is a lot of concern in Congress that this is not a good policy. Many people understand that if the tariffs continue in China, the bulk of what we buy in China would go to some other low-cost country; it wouldn't be repatriated to the United States, because the cost would be too high even if you could find capacity to produce it. I think that's the perspective we have on tariffs. We're certainly hopeful that eventually an exclusion process will be put in place maybe in the next quarter or so. That's certainly what we think ought to happen, and we just keep our fingers crossed that it does. To your second point, we had already begun to diversify our low-cost supply chain sourcing capabilities. We have sources in Vietnam, we have sources, particularly in India, but as you know, there are complexities in India right now given the impact of COVID-19 on our supply chain there, but we have active programs that are designed to find other competitive sources for Chinese components. Rajiv, do you want to add anything to that?

I think the first thing to recognize is that China, and if you just take casting, we use a lot of casting and China, by far, has the highest casting impact – more castings than the rest of the world combined in terms of capacity. The significant amount of those castings come from China. We are looking to outsource it through other places, but again, capacity is constrained. The process is slow, not only because of capacity but also due to COVID-19, but that is our plan. We will diversify.

Let me just say, to reinforce Rajiv's comment, what he just said is precisely why there needs to be an exclusion process. The casting capacity simply doesn't exist in the United States, and it's not likely to be put in place here.

Well, thank you so much. I appreciate all the thoughtful answers this morning. Good luck with the next quarter.

Thanks.

Your next question is from the line of Brett Kearney. Please go ahead.

I want to ask about Nuvera. You mentioned increased opportunity for product demonstration. Could you just elaborate? It's probably a question for Lucien on the 25th of this month, but I'm just curious about what opportunities you're seeing? Obviously, you had success in the China bus market, but what else, even if initial conversations at this stage, you're seeing opportunities in the commercialization front for Nuvera?

Maybe Rajiv would just comment a little bit on how we see the sales cycle evolving, because that really is what lies at the heart of the process or the end result of getting bookings. You've got to go through a cycle of activity. Rajiv?

Yeah. Thanks, Al, and you're right. We will go through this in much more detail on the 25th. But let me give you a sense of it. So you could imagine that we're predominantly working with integrators and OEMs of equipment. The primary areas are around heavy-duty vehicles, you know we're talking buses, trucks, vans, and some off-road vehicles, including ours. The process that customers go through, the first question is, do you have an electrification plan? Do you have an electrified part? The majority of the time they don't, and sometimes they do. The next question is, have you thought about integrating hydrogen into your solution? The next piece is integrating and developing a solution, then doing a pilot of a product type, and then going into production. We are improving people through that whole process. If I can just maybe talk about geographies, you're right. Over the last few years, our attention has been on China, because we felt that was a rapidly growing market, supported by government initiatives. But we have seen a strong pickup in Europe, and we're starting to see some traction in North America. In our pipeline today, we have customers in all of those regions. We can put - we will give you more color on that in May, but I hope that gives you a sense of the process we're going through, why it's taking time, and also the business and system development, which is closely tied together.

Rajiv, just as a point of reference, you know we put periodically new generations of internal combustion engines into our vehicles that meet different emissions standards. That is not a short process. Even something that's determined and fixed as putting an upgraded engine in would take sort of how long, Rajiv?

Yeah, we've seen - we've done a lot of emission programs. It takes between 24 and 36 months depending on what else we need to change with the engine, which recently has been a significant amount of the craft. If you have an electric vehicle and electric platform, we think that's more of an average of around 18 months process with the hydrogen solution in. If you have an internal combustion engine and you need to create an electric drive frame and then put the hydrogen solution in, that's more around the 36-month time frame. Just to give, you know, plus or minus depending on the customer and their infrastructure, but that's a sense of time it's taking to go through the integration process.

On the other hand, I would just note that we're doing plenty of demonstrations, and then there are test programs. We've been doing that in China, where our vehicles are being run with our engines in them. This is all part of the process of developing bookings, and we expect to see an acceleration of that process over the remainder of 2021, and then, of course, significantly in 2022 and 2023.

Great. That's very helpful. Lastly, just curious what's the company's remaining stake in 1H2 at this point? Do you still hold some amount of preferred or common equity in that business? And I guess, what was your intention going forward?

Yeah, we do still have a small ownership, and just like always, we look at what's the best alternative for us moving forward. So we're talking to the 1H2 team about potential ways of moving forward.

Certainly, the sale of the remaining interest is a possibility. We just have to see how it all works out in the context of the prospects for 1H2. If there is something specific to report, we'll report it.

Just to strategically say that, as you know, we're really focused on Nuvera on the fuel cell engine side, and this is part of reinforcing that direction.

At this time, I'm showing there are no further questions.

Thank you. Al, did you have any wrap-up comments?

I have no further wrap-up comments than the ones I gave earlier, Christie.

Okay. Thank you again, everyone, for joining us today. As a reminder, as Al mentioned, on May 25 we'll be holding our Investor Day and the release with the link to register for that. We’ll be going over this one. Thank you and have a good day. Thank you for listening.

Thank you for participating in today's Hyster-Yale Q1 2021 earnings conference call. This call will be available for replay beginning at 2:00 PM Eastern Time today through 11:59 PM Eastern Time on May 12, 2021. The conference ID number for the replay is 8861383. Again, the conference ID number for the replay is 8861383. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. Thank you for participating. You may now disconnect.