Hyster-Yale, Inc. Q3 FY2021 Earnings Call

Good day. And thank you for standing by. Welcome to the Hyster-Yale Third Quarter 2021 Earnings Conference Call. I would now like to hand the conference over to your first speaker today, Ms. Christina Kmetko, Investor Relations. Ma'am, please go ahead.

Thank you. Good morning, everyone, and thanks for joining us today. Welcome to our 2021 third quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at Hyster-Yale. Joining me on today's call are Al Rankin, Chairman and Chief Executive Officer; Rajiv Prasad, President; and Ken Schilling, our Senior Vice President and Chief Financial Officer. Yesterday evening, we published our third quarter 2021 results and filed our 10-Q, 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 to 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-Q and other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. 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?

Thank you, Christina, and good morning everyone. Our results for the third quarter of 2021 are quite mixed, and most importantly, we are reporting a significantly lower operating profit and a net loss. As we indicated last quarter, demand for lift trucks continued to grow compared to 2020. However, it decreased from the second quarter of 2021 as market conditions moderated. Due to the year-over-year market growth and share gains, Hyster-Yale experienced strong bookings, reaching a record lift truck backlog level that surpassed the high level achieved in the second quarter. Because of these factors, the lift truck business has solid production plans and is fully scheduled for the rest of the year and into 2022. Last quarter, we anticipated substantial losses for the third quarter at Hyster-Yale Group due to ongoing supply chain issues, rising material and logistics costs, which led to reduced margins for trucks in the backlog, as well as normal planned shutdowns. Additionally, the global supply chain and logistics challenges that emerged in the second quarter escalated more than we had anticipated, significantly impacting Hyster-Yale, similar to many other companies. This worsened our component shortage issues and severely affected our ability to ship units. Consequently, our third quarter shipments were only slightly higher than in the second quarter and considerably lower than we had expected, with the greatest impact felt in our Americas division, where the ability to receive components for certain truck builds is inadequate. These challenges at Hyster-Yale Group, along with unfavorable inventory and equipment adjustments at Nuvera due to decreased near-term sales expectations, resulted in notable operating profit losses and net losses for the consolidated company in the third quarter. As anticipated, given the effect of these supply chain and logistics challenges, an expanded team is actively working to secure the needed components for production and to enhance margins in both our backlog and new orders. With a very high backlog and the potential for increased production amidst supply chain delays, our determination remains strong. After Christina reviews our financial results for the quarter, Rajiv will elaborate on these supply chain issues and offer an update on our business operations and strategic initiatives. Ken will then share our financial outlook in this challenging and dynamic environment. Christina?

Thanks, 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 and share gain, we had a 63% increase in lift truck bookings over the third quarter of 2020, but our bookings of 37,100 units decreased 20.9% from the extraordinary record level booked in the second quarter. We ended the third quarter with a historically high backlog of 98,800 units. Our third quarter unit shipments increased 12.6%, primarily driven by our EMEA and Americas segments, and our revenues increased 14.7% from the prior year, with gains in the lift truck business being the primary drivers for the increase in our 2021 third quarter consolidated revenues to $748.2 million, up from $646 million in the prior year. Despite the higher revenues, we reported an operating loss of $54.3 million compared with operating profit of $7.3 million in the prior year. This was the result of several significant factors, including cost increases of $37.2 million driven by significant material cost and freight inflation, higher and unfavorable manufacturing variances of $6.4 million resulting from insufficiencies associated with component shortages, and higher operating expenses of $13.7 million primarily due to the elimination of many of the cost containment actions taken in 2020. In addition, as a result of a reduced near-term sales forecast, Nuvera reduced its inventory value by $14.8 million to an estimated net realizable value in the near term, and recorded a $10 million fixed asset impairment charge to reduce the value of its fixed assets to market value. As a result of these factors and a $38.4 million charge to establish a valuation allowance on certain U.S. deferred tax assets, which Ken will discuss in more detail, we reported a consolidated net loss of $77.2 million compared with net income of $5.1 million in the prior year quarter. Turning to the segment results, our lift truck business reported an operating loss of $21.3 million, down from operating profit of $16.2 million in the prior year quarter, primarily due to a significant decrease in gross profit and higher operating expenses in the Americas and EMEA segments, both resulting from the specific factors I noted in the discussion of our consolidated results. By far, our Americas division felt the greatest impact of production delays and higher costs with EMEA experiencing the same difficulties, but to a lesser extent. However, in JAPIC, the lower gross profit was mostly offset by lower operating expenses. Bolzoni's revenues for the 2021 third quarter increased 42.2% over the prior year. Despite these higher revenues, higher material and freight costs and component shortages resulted in Bolzoni reporting breakeven operating results, which were comparable to the prior year quarter. Finally, at Nuvera, revenue decreased to $200,000 in the third quarter from $700,000 in the prior year. As a result of the $24.8 million of unfavorable inventory and fixed asset charges, Nuvera's operating loss was $32.5 million, up from $8.7 million in 2020. That completes the update of the results for the quarter. Now, let me turn to Rajiv, who will provide an overview on our operations and our strategic projects.

Thanks, Christina. Our sales team continued to improve market share in this strong market environment. The global lift truck market increased approximately 23% over the prior third quarter. But compared to the second quarter, the market decreased more than 14% due to downturns in all markets, except Latin America. The market improvements over the prior year quarter, combined with our share gain programs as well as long lead times and the pull forward of orders before price increases went into effect, translated into an increase in the company's 2021 third quarter bookings that exceeded market growth. We expect the global lift truck market to decline in the fourth quarter of 2021 compared with the prior year fourth quarter, and that markets in 2022 will recede from the historical highs of 2021. However, both periods are expected to remain significantly higher than pre-pandemic levels. As a result of this market outlook, our lift truck business is anticipating a substantial decrease in bookings in the 2021 fourth quarter compared with the third quarter of 2021 and in the succeeding 2022 quarters compared with the respective 2021 quarters. Many industries, including our own, are experiencing a significant increase in demand as markets recover, and this is causing significant stress on the global supply chain, which has significantly intensified over the past quarter. Our supply chain group has continued to work diligently to address the challenges related to component shortages caused by supplier constraints and logistic challenges. These challenges are arising due to shipping space availability in China, congestion at U.S. ports, and the shortage of trucks available to move the goods once they are received at a U.S. port as a result of the general lack of truck availability and labor shortages. All of these factors have limited our ability to receive parts at their originally scheduled time. We have put significant effort into securing components through other channels, including different shipping methods and other vendors. However, the limited availability of alternative shipping methods and the build-to-order, highly configured nature of our components mean that alternative vendors that can provide the necessary components are very limited. Therefore, counteracting these constraints successfully has proven to be very difficult. As a result, despite the high backlog, unit shipments were only modestly higher than the 2021 second quarter. In fact, these factors led to a large increase in backlog over the 2021 second quarter and to a new historically high backlog level. This has extended delivery lead times substantially. Our single most significant issue right now is managing margins in our record backlog for new orders. At our lift truck business, we have implemented price increases several times over the course of 2021 to address the effect of material cost inflation. But many of the orders in our backlog slated for production in the remainder of 2021 and the first half of 2022 do not reflect the full effect of all these price increases. As a result, we expect to continue to experience low margins in the fourth quarter of 2021 and our best in the first half of 2022. Due to the lag between unit price increases going into effect and when they are realized as the units are shipped, nevertheless, the lift truck sales team is working to try to improve these backlog margins. The team is also working diligently to ensure new orders are booked at target gross margins based on the future dates they will be shipped, mainly given the current backlog in the fourth quarter of 2022. Now, let me spend a few minutes discussing our strategic initiatives. The lift truck business has three core strategies that are expected to have a transformational impact on our competitiveness, market position, and economic performance. The first is to provide lower cost of ownership while enhancing customer productivity. The primary focus of this strategic initiative is our new modular and scalable project, which is expected to lay the groundwork for enhanced market position by providing lower cost of ownership and enhanced productivity for our customers, including low-intensity applications. Additionally, our key projects are geared toward the electrification of trucks for applications now dominated by internal combustion engine trucks, automation, product options, and telemetry, along with operator AFES systems. Our second core strategy is to be the leader in the delivery of industry and customer-focused solutions. The primary focus of this strategic initiative is transforming our sales approach by using an industry-focused approach to meet our customers' needs. Finally, the third core strategy is to be the leader in independent distribution. The focus of this strategic initiative is on our dealer and major account coverage, providing dealer excellence and ensuring outstanding dealer ownership globally. Bolzoni continues to focus on implementing its one company three brand organizational approach to help streamline corporate operations and strengthen its North America and JP commercial operations. It is also working to increase its Americas business by strengthening its ability to serve key attachment industries and customers in North America markets through the introduction of a broader range of locally produced attachments with shorter lead times, while continuing to sell cylinders and various other components produced in Sulligent, Alabama plant. Bolzoni is also increasing its sales, marketing, and product support capabilities, both in North America and Europe based on an industry-specific approach with an immediate focus on paper, beverage, appliance, 3PL, and automotive industries. Nuvera continues to focus on serving niche, heavy-duty vehicle applications with expected strong near-term fuel cell adoption potential, using its 45 and 60 kilowatt engines, which were both released for sale late in 2020. As a result of these releases, Nuvera accelerated its 45 kilowatt engine commercialization operation for the global market. In the fourth quarter of 2021 and in 2022, Nuvera will continue to focus on ramping up demonstration quotes and bookings for these products. In addition, Nuvera has initiated development of a new 125-kilowatt engine and continues to focus on applications in the forklift truck market. Overall, we continue to believe 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'll now turn the call over to Ken for an update on future quarters and liquidity.

Thanks, Rajiv. As you've heard from both Al and Rajiv, during the first nine months of 2021, we have experienced shipment levels that are far lower than our objectives due to supply chain logistic constraints. The results stemming from these challenges contributed to our need to book a valuation allowance against our U.S. deferred tax asset, which Christina mentioned in her remarks. The valuation allowance was established based upon a review of our recent operations, including cumulative U.S. pre-tax losses, lack of available tax planning strategies, and declining forecasts due to supply and logistics constraints. Due to these factors, the evidence no longer supported realization of our U.S. deferred tax assets, and the accounting rules required the need to record a valuation allowance in the third quarter. We expect to continue to experience supply chain logistic constraints in the 2021 fourth quarter into at least the first half of 2022. Nonetheless, we are expecting 2021 fourth quarter shipments to increase over the prior year fourth quarter and the third quarter of 2021. Significant material cost inflation and higher freight costs, which have continued to worsen in the 2021 third quarter and the current non-renewal of the U.S. tariff exclusions, are expected to continue to negatively affect the cost of components and freight over the remainder of the year compared with the prior year. We continue to work aggressively to manage the supply chain, logistics costs, component availability, and tariff exclusions and will adjust our prices for all new orders accordingly. Nonetheless, as a result of these factors and the increase in costs associated with the reinstatement of pre-pandemic salaries and benefits, we expect significant operating and net losses in the lift truck business in the 2021 fourth quarter and in the first half of 2022. As a result of core strategies discussed by Rajiv and the increased shipment volume potential of the higher-priced lift trucks in our current backlog, as well as the anticipated bookings for Q4 2021 and 2022, we expect the lift truck business to return to an operating profit in the second half of 2022. However, for this to occur, we are assuming the stabilization or reduction of product and transportation costs and the continued expectation of improved component and logistics availability. In addition, over this period in the longer term, we are also assuming the continued introduction of the currently released and additional modular and scalable product families and the continued implementation of cost-saving initiatives. At Bolzoni, we expect operating profit and net income to increase in the fourth quarter compared with both the prior year period and the first nine months of 2021. Over the course of 2022, we expect Bolzoni's component shortages to moderate in pricing to permit improved returns as the year progresses despite higher costs. On a consolidated basis, given the extensive component shortages, significant material and freight cost inflation, as well as continued losses at Nuvera, we expect to have a significant operating net loss in the fourth quarter of 2021 and the first half of 2022. Consolidated results are expected to return to an operating profit in the second half of 2022, assuming reasonable resolution of component shortages and relative stabilization of material and freight costs. We also expect to have moderated reduced losses at Nuvera as a result of enhanced fuel cell shipments. While we expect to make additional investments in the business during the remainder of the year and in 2022, maintaining liquidity will continue to be a priority. We have adequate borrowing facilities in place to help us weather these near-term challenges. As of September 30, we had cash on hand of $61.4 million and debt of $428 million compared with cash on hand of $87.5 million and debt of $345.7 million at June 30. We were fortunate to be able to refinance our revolving credit facility and expand our term loan facility in the second quarter of 2021 to finance our growth and working capital needs during this challenging period. As of September 30, we had unused borrowing capacity of approximately $245.9 million under our revolving credit facilities compared with $313.9 million at June 30. I'll now turn the call back over to Al.

As we finish 2021, we will be focused on managing effectively in a challenging and dynamic environment. We continue to execute our near-term, mid-term, and long-term strategies and remain focused on the safety of our employees. Our strategy for the longer term is clear and transformative. Our key projects, as well as the explicit objectives for the lift truck, Bolzoni and Nuvera businesses support this long-term strategy. But near-term prospects are uncertain as a result of a number of abnormal, largely external influences, as we've discussed, specifically suppliers' manufacturing levels around the world and logistics issues, which collectively create supply and cost challenges. End markets are strong. We have 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 behind us, we believe we will deliver solid sales and earnings performance, and that our long-term strategies and prospects will significantly impact our future. We will now turn to any questions you may have.

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

Good morning. Thanks for taking my question.

Good morning, Chip.

Good morning.

Good morning, Chip.

Good morning.

I was wondering if you could maybe drill into pricing actions a bit more in relation to the current backlog, particularly in relation to margins, right. We've talked about layers in the past. This quarter was, I think, the lowest margin level in at least the last decade. Are we thinking about modest sequential improvement over the next couple of quarters, assuming things don't get worse on the supply chain front? And then also maybe you could speak to mix a little bit. How much of an impact was that this quarter? And how do things look in backlog?

Rajiv, you want to take that?

Sure, Chip. The first point to make regarding our supply chain challenges is that we are primarily producing trucks that were ordered in the fourth quarter of 2020 and the first quarter of 2021. The mix has not significantly influenced our situation. The main factor behind our margin compression is the increase in commodity prices, which have risen sharply, particularly early on, and have persisted longer than we anticipated. Additionally, we faced logistical challenges that haven't helped. For context, a typical 40-foot container used to cost us between $2,000 and $3,000 to import, but last quarter we saw spot prices soar to as high as $30,000 for the same container. These unexpected costs have greatly affected our margins. We do expect to continue addressing backlogs from bookings made in the first and second quarters through the fourth quarter. In the first half of the year, we will produce trucks that were booked up to the third quarter and into the fourth quarter of this year. As Ken mentioned, margins should improve as we build newer trucks that reflect updated pricing. Lastly, the trucks we are currently booking include prices that account for the inflation we have experienced. Unfortunately, we do not anticipate building these trucks until well into the third quarter of 2022 due to the existing backlog. I hope that addresses your question.

I would like to add a few points. The price increase began most significantly at the start of this year. As future costs have risen, we implemented additional increases at various times from January to February and more recently. We have been attempting to anticipate future price forecasts based on the shipping schedule of trucks. Unfortunately, this process has been lengthy and uncertain. As cost increases have accelerated, it has been challenging to keep pace. Regarding future cost increases related to current bookings, we are being cautious and not assuming any price reductions, instead anticipating further cost increases. We are trying to maintain a conservative cost structure for trucks that are being booked now, which will likely be shipped in about nine months to a year. This adds another layer to the overall situation. The future costs have risen at a quicker rate, and as shipments have been delayed, it has created an accumulation issue. However, the level of price increases has been faster, and we expect to catch up over the coming quarters of 2022.

That's helpful. Thanks. And my second question was around capex. I think we were talking about $50 million before in the back half of the year. And I think that's a little bit lower now. Obviously, if we take the focus on liquidity, it's in this unprecedented environment, but just curious if that's delaying any of the strategic initiatives, or if everything is on track there?

Let me just say that we are scrubbing our capex, as you would expect in this environment. But we're working very hard not to do anything that would delay critical strategic programs, especially those that would relate to share gain and the implementation of those kinds of long-term programs, product and sales and marketing programs. So, I feel that on the capex side, it is a very, very disciplined process for both this year and next year. But I think the perhaps even more important thing to understand is that we have an enormous inventory bubble that is related to past due trucks that have been hung up because of the supply chain shortages that have had an impact on us. So, what we're focused on now is making sure that we produce those past due trucks, bring down that inventory and working capital bubble very dramatically. And then are only purchasing new inventory that clearly can be built given the supply chain constraints that we're operating under. So, I would attach more importance at this point to the working capital management than further reductions in CapEx.

Got it. Okay. That makes sense. And just last one for me. Just curious on Nuvera, if anything's changed materially from the last quarter, right? We were talking about accelerated commercialization efforts, developing the new larger engine. Just, I guess, when we might expect to take some traction on the bookings front, any insights there?

So, Nuvera, let's take our fuel cell programs as an example of what we're doing. We have some fuel cells in the marketplace for battery box replacement, and we’ve received significant feedback on their performance, which has allowed us to enhance our solutions. We’ve learned a lot from this process. Additionally, we see the future as integrating fuel cells into our trucks, starting with our larger models. Early in 2023, we're working on a complete fuel cell-based solution for ports. This will include a jointly developed terminal tractor, along with our reach stackers, top picks, and empty container handlers—all of which will feature integrated fuel cell systems. Our primary focus is on segments that could benefit from fuel cells during the early stages of market development, especially in heavier-duty trucking applications like refrigerated and refuse trucks, where battery solutions might not be effective. That is the direction Nuvera is moving towards, and we will provide more details on this in the future.

I would only add to that to amplify that the need for electrification in these heavy-duty segments appears to be quite broadly understood. What isn't so well understood by the potential builders and users of those vehicles is that pure battery solutions are unlikely to work effectively and productively in a significant portion of those heavy-duty applications. So, rather than offer focus on sort of broad, very, very long-term solutions, we're trying to focus on ones where we think that there's very limited battery electrification solution available and where our fuel cells will really be the right way to fill the gap as they move to a non-carbon solution. I hope that helps you.

And again, we'll talk about this more in the future as things solidify.

No, makes a lot of sense. I agree with that. Thank you.

Thank you. Your next question comes from the line of Steve Ferazani from Sidoti & Company. Please proceed with your question.

Hi, everyone. I’d like to inquire about the improving volatility numbers. Revenue increased even during what is typically a weaker quarter in Europe due to our high European exposure. The margin appears reasonable considering the material prices and freight costs. Is the improvement simply due to fewer components and less complexity, or is there another factor at play?

I think the main thing that's at work is that the cycle time is much shorter. So, Rajiv, the time from order to delivery would be…

Six to eight weeks.

Just six or eight weeks where it could be six or eight months from a forklift truck, so they have the ability to respond to price material cost and freight cost increases much more rapidly than the forklift truck business does.

I mean, I think the really great situation for Bolzoni is the huge amount of backlog, not just we have but competitors have too in the marketplace. We expect significant shipments in 2022. And the order for attachment will probably come six to eight weeks before the delivery of the truck, not when the trucks were booked. But to a certain extent, our backlog is showing Bolzoni the potential, the market potential, and we're very excited at Bolzoni about what will happen in 2022 and going into 2023, a very positive market for that.

When you combine that sort of broad market perspective with the initiatives that Rajiv outlined in his strategic summary, the focus on one company activities with a particular emphasis on industry strategy work and the enhancement of our delivery capabilities in North America, we think we have a very powerful engine going there.

We have talked about lead times and how it affects orders. I'm sort of getting two different answers on that. Every company's been going through backlog and what seems spending lead time. Some would say spending lead time is a deterrent but others are saying that they're seeing more orders. People know they're going to be just long a wait and are already looking that far ahead perhaps in thriving order intensity. I want to hear your thoughts.

Yes, I think generally if we take this at a step back and think about the dynamics of the current market at the moment. But ultimately, we believe that a shorter lead time is better for everyone; better for us, better for the market, better for our customers. But you're right, the current situation is basically getting customers to book ahead and we're seeing that, and that you can see last quarter, we had a very large backlog and you can see we have an even bigger backlog now because customers want to make sure that they have slots in the queue for their need. And as you say, it's not just us that have the long lead time but all of our competitors and industry in general. So there is a significant amount of booking ahead going on because, as you see, we are not getting any cancellations because of the long lead time. So, I think it is a transition situation. We would like to get back to build through the backlog and get back to the more normal lead times. That's our primary mission.

As you think about that and it's worth hearing about supply chain issues intensifying, not easing, and that's the duration perhaps expands. And you've addressed it a lot, but I'm just trying to think through workarounds and ability to deal with something that clearly has grown in intensity as the year has gone on. And certainly, no one's talking transitory anymore.

Right, let me just give a very broad-based answer to that. I don't think people in general, whether it's the government or companies broadly, and the public have internalized the degree to which consumer demand has increased during the COVID period over and above the level of demand in 2019; not 2020, because that was COVID influence. But if you look at today, we had a huge increase in total demand, but it shifted. Restaurants, travel, and entertainment have all gone way down. Goods have gone way up, and so the mix has changed with a huge pent-up demand. People have had generous benefits that they save rather than spend. And so, if you have the end product demand for consumption by U.S. consumers or consumers around the world in goods, then you got to look at the whole supply chain structure and what end up claiming is that everything is out of capacity. It's the supplier's capacity, the commodity producer's capacity. We've heard a lot about chemicals. You're hearing daily about chips. All of these are the result of this very substantial increased demand. And I think people have been, if you will, sort of not thinking carefully enough about the impact on the margin from a mismatch between supply and demand. Demand is high and supply is lower than demand. What you can get, in many cases, particularly commodities, and certainly now in shipping, is the kind of cost increase that is not marginal. It's not small to reflect a small imbalance. It becomes a bidding contest between those who really, really want to have the space on ships and those who just can't afford or see that opportunity. So, it's a very broad-based issue that's coursing through the economy and the world in a way in terms of commodity development. So, I think that's really the backlog. And one of the questions, then, is, will that demand mix shift be sustained? I think that's partly the $64 question here because it's going to take time to break all of the supply chain constraints. You've heard about chip manufacturing. It's going to take a couple of years to bring new chip fab operations on stream. And so, what we forecast is a decline in the market compared to the last couple of years in 2022 because we think that there's going to be some kind of shift back as COVID moderates toward more expenditures on travel and entertainment and so on and so forth. So, that's kind of a very broad overview, but I think it captures the dynamics. And you miss that when you just focus on what's going on in the lift truck business.

That's fair. Appreciate the thoughtful answer. Thanks everyone.

Thank you. Your next question comes from the line of Brett Kearney from Gabelli Funds. Please proceed with your question.

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

Good morning.

Good morning.

Good morning.

So, it sounds like increasing product demonstrations at Nuvera, which is encouraging. I was curious how much of that is based around the new test facility you've been able to establish in Italy? And whether there's thoughts on similar establishments in some of the other geographic markets. It sounds like there's more interest in North America. And I guess tied to that, it sounds like the China bus market proceeding a little bit slower than initially anticipated. Just strategically, how you're thinking about resources and allocating them at Nuvera going forward?

I want to highlight that interest in fuel cells is on the rise. In China, we are seeing a government-led transition from focusing on fuel cell buses to trucks, which are becoming increasingly significant for fuel cell applications. In Europe, there is a growing realization that fuel cells represent a long-term solution for mobility, and numerous government-sponsored initiatives are being rolled out. There are also similar trends emerging in parts of North America, especially California and some East Coast areas. Overall, there is a better understanding of the critical role fuel cells will play in our electrification efforts moving forward. Regarding application phases, we are seeing a shift in how people perceive them. The initial focus has been on vehicles that operate from a centralized location, such as forklift trucks, where hydrogen can be supplied conveniently at depots. We anticipate a progression from forklift trucks to delivery trucks and other vehicles like refuse trucks, where battery solutions may not be as effective. This is the direction Nuvera is pursuing, and we will provide more updates on these markets in the future.

Let me elaborate on your question regarding the prospects for fuel cells in the three major regions: China, North America, and Europe. Recently, the situation in China has changed significantly. One of the complexities we've observed is that, in a highly regulated economy like China, priorities can shift very quickly, especially since these priorities are supported by government subsidies and incentives. When we entered our commercial agreements in China, particularly the two major ones, we anticipated that the regulatory framework would make those arrangements widely advantageous. This expectation is why we invested in inventory and equipment. As you've noted, we have since reduced the value of these assets. However, it's important to mention that the inventory itself is still good; it simply cannot be utilized in the near term due to anticipated low sales. It will eventually be sold at the adjusted cost. Very little of our equipment and inventory is unusable from our perspective. We are focused on securing business for these assets but are now being cautious when establishing contracts in China to ensure they are more robust and less susceptible to delays as government incentives fluctuate. Overall, the Chinese market is becoming less of a focal point for us compared to Europe and North America. In Europe, we see substantial opportunities due to a more stable regulatory environment that tends to stick once implemented, aligning with the region's commitment to addressing climate change. We plan to concentrate on these opportunities, shifting our focus away from the forklift truck business towards the segments outlined by Rajiv. We believe that in the United States, the drive for electrification will encourage the adoption of fuel cells in applications I've mentioned earlier. In summary, we are witnessing a fundamental shift in prospects among these three key regions regarding near-term market development. Each region remains important to us, but our emphasis is evolving.

Yes, okay. That's very helpful. Thank you. And then maybe just one other quick one, probably for Ken, you guys were proactive, able to complete that refinance back in Q2. And just curious, whether I have it right, is there a restriction on dividends from a covenant standpoint? Could you just maybe remind me of the financial covenant package included in that covenant agreement?

Yes, we can continue to pay dividends as long as we maintain sufficient availability as outlined in the agreement. Our goal is to stay within those availability restrictions to navigate the situation effectively. The increase in the Term Loan B and the larger ABL was intended not only to support the seasonal rise in our anticipated sales but also to help us manage the unexpected fluctuations in material pricing, availability, and logistics. We have taken these factors into account. We are actively working through this and will continue to prioritize availability. We are not relying on the springing fixed charge.

Okay, terrific. Very helpful. Thanks so much.

Thank you. There are no further questions in the queue. I will now turn the call back to Christina. Now, please go ahead.

Thank you. That will conclude our Q&A session. Al, do you have any final closing comments?

There's no final comments.

Okay. Thank you. We'll close with just a few final reminders. A replay of our call will be available online later this morning. We'll also post a transcript on the Investor Relations website when it becomes available. If you have any questions, please reach out to me. You can reach me at the number on the press release. I hope you enjoy the rest of your day. I will now turn it back to the operator to conclude the call.

Thank you, Christina. Once again, as a reminder, the encore replay will be available approximately two hours after the conclusion of this call. You can dial out 800-585-8367 or 416-621-4642 until November 10, 2021, at 11:59 p.m. Eastern Time. Conference ID number is 4694252. Thank you for your participation. You may now disconnect.