Earnings Call Transcript - HY Q3 2020

Christina Kmetko, Investor Relations

Good morning, everyone, and welcome to our 2020 third quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at Hyster Yale. Thank you for joining us this morning. Joining me on today's call are Al Rankin, Chairman, President and Chief Executive Officer of Hyster-Yale Materials Handling; Rajiv Prasad, President and Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President and Chief Financial Officer. Yesterday evening, we issued our third quarter 2020 results and filed our 10-Q. Copies of our earnings release and 10-Q are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such 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 we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Also, certain amounts discussed during this call may be considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our earnings release and available on our website. In a moment, I'll discuss our third quarter results. But first, let me turn the call over to our Chairman and CEO, Al Rankin, for some opening remarks. Al?

Alfred Rankin, Chairman, President and CEO

Thanks, Christie, and good morning, everyone. Thanks for joining us today. The global COVID-19 pandemic continues to cause challenges to every aspect of our daily lives, and our first priority continues to be to keep our global workforce safe and to help reduce the spread of the coronavirus. The spread of this virus, as you all know, began in January. It...

Christina Kmetko, Investor Relations

I'm sorry, Al, you're breaking up. Al? Al? I'm sorry.

Alfred Rankin, Chairman, President and CEO

Hello? Christie?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Sure. So I'll just continue with Al's remarks. So the spread of this virus began back in January, as you all know. And despite all the progress we've made since then, the questions that we were contemplating months ago regarding the depth and duration of the downturn and the speed and shape of the recovery are still very much with us, especially as we see cases rise again globally. While there are several promising vaccines in process, timing, availability and mass distribution capabilities remain open questions. Despite these ongoing challenges, our global workforce has remained focused and agile during this period, effectively navigating an evolving landscape to meet the needs of our customers and deliver solid third quarter financial results. Christie will provide the financial details next. But overall, our business is still feeling the impact from the COVID-19 pandemic, although the effects have moderated from those realized in the second quarter. The significant decline in global economic activities as a result of the broad measures taken globally to limit the spread of the virus, specifically early in the second quarter, continued to affect demand for our products during the third quarter. As a result, our third quarter consolidated operating profit and net income was significantly lower than in the prior third quarter. Nevertheless, as a result of higher-than-anticipated sales growth subsequent to the pandemic related global shutdown and the impact of our cost reduction programs, our third quarter 2020 results significantly exceeded our initial expectations. And we are continuing to make important investments for the future. The third quarter results also included a full quarter's benefit associated with several cost reduction measures implemented throughout the first six months of the year. Benefits from these cost containment actions resulted in a decrease in operating expenses of $19.4 million for the third quarter and $47.3 million year-to-date compared with the respective prior year period. In this pandemic related work environment, the resiliency of our workforce has been impressive, and we greatly appreciate their efforts to remain both safe and productive while keeping costs down. Our Hyster-Yale management team and global workforce have responded confidently and successfully to a variety of challenges thus far. As a result, we believe our employees and our businesses are well-positioned to manage through the remainder of this pandemic. Everyone's disciplined execution in this current difficult environment has enabled us to support our dealers and customers while also diligently ensuring health and safety. After Christie reviews the results of the quarter, I'll discuss our business operations and our strategic program. Ken will then talk about the outlook and how we are managing our business through this uncertain and evolving environment. Let me turn the call over to Christie to cover our results for the quarter. Christie?

Christina Kmetko, Investor Relations

Thank you, Rajiv. I'll start with the quarter highlights and then discuss the individual segments. Our third quarter consolidated revenues decreased to $652.4 million, down 14.8% from last year's third quarter, mainly due to lower bookings in the second quarter and the resulting lower shipments, primarily caused by the pandemic-related global effects and the pace of the subsequent forklift truck market recovery. Our consolidated operating profit also decreased significantly to $7.3 million from $19.5 million in the prior year third quarter due to lower results in all our segments. However, I want to point out that the 2019 third quarter results included $8.7 million of favorable retroactive tariff exclusion adjustments. If you exclude those out-of-period adjustments from the prior year results, the decline in operating profit associated with the actual business operations was not as substantial, primarily because of lower operating expenses due to the cost containment actions previously implemented. Net income decreased to $5.1 million or $0.30 per share from $12.8 million or $0.76 per share in the prior year quarter. I'd also like to note that the third quarter is generally our seasonally low quarter as a result of normal summer plant shutdowns and customary lower third quarter production schedules at our manufacturing plants. Turning specifically to the Lift truck business. Hyster-Yale Group's third quarter revenues decreased 14.7% to $618.7 million from $725.3 million in 2019, primarily due to fewer shipments in the Americas and EMEA segments. Consolidated shipments decreased by approximately 2,900 units due to fewer shipments than all but Class 1 electric counterbalance trucks in the Americas and JAPIC segment and Class III warehouse trucks in EMEA and JAPIC. Rajiv will provide more detail about our bookings and shipments in a moment. Third quarter 2020 operating profit in the Lift truck business decreased 42.1% from the prior year quarter, mainly because of a decrease in gross profit in all segments due to lower units and parts volumes as well as the absence of the favorable retroactive tariff exclusion adjustments I previously mentioned. In the Americas and JAPIC segment, the decrease in gross profit was partially offset by lower operating expenses, primarily as a result of cost containment actions previously implemented. In EMEA, the decline in gross profit was more than offset by the favorable impact of the cost containment actions combined with $1.6 million of government subsidies, which combined resulted in an increase in EMEA's third quarter operating profit over 2019. At the Bolzoni segment, revenues decreased 16.5%, and Bolzoni reported operating profit of $100,000 compared with operating profit of $700,000 for the 2019 third quarter. The decrease in revenues was due to lower sales resulting from the decline in global economic activity subsequent to the pandemic-related shutdown. The decrease in operating profit was also mainly because of lower sales volume, but the decline was partially offset by lower operating expenses due to the cost containment actions taken. Finally, at Nuvera, revenues were $700,000 in the third quarter of 2020, down from $2.4 million in the prior year, and Nuvera's operating loss decreased modestly to $8.7 million from $9.3 million in 2019. The revenue decrease was primarily the result of a decrease in third-party fuel cell development services. The improvement in operating results was driven by lower inventory adjustments in the 2020 third quarter compared with the prior year, as well as the favorable effect of cost containment actions. Those are the results for the quarter. Now, let me turn this over to Rajiv, who will provide an update on our operations and our strategic program.

Rajiv Prasad, President and CEO of Hyster-Yale Group

Thanks, Christie. As I said, I continue to be very proud of the hard work and disciplined execution of our global workforce as we continue to work through the challenges brought on by the COVID-19 pandemic. Across the company, we have focused on maintaining the safety of our employees and preventing the spread of the virus. We have a good track record in doing that. However, the recent resurgence in cases is creating new uncertainties and added stress. And it is as important as ever that we are diligent and maintain strong safety procedures despite the pandemic fatigue many of us are experiencing. Let me reiterate, I'm very proud of our workforce for their ability to stay focused and effective in these uncertain times, including maintaining the protocols we have established to keep themselves and those around them safe. Moving on to our operations. As economies continue to reopen in the 2020 third quarter, as we mentioned, lift truck market activity improved faster than anticipated, with markets ending the quarter at roughly pre-pandemic levels. Excluding China, which increased 78% over the prior year third quarter, the global lift truck market was down less than 1% compared with the third quarter of 2019. Compared to the second quarter of 2020, the global lift truck market increased 22.5% in the 2020 third quarter, driven by 28.8% increase in EMEA and a 25.9% increase in Americas, as well as a 19.7% increase in China. These market improvements over the second quarter translated into a solid increase in our 2020 third quarter bookings. During the third quarter, our unit shipments decreased from the prior year third quarter but were higher than the second quarter. Third quarter shipments were down because of substantially lower bookings in the second quarter of 2020 due to the pandemic-related shutdown and the lower production rate that we put in place to match market conditions. While shipments were down from the prior year, third quarter bookings were comparable to the 2019 third quarter but were up substantially from the second quarter of 2020 as global demand steadily improved throughout the third quarter, specifically in our primary markets of Americas and EMEA. Bookings in each month of the third quarter continued the steady upward trend that began back in May. Also, our September booking increased substantially over August, reaching a level that exceeded the September 2019 booking. While we continue to carefully manage our backlog and shipments so that our lead times and production rates match market conditions during this period of uncertainty, the strong third quarter bookings led to a modest increase in our ending backlog over the second quarter. Additionally, as markets and industries where our position is strongest have begun to recover, we have experienced a change in the mix of products, which have resulted in a higher average price per unit in both our bookings and backlogs for the 2020 third quarter compared with the 2020 second quarter. As market conditions improve, we expect that increased bookings and the strategic programs we continue to pursue will position each of our businesses to recover to sound long-term financial returns. Now let me spend just a few minutes talking about our strategic program. Despite the uncertainty regarding near-term economic activity, we continue to be committed to our long-term strategy. The projects required to execute our strategies continue to move forward. But in light of the COVID-19 pandemic, the pace of certain projects have been given greater emphasis than others to reduce near-term operating expense and capital expenditures. While we are continuing to introduce a number of new products during this period, our primary focus in the lift truck business is on a set of new modular scalable product families covering both internal combustion engine and electric trucks. We have been focused on maintaining the timing of the introduction of the first of these products, which is the standard version of the 2- to 3-ton internal combustion engine lift trucks for the EMEA market. This version is expected to be launched in the first quarter of 2021. The launch of this new heart of the line range of 2- to 3-ton counterbalance trucks will continue throughout 2021, with trucks that the Americas market expected to be launched in the second half of 2021. We expect the modular nature of these new products to enhance our ability to meet customer needs at lower cost and with more application specificity, both at the industry level and at the individual customer level. In this rapidly changing environment, we have accelerated our focus on finalizing and implementing industry strategies and our investment in industry-focused sales capabilities to support our dealers. Given the COVID-19 environment, we have also focused on enhancing our remote selling capabilities through technology and IT enhancements. Bolzoni continues to focus on its Americas growth strategy, including strengthening its ability to serve the North America market through the supply of cylinders and various other components from its Sulligent, Alabama plant and introducing a broad range of locally produced attachments with shorter lead times to service customer base. Bolzoni is also implementing its one company three brand structural approach, which will help streamline back-office operations and strengthen its Americas and JAPIC commercial operations. Nuvera continues to focus on serving heavy-duty applications, particularly bus and truck applications with a 45-kilowatt engine, which was released for sale during the 2020 second quarter. It also continues to focus on the lift truck market. During the second quarter of 2020, Nuvera, which had successfully achieved certification of its 45-kilowatt engine for China in 2019, received its first integration certification, which allows the engine to operate in buses. During the third quarter, testing of these engines in China, Chinese buses was completed for one company, and that company has now included the certified bus design in its sales catalog. Certification of other bus companies are expected late in the fourth quarter of 2020 and in the first quarter of 2021. As a result of these milestones, Nuvera has accelerated the 45-kilowatt commercialization operation for the global market and is focusing on ramping up the sale of this product in the fourth quarter of 2020 and in 2021. Nuvera is also developing a new engine that will be approximately 60 kilowatts for the Chinese market that is expected to begin the certification process during the fourth quarter. The engine certification for this engine is expected to be received during the 2020 fourth quarter, with vehicle integration certification expected to be completed in late quarter or early in the first quarter of 2021. Overall, it is our intention to emerge stronger from this pandemic and to thrive as business conditions improve. We believe our prioritized strategic program will put us in that position.

Kenneth Schilling, CFO

Thank you, Rajiv. Although recent market activity and bookings are positive and growth since the shutdowns in the second quarter of 2020 has exceeded expectations, the outlook for our future bookings remains uncertain. While the trend for bookings is on the uptick, the rate of improvement is slowing, and COVID-19 cases are rising. We operate under the assumption that the economic and market landscape will remain challenging for the rest of 2020, with an expected increase in COVID-19 cases as winter approaches, and continuing into 2021 until an effective vaccine or therapy becomes widely accessible. Although we cannot control the macroeconomic factors influencing demand for our products, we are actively implementing measures within our control to safeguard our employees' health as COVID-19 cases surge in various countries and to mitigate any short-term financial consequences from the ongoing pandemic. Starting in late Q1, we initiated plans to address the impact of declining markets and bookings as well as the resulting slowdown in manufacturing due to pandemic-related shutdowns, including implementing cost-reduction strategies designed to lower expenses and improve liquidity. Even with the current market improvements, we expect to maintain these measures until economic uncertainty lessens and results improve, which we anticipate will take place throughout 2021. We project these cost-saving actions to yield between $60 million and $75 million in operating expense savings for 2020 compared to 2019, with around $47 million realized by the end of Q3. As Rajiv noted, we adjusted production levels at our facilities during the second quarter of 2020 to better align with the anticipated decline in demand. In Q3, we moderately increased production in response to slight market improvements, and we expect to ramp up production even further in Q4 based on forecasted bookings and backlog, provided there are no new government shutdowns. With our current backlog and production levels, we expect to have a sufficient supply of components and limited available production slots for the remainder of the year, positioning us to maintain competitive lead times and manage our backlog effectively. We will continue to adapt production levels swiftly to align with market and booking changes while collaborating closely with our suppliers to ensure we have the necessary components as production fluctuates. Given these circumstances, we anticipate our operating profit and net income for Q4 2020 will be significantly higher than in both Q3 2020 and the fourth quarter of the previous year. However, it is important to note that our expectations for Q4 2020 were set before the latest spikes in COVID-19 cases across several countries, including our key markets. This situation could pose challenges to our Q4 booking forecasts. Additionally, we or some of our suppliers might face shutdowns. Several European countries have already implemented renewed measures to curb the virus's spread, and similar actions may occur in other nations. Currently, these new measures haven't greatly affected our plants or suppliers, but we are closely monitoring the situation, especially suppliers in regions experiencing sharp increases in cases. We stand ready to take additional actions if required to ensure the health and safety of our employees globally and to address any potential production or supply chain challenges. Consequently, the uncertainties stemming from the pandemic are limiting our ability to predict booking levels for 2021. Alongside our cost-control initiatives, we are also focused on enhancing our cash flow before financing by reducing working capital and postponing capital expenditures, with projected capital expenses for 2020 now expected to reach around $61 million. Our cash flow before financing improved considerably in Q3 compared to both Q2 and the same quarter last year, yielding $46.3 million for the nine months ending September 30, 2020. Ensuring liquidity remains a high priority for us. As of September 30, 2020, we had $89.9 million in cash and $297.7 million in debt, compared to cash of $60.5 million and $337.7 million in debt at the end of Q2. Importantly, our net debt improved to $207.8 million, a decrease of $69.4 million from $277.2 million at the end of the second quarter. Also, we have approximately $260 million in unused borrowing capacity available under our revolving credit facilities, up from $218 million at the end of Q2. Looking ahead, in light of improving booking trends, we plan to increase our investment in working capital to support the anticipated growth of our business. Al, if your line is secure now, I will pass the call back to you.

Alfred Rankin, Chairman, President and CEO

Thanks, Ken. Before I turn the call over for questions, let me say that Hyster-Yale is very strong, and we have an outstanding group of leaders and employees who have effectively managed production and supply chain disruptions and kept Hyster-Yale on a positive path in the period since the pandemic began. We can't let up as the pandemic is still with us, but I'm reassured by the strength and resilience of our people and believe we would deliver solid sales and earnings performance over the long term. Now let me open up the call for any questions that you may have.

Operator, Operator

Our first question comes from Michael Sesser with DWS.

Michael Sesser, Analyst

Can you guys comment on the significance of completing the certification for that 45-kilowatt engine that you remarked about?

Alfred Rankin, Chairman, President and CEO

Rajiv, do you want to take that?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes, sure. So to apply these engines in China, you have to go through two types of certification. One is at the engine level and the other one is at the vehicle level. The engine-level certification is called SMVIC and once that's approved, then you can start working with vehicle integrators to integrate those engines and certify the whole vehicle with a fuel cell system, and that's called MMIT certification. So as we stated, we have done that with our 45-kilowatt engine and one OEM in China, which is now available for orders. Now what's also happening in China is there's some changes to the subsidy regulations, so a large number of customers are waiting for that to stabilize. What it may require is a higher power engine, and that's part of the reason why we're developing the 60-kilowatt engine, which is going into the certification process right now or going through it right now. Now we feel that the 45-kilowatt is the right solution for these kinds of medium-sized buses, so 8- to 10-, 11-meter buses. So we will continue to market that elsewhere. We are talking to other customers in Asia and Europe about that engine. And then we're starting to talk about the 60-kilowatt engines with our customers in China.

Michael Sesser, Analyst

So based on the way things have evolved over the last year or so since you guys did the Analyst Day, how has your long-term outlook for Nuvera changed? Or has it not changed at all?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Our outlook for Nuvera is very positive. We believe we are at the right moment to accelerate our progress. There is an increasing discussion in the marketplace about hydrogen fuel cells being considered the main alternative to internal combustion engines, especially for heavy-duty vehicles over the short to medium term, including buses, vans, trucks, and larger vehicle platforms. We are engaging in conversations with many original equipment manufacturers regarding our solutions, which gives us confidence in our position. As the market improves, we believe we are well-equipped to engage with significant platforms that will incorporate fuel cells.

Alfred Rankin, Chairman, President and CEO

I think I'd just add to that, that the real significance of passing those certification tests is that our commercialization programs can go into high gear. The most immediate markets of volume appear to be in China, but other markets are emerging in segments in both the Americas, North America, and in Europe. But at Nuvera, the focus is beginning to shift from ensuring that we have the right engine and the right engine variants that is a 60-kilowatt engine to our commercialization and really beginning to drive revenue over the next couple of years. So we're moving into quite a different phase at Nuvera as a result of passing those certifications.

Michael Sesser, Analyst

What milestones should investors be looking for to track the progress of commercialization and the increase in revenue?

Alfred Rankin, Chairman, President and CEO

Well, we'll be reporting in our regular quarterly meetings on the level of orders and the kind of shipments that we think we may be seeing. Now we'll be very careful how we do that to make sure that the timing of those is fully agreed upon by not only us and our customers but by the end users of the products. So that's what you want to be watching for, but we're not going to forecast way in advance. We're going to let the process work through, get the orders and then make the shipments.

Michael Sesser, Analyst

Okay. I have a couple of final follow-up questions. Given your current position and focus on commercialization, are you considering strategic partnerships, or is Hyster-Yale the best entity to handle the commercialization?

Alfred Rankin, Chairman, President and CEO

We are consistently exploring alternatives to ensure we move forward in the most effective manner. We won't discuss specifics at this time, but it's important to note that there are various segments within the total addressable market. We will likely need to form alliances, including dedicated sales arrangements with potential customers across different segments as we progress. This will be a systematic process of identifying the most appealing market segments and determining how we can best engage with them. Rajiv, do you have anything to add? I believe that outlines our current approach.

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes. I think that's a good summary, Al.

Michael Sesser, Analyst

Okay. Just final follow-up. Given the increased attention to hydrogen fuel cells as a technology, do you have any thoughts on where Nuvera sits within the competitive landscape?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes. Maybe I can take this one, Al. So if you think about the fuel cell, there's some critical attributes that you need to have. And we feel good about the attributes that Nuvera has. For instance, one of the critical ones is power density, both from how much power a unit weight of fuel cell can generate and also the unit volume. As you can imagine, both rate and volumes are very critical for OEMs, and we feel we are leading in that area because of our open flow field architecture. The other area is robustness. As you know, our basic structure of the fuel cell is based on stainless steel, where a number of our competitors are using different types of substrates such as graphite, which we feel is less appropriate for motive power. The last area is working within Nuvera and high steel group, we've applied fuel cells to forklift trucks. And in that process, we've learned a significant amount about how to manage the fuel cell as it transitions into an engine and have significantly increased the robustness of the solution. So I think those three parameters we feel we're either leading or amongst the leaders in those parameters, which are critical to both OEM and system integrators.

Alfred Rankin, Chairman, President and CEO

Well, let me just add to that, that the backdrop for everything that Rajiv just outlined is a very significant patent position in a fuel cell solution, which is different from many of our competitors. And we think that gives us a very good position for long-term success, especially in the heavier duty motive applications of various kinds, but also in other segments of the market.

Operator, Operator

Your next question comes from Michael Shlisky with Colliers Security.

Michael Shlisky, Analyst

And I may say great job on the opening comments that the true definition of teamwork has been evident for quite a long time now. Great work on that. I will ask the question about lift truck, but I wanted to follow up with a few questions on Nuvera. I guess, firstly, just a bit more on the opportunity in the U.S. for some of the on-highway applications of fuel cell systems. I guess, do you have to get a different kind of certification or any of your engines if you wanted to have them on U.S. highways? That's my first question.

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes, I'll take this one. This is Rajiv. Again, certifications are by region. So kind of a set of requirements drives integration into commercial trucks in North America, a different set of requirements are driven by Europe. And in Japan, they have the same set of requirements. And you do need to certify. There is a lot of consistency in certification, but they are a little different for each market.

Michael Shlisky, Analyst

Okay. And then I would love to hear your comments on the fuel cell fueling infrastructure across the U.S. Have you got any feel for whether there are any major companies out there that are developing the kind of infrastructure that you would need to fuel a fuel cell truck along a long-distance route? Or are you expecting mostly adopters of any on-highway equipment to return to base operations with their own infrastructure?

Rajiv Prasad, President and CEO of Hyster-Yale Group

I’ll start with this and then Al can add his thoughts. From my perspective, we should view hydrogen in several stages. First of all, hydrogen is a plentiful resource. It's available in various forms; it's present in water and in carbon compounds. Therefore, availability is not a concern. The process of separating hydrogen from molecules is straightforward. You can electrolyze it or use reforming methods to extract hydrogen, which is well understood. So, producing hydrogen is not an issue. The next consideration is hydrogen distribution, which could parallel the distribution of carbon fuels like gasoline. Similar types of stations could be utilized for distribution. I see no physical, chemical, or economic barriers to hydrogen; it ultimately depends on demand. In North America, the most significant application of fuel cells has been in forklift trucks, thanks to local fueling options. We expect this trend to expand. We anticipate that hydrogen will also be used in buses, which return to central fueling points, as well as delivery trucks and vans that do the same. In the short to medium term, we see it being incorporated more in vehicles that have a central refueling location, such as depots. However, there is substantial ongoing work with various groups in different regions to develop hydrogen infrastructure. As I mentioned, the barriers are not significant. It’s really a matter of need driving this development.

Alfred Rankin, Chairman, President and CEO

Yes. The only thing I'd add to that is that once hydrogen is produced, it's relatively straightforward to put it under pressure and ship it. So in that sense, it's analogous to gasoline. And as Rajiv suggested, there are going to be these specialized depots and manufacturing plants that have their own refueling systems. And those may be the hubs for further expansion of refueling as hydrogen becomes more adopted. So there's a lot of flexibility. I don't think there's going to be any one solution, but there are no real technical challenges; it's going to be a very practical matter of getting it transported to the end user in the most efficient way possible as the volumes increase. And as the volumes increase, there are going to be more outlets of different kinds. So it's going to be very much an evolutionary process.

Michael Shlisky, Analyst

That's great insight. I wanted to address some of Ken's comments at the end. You mentioned tracking some of your suppliers during the pandemic as new market shutdowns occurred. Can you provide details on how your orders performed in October? Additionally, how have orders been affected in specific regions or areas that have experienced shutdowns? Have you noticed any decline in activity over the past few weeks?

Alfred Rankin, Chairman, President and CEO

Rajiv, you want to comment on that?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Thank you for the question. We have observed ongoing activity, which has continued into October. However, we are starting to notice some effects, especially in Europe, where recent lockdowns have had a significant impact. Our pipeline is not deteriorating, but customers are taking longer to make decisions, causing some of the orders in our plans to be delayed. We somewhat anticipated this after the initial increase. In Europe, we’re in a strong position, as evidenced by our robust backlog. We believe we can navigate this situation effectively. North America remains strong, and China is very strong, fueled by economic initiatives from the government and aggressive competition, which is boosting volume. Asia presents a mixed picture; while some regions are performing well, others are effectively shut down.

Alfred Rankin, Chairman, President and CEO

Let me just add one other backdrop to the answer to that question. In the first round of COVID-19, the disease was obviously not well understood. There were lots of questions. And as a result, the concept of a lockdown tended to embrace almost all elements of the economy; relatively few were left open. I think what we found is that factories, warehouses, and physical operations can adjust to COVID conditions. They can have reasonable social distancing, very good health protection measures, testing, strict oversight, and rules. That's certainly what we're doing in all of our plants. But the broader result is that as we look at it in the second round, we don't think the focus of the lockdown of activities is going to be on manufacturing the way it was in the first round. So that gives us real encouragement that any slowdowns that we see are really at the type that Rajiv mentioned, delays in communication processes, and sign-offs, and things of that nature. But the need is there. And if the factories continue to work as we think is most likely, then the opportunity is going to be increasingly there over the next year.

Michael Shlisky, Analyst

Okay. That's great color as well. Can I also ask about your parts and service business? Do you get a sense in the quarter that you're seeing enough parts business coming in that you're encouraged that your machines are being used in the field adequately or appropriately and enough? Or do you think you've got some more to go on parts and service in the fourth quarter?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes. I can take that question, and then you can add your comments. We continue to see strong parts requirements in the market. In North America, we have a good understanding of the demand for our lift trucks based on telemetry data from around 50,000 units. This data is representative across various industries. We did notice a drop in daily usage of forklift trucks during April and May, but since then, there has been a steady improvement. Since around August and September, daily usage has stabilized to levels that indicate mature productivity for our customers. In Europe, as mentioned, the lockdown is more related to home activities rather than work, yet we are still seeing solid demand there as well.

Michael Shlisky, Analyst

Okay. And maybe I'd just throw one last one in here. I understand in your comments, Rajiv, about introducing some of the modular products over the next year or so. That's been coming for a while now; we see it's only working. Can you clarify maybe two things? One, has that project been pulled forward thanks to COVID-19? Have you had more time to focus on it? I wasn't sure if your comments meant that you're going to be able to do this faster or better than your plan? And then perhaps secondly, are any competitors already offering products like this that have these modular capabilities? And are there any changes that you've seen in performance with these products compared to the old versions? And any changes to how you maybe fix them or how you service them?

Alfred Rankin, Chairman, President and CEO

Yes, that's a big question and long question.

Rajiv Prasad, President and CEO of Hyster-Yale Group

That COVID impacted the development. I think marginally, we've had our development center operating throughout the pandemic. A large number of our engineers are working from home, which has allowed our testing centers to be reconfigured so that people can socially distance and complete that test. And as normal development issues come along, they have resolved it. We do have a ramped introduction planned for this platform. And so it will progressively introduce new versions, the start of it, both in terms of models, but also in terms of geography. So we expect these products to be launched in the first part of 2021 and then throughout over the next two or three years, depending on geography and the types of models. So it's a pretty extensive program that over the next five years will replace everything we do. So it's very, very significant in terms of the investment the company is making but also the improvement it brings with it. And so I'll turn to that. With the trucks that we're designing, they are very customer-centric in two ways. Firstly, for the operator, the productivity is greatly enhanced; the economics is greatly enhanced. The power sources made available are varied, kind of from ICE to fuel cells and different types of batteries. Then on the other side, the modularity side, what it allows us to do is to configure the right solution for our customers' application, an optimal solution, which invariably will give them the lowest cost of ownership. So the modular and scalable nature of this design allows us to do that. Do we have competitors who can do it? There are some competitors who have taken a modular approach, but we haven't come across any competitors that have taken it to the degree we have with our modularity and scalability and the way we are applying it to our complete product range.

Operator, Operator

Your next question comes from Ramya Sri with Infosys.

Christina Kmetko, Investor Relations

We can't hear you if you're asking questions. I'm sorry.

Operator, Operator

Your next question comes from Michael Sesser with DWS.

Michael Sesser, Analyst

Can you guys comment on the significance of completing the certification for that 45-kilowatt engine that you remarked about?

Alfred Rankin, Chairman, President and CEO

Rajiv, do you want to take that?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes, sure. So to apply these engines in China, you have to go through two types of certification. One is at the engine level and the other one is at the vehicle level. The engine-level certification is called SMVIC and once that's approved, then you can start working with vehicle integrators to integrate those engines and certify the whole vehicle with a fuel cell system, and that's called MMIT certification. So as we stated, we have done that with our 45-kilowatt engine and one OEM in China, which is now available for orders. Now what's also happening in China is there's some changes to the subsidy regulations, so a large number of customers are waiting for that to stabilize. What it may require is a higher power engine, and that's part of the reason why we're developing the 60-kilowatt engine, which is going into the certification process right now.

Michael Sesser, Analyst

So based on the way things have evolved over the last year or so since you guys did the Analyst Day, how has your long-term outlook for Nuvera changed? Or has it not changed at all?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Our outlook for Nuvera is very positive. We believe we are at an ideal stage for growth. Recently, hydrogen fuel cells have started to gain attention as a major alternative to internal combustion engines, especially for heavy-duty vehicles in the short to medium term, including buses, vans, trucks, and larger vehicle platforms. We are currently in discussions with many original equipment manufacturers regarding our solutions. We feel confident about our position and believe that as the market improves, we are well-prepared to engage in key platforms that will incorporate fuel cells.

Alfred Rankin, Chairman, President and CEO

I would like to emphasize that the importance of passing those certification tests is that our commercialization programs can accelerate significantly. The most promising immediate markets appear to be in China, with additional opportunities emerging in various segments across both North America and Europe. At Nuvera, we are now shifting our focus from simply ensuring we have the appropriate engine to actively driving revenue over the next couple of years, particularly with our 60-kilowatt engine.

Michael Sesser, Analyst

Great. As investors, what milestones should we be looking for to track the progress of commercialization and the revenue ramp?

Alfred Rankin, Chairman, President and CEO

Well, we'll be reporting in our regular quarterly meetings on the level of orders and the kind of shipments that we think we may be seeing. Now we'll be very careful how we do that to make sure that the timing of those is fully agreed upon by not only us and our customers but by the end users of the products. So that's what you want to be watching for, but we're not going to forecast way in advance. We're going to let the process work through, get the orders, and then make the shipments.

Michael Sesser, Analyst

Okay. I have two final follow-up questions. Given your current focus on commercialization, are you considering strategic partnerships, or is Hyster-Yale the best option to lead the commercialization efforts?

Alfred Rankin, Chairman, President and CEO

We are continually exploring various options to advance effectively. While we won't comment on specific details ahead of time, it's important to note that there are numerous segments within the total addressable market. It seems likely that forming alliances, including dedicated sales arrangements with potential customers across different segments, will be essential as we progress. Our approach will involve a systematic evaluation of the most appealing market segments and determining the best ways to engage with them. Rajiv, do you have any additional insights on this? I believe that outlines our strategy well.

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes. I think that's a good summary, Al.

Michael Sesser, Analyst

Okay. Just final follow-up. Given the increased attention to hydrogen fuel cells as a technology, do you have any thoughts on where Nuvera sits within the competitive landscape?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes. Maybe I can take this one, Al. So if you think about the fuel cell, there's some critical attributes that you need to have. And we feel good about the attributes that Nuvera has. For instance, one of the critical ones is power density, both from how much power a unit weight of fuel cell can generate and also the unit volume. As you can imagine, both rate and volumes are very critical for OEMs, and we feel we are leading in that area because of our open flow field architecture. The other area is robustness. As you know, our basic structure of the fuel cell is based on stainless steel, where a number of our competitors are using different types of substrates such as graphite, which we feel is less appropriate for motive power. The last area is working within Nuvera and high steel group, we've applied fuel cells to forklift trucks. And in that process, we've learned a significant amount about how to manage the fuel cell as it transitions into an engine and have significantly increased the robustness of the solution. So I think those three parameters we feel we're either leading or amongst the leaders in those parameters, which are critical to both OEM and system integrators.

Alfred Rankin, Chairman, President and CEO

Well, let me just add to that, that the backdrop for everything that Rajiv just outlined is a very significant patent position in a fuel cell solution, which is different from many of our competitors. And we think that gives us a very good position for long-term success, especially in the heavier duty motive applications of various kinds, but also in other segments of the market.

Operator, Operator

Your next question comes from Michael Shlisky with Colliers Security.

Michael Shlisky, Analyst

And I may say great job on the opening comments that the true definition of teamwork has been evident for quite a long time now. Great work on that. I will ask the question about lift truck, but I wanted to follow up with a few questions on Nuvera. I guess, firstly, just a bit more on the opportunity in the U.S. for some of the on-highway applications of fuel cell systems. I guess, do you have to get a different kind of certification or any of your engines if you wanted to have them on U.S. highways? That's my first question.

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes, I'll take this one. This is Rajiv. Again, certifications are by region. So kind of a set of requirements drives integration into commercial trucks in North America, a different set of requirements are driven by Europe. And in Japan, they have the same set of requirements. And you do need to certify. There is a lot of consistency in certification, but they are a little different for each market.

Michael Shlisky, Analyst

Okay. And then I would love to hear your comments on the fuel cell fueling infrastructure across the U.S. Have you got any feel for whether there are any major companies out there that are developing the kind of infrastructure that you would need to fuel a fuel cell truck along a long-distance route? Or are you expecting mostly adopters of any on-highway equipment to return to base operations with their own infrastructure?

Rajiv Prasad, President and CEO of Hyster-Yale Group

I will start with this and then Al may add his thoughts. From my perspective, we should consider hydrogen in several stages. Firstly, hydrogen is an abundant resource; it's found in many sources, including water and carbon fields. Therefore, the availability of hydrogen is not a concern. Separating hydrogen from a molecule to an atom is also quite straightforward. You can either electrolyze it or apply methods like reforming to extract the hydrogen, which is well understood. Thus, producing hydrogen is not an issue. The next factor is hydrogen distribution, which can be similar to the distribution of carbon fuels like gasoline; you could utilize the same types of stations for distribution. I believe there are no physical, chemical, or economic barriers to hydrogen. The critical aspect will be the demand driving it. Currently, the most significant application of fuel cells in North America has been in forklift trucks due to the local fueling capability. We anticipate this will expand. Specifically, we foresee hydrogen being used in buses that return to central fueling locations, as well as in delivery trucks and vans. In the short to medium term, we expect more adoption in vehicles that have a refueling center to return to, like a depot. However, substantial efforts are underway across various regions to establish a hydrogen infrastructure. As I mentioned, the obstacles to this development are minimal; it will ultimately depend on the need for it.

Alfred Rankin, Chairman, President and CEO

Yes. The only thing I'd add to that is that once hydrogen is produced, it's relatively straightforward to put it under pressure and ship it. So in that sense, it's analogous to gasoline. And as Rajiv suggested, there are going to be these specialized depots and manufacturing plants that have their own refueling systems. And those may be the hubs for further expansion of refueling as hydrogen becomes more adopted. So there's a lot of flexibility. I don't think there's going to be any one solution, but there are no real technical challenges; it's going to be a very practical matter of getting it transported to the end user in the most efficient way possible as the volumes increase. And as the volumes increase, there are going to be more outlets of different kinds. So it's going to be very much an evolutionary process.

Michael Shlisky, Analyst

Okay, that's great information. I wanted to revisit some of Ken's comments from the end. You mentioned tracking some of your suppliers during the pandemic due to new market shutdowns. Can you provide insights on how your orders performed in October? Also, how did the orders hold up in regions or areas that have experienced shutdowns? Have you noticed any decline in activity over the past couple of weeks?

Alfred Rankin, Chairman, President and CEO

Rajiv, you want to comment on that?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Sure. Thanks for the question. We've observed ongoing activity, as noted in our comments, and this has continued into October. However, we are starting to see some impact, especially in Europe, where recent lockdowns have significantly affected operations. It's not that our pipeline is deteriorating; rather, our customers are taking longer to make decisions, which is delaying some of the orders we had anticipated. We expected this delay when we noticed the initial rise. In Europe, our position is solid, as reflected in our backlog, which we believe will allow us to navigate this situation effectively. North America remains robust, and China is performing exceptionally well, driven by economic initiatives from the government and aggressive competition that is boosting volume in the region. Asia presents a mixed picture, with some areas thriving while others are essentially shut down.

Alfred Rankin, Chairman, President and CEO

Let me just add one other backdrop to the answer to that question. In the first round of COVID-19, the disease was obviously not well understood. There were lots of questions. And as a result, the concept of a lockdown tended to embrace almost all elements of the economy; relatively few were left open. I think what we found is that factories, warehouses, and physical operations can adjust to COVID conditions. They can have reasonable social distancing, very good health protection measures, testing, strict oversight, and rules. That's certainly what we're doing in all of our plants. But the broader result is that as we look at it in the second round, we don't think the focus of the lockdown of activities is going to be on manufacturing the way it was in the first round. So that gives us real encouragement that any slowdowns that we see are really at the type that Rajiv mentioned, delays in communication processes, and sign-offs, and things of that nature. But the need is there. And if the factories continue to work as we think is most likely, then the opportunity is going to be increasingly there over the next year.

Michael Shlisky, Analyst

Okay. That's great color as well. Can I also ask about your parts and service business? Do you get a sense in the quarter that you're seeing enough parts business coming in that you're encouraged that your machines are being used in the field adequately or appropriately and enough? Or do you think you've got some more to go on parts and service in the fourth quarter?

Rajiv Prasad, President and CEO of Hyster-Yale Group

Yes, I can handle that one, Al, and then you can add your thoughts. We're seeing solid parts requirements in the marketplace. In North America, we have a reliable indicator of demand for our lift trucks based on telemetry from about 50,000 units. This data spans across nearly every industry. We did notice a decline in daily usage of forklift trucks during April and May, but since then, there's been a consistent improvement. Since around August and September, daily usage has stabilized at levels indicative of mature productivity for these customers. This is our current situation. In Europe, as Al mentioned, lockdowns are more focused on home rather than work, yet we continue to observe strong demand there as well.

Michael Shlisky, Analyst

Okay. And maybe I'd just throw one last one in here. I understand in your comments, Rajiv, about introducing some of the modular products over the next year or so. That's been coming for a while now; we see it's only working. Can you clarify maybe two things? One, has that project been pulled forward thanks to COVID-19? Have you had more time to focus on it? I wasn't sure if your comments meant that you're going to be able to do this faster or better than your plan? And then perhaps secondly, are any competitors already offering products like this that have these modular capabilities? And are there any changes that you've seen in performance with these products compared to the old versions? And any changes to how you maybe fix them or how you service them?

Alfred Rankin, Chairman, President and CEO

Yes, that's a big question and long question.

Rajiv Prasad, President and CEO of Hyster-Yale Group

That COVID impacted the development. I think marginally, we've had our development center operating throughout the pandemic. A large number of our engineers are working from home, which has allowed our testing centers to be reconfigured so that people can socially distance and complete that test. And as normal development issues come along, they have resolved it. We do have a ramped introduction planned for this platform. And so it will progressively introduce new versions, the start of it, both in terms of models, but also in terms of geography. So we expect these products to be launched in the first part of 2021 and then throughout over the next two or three years, depending on geography and the types of models. So it's a pretty extensive program that over the next five years will replace everything we do. So it's very, very significant in terms of the investment the company is making but also the improvement it brings with it. And so I'll turn to that. With the trucks that we're designing, they are very customer-centric in two ways. Firstly, for the operator, the productivity is greatly enhanced; the economics is greatly enhanced. The power sources made available are varied, kind of from ICE to fuel cells and different types of batteries. Then on the other side, the modularity side, what it allows us to do is to configure the right solution for our customers' application, an optimal solution, which invariably will give them the lowest cost of ownership. So the modular and scalable nature of this design allows us to do that. Do we have competitors who can do it? There are some competitors who have taken a modular approach, but we haven't come across any competitors that have taken it to the degree we have with our modularity and scalability and the way we are applying it to our complete product range.

Operator, Operator

Your next question comes from Ramya Sri with Infosys.

Christina Kmetko, Investor Relations

We can't hear you if you're asking questions. I'm sorry.

Operator, Operator

Your next question comes from Michael Sesser with DWS.