Earnings Call Transcript - HY Q2 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Hyster-Yale Inc. Second Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded August 7, 2024. I would now like to turn the conference over to Christina Kmetko, Investor Relations.

Christina Kmetko, Investor Relations

Good morning, and thank you for joining us for Hyster-Yale's 2024 second quarter earnings call. I'm Christina Kmetko, and I'm responsible for Investor Relations. Yesterday evening, we published our second quarter 2024 results and filed our 10-Q. These documents are available on the Hyster-Yale website. We're recording this webcast, and a replay will be on our website later this afternoon. The replay will remain available for approximately 12 months. I'd like to remind you that our remarks today, including answers to any questions, will include comments related to expected future results of the company and therefore forward-looking statements. Our actual results may differ materially from our forward-looking statements due to a wide range of risks and uncertainties that are described in our earnings release, 10-Q and other SEC filings. We may not update these forward-looking statements until our next quarterly earnings conference call. Our presenters today are Al Rankin, Executive Chairman, Rajiv Prasad, President and Chief Executive Officer, and Scott Minder, our Senior Vice President and Chief Financial Officer, and Treasurer. With the formalities out of the way, let me turn the call over to Rajiv to begin.

Rajiv Prasad, President and CEO

Thank you, Christi, and good morning, everyone. I'll start by providing the operational perspective and some commentary on our markets. Scott will follow with the detailed financial results and outlook. Al will close the call with his perspective and then we'll open it up for your questions. Let's start with some second quarter highlights. I'm pleased to say that we again generated exceptionally strong quarterly results and exceeded our expectations. Revenue growth continued and profits were up significantly versus prior year. In fact, our second quarter consolidated operating profit and margins reached higher levels than ever before. Scott will have more detail on this later in the call. Before I discuss our markets and operations, I'd like to share a change in how we think about our bookings and backlog. As you can see in our earnings release, we've decided to provide total dollar values instead of unit counts for these measures. Let me explain why: Hyster-Yale is rapidly becoming a solutions-based company. We're increasingly focused on complex, value-adding technology solutions for our customers that include trucks as well as advanced on-truck technologies. Additionally, per-unit truck sales values differ substantially across the product lines. As a result, aggregate unit bookings data is less meaningful when analyzing our performance. This change to total bookings and backlog dollar values is more in line with industry standards. I'll share an additional explanation around our outlooks of context. This quarter, our release discusses factory and retail bookings. Factory bookings represent orders placed directly with the manufacturer or on the factory. These are typically for larger quantities and may include custom specifications. Retail bookings are orders placed through dealers with specific customer purchase orders and are typically for smaller quantities. All retail orders are factory orders, but not all factory orders become retail orders immediately and some could be canceled. By netting these two measures, we can see if stock and backlog are building, which occurs when factory orders outpace retail orders, or are being drawn down when retail orders outpace factory orders. Now here's what we see in the market and with our operations. Based on market industry data and our internal estimates, we believe that the global lift truck market was below prior in quarter two, 2024. This decline was driven by a significant decrease in the Americas and a more moderate reduction in EMEA. Current market data from the Industrial Truck Association or ITA showed a 56% year-over-year decrease in quarter two, 2024, North America factory bookings. These reduced North America factory booking rates were expected compared to the highly elevated levels reached during the pandemic and subsequent period of supply chain shortages. That said, the decline was steeper and earlier than we anticipated. In effect, these recent low factory booking levels are quickly moving total average bookings back towards a normalized growth trend line. The company expects below trend North America factory bookings levels to continue into early 2025. After this relatively short period of demand correction, the market is expected to return to more normalized growth rates over time. We are working diligently to ensure those low-level bookings fill open production slots in 2024 and 2025 until normalized bookings level come back. As we reported in the release, our dollar value factory bookings declined to $380 million in quarter two, 2024, from $680 million in quarter two, 2023 and $520 million in quarter one, 2024. While we increased our Americas market share in the first half of the year, this was not enough for factory bookings to offset the steep market decline. The dollar value of our second quarter 2024, Americas factory bookings decreased by 56% year-over-year and 36% sequentially. We believe four factors contributed to this substantial decline: First, order cancellations by customers who no longer need previously placed orders due to lower than expected activity. Second, shorter lead times. Third, customer and dealer requests to delay shipments of current backlog orders to a time that better suits their needs. And finally, current retail bookings being fulfilled from existing unshipped factory bookings or from current dealer stock levels. Considering the company's strong global backlog, including in the Americas, shipments are expected to continue at sound levels for the remainder of 2024. The Americas' few remaining open 2024 production slots are expected to be filled between August and December. This segment is working to extend its backlog by filling open 2025 production slots largely in the second half of the year. We anticipate the Americas market share will continue to increase over the remainder of 2024 and into 2025. These projections are driven by the recently introduced one to three and a half ton modular scalable trucks now reaching their full market potential and additional modular scalable products expected to launch in late 2024 and the first half of 2025. Our EMEA and JAPIC order increased more slowly than in the Americas over the past few years, but the market downturn is not as steep for these regions. EMEA and JAPIC factory orders were $150 million in quarter two 2024 compared to $160 million in both quarter two 2023 and quarter one 2024. As in the Americas, we expect EMEA and JAPIC's market share to strengthen with the production rate ramp up of the new one to three and a half ton modular scalable products and the launch of other new products. Production slots in EMEA and JAPIC are also largely filled for the balance of 2024, with some lines already in a strong backlog position for 2025. We expect our current backlog to act as a shock absorber, keeping global shipments generally in line with our 2024 production expectations. However, certain lines, particularly those for JAPIC's and EMEA's lower-value warehouse products are expected to have lower shipments in the second half of 2024 compared to the first half. Global production levels may moderate in 2025 without market or share improvements above our current expectations. Over the past 18 months, our results have benefited from strong pricing tailwinds and a significant order backlog, which led to product margins above our target levels. Looking forward, we are focused on maintaining competitively priced products at or above target margin levels. We expect to achieve this by introducing new models, decreasing costs and through ongoing pricing discipline. Before I turn the call over to Scott, I'll point out that despite the market weakness, the lift truck industry is quite resilient and has gone through similar cycles in the past. We plan to push through this latest market downturn by using our backlog and new factory orders while still delivering on our customers' promise to provide optimized product solutions and exceptional customer care. We'll continue to execute on our strategic initiatives and key projects to fulfill these promises. There are many successful projects occurring across all our businesses. We've provided those details in our quarter two 2024 investor deck, which is currently available on Hyster-Yale website. I encourage you to check it out for more information. I'll turn the call over to our CFO, Scott, to provide more detailed financial results and outlook.

Scott Minder, CFO

As Rajiv mentioned, our Q2 2024 results were quite strong, building on a very healthy first quarter, and they were significantly better than we expected. Consolidated revenue rose to nearly $1.2 billion, up more than 7% from Q2 2023. Consolidated operating profit increased ahead of expectations to approximately $96 million, rising 63% year-over-year. Our operating profit margin of 8.2% increased by 280 basis points from a year ago, while our net income increased by 65% to $63 million over the same period. Now I'll provide some color by business. Lift truck revenues grew 8% versus the prior year due to higher average selling prices and a favorable impact from reduced dealer incentive programs. As a result of previously implemented price increases, average lift truck selling prices increased 23% year-over-year. A favorable product mix in the quarter more than offset the effect of lower unit volumes. Mix improved in both the Americas and in EMEA compared to the prior year. This was driven by increased sales of high value options of Class 5 internal combustion engine trucks in the Americas and higher sales of Class 1 and Class 5 trucks, including big trucks in EMEA. Despite mixed benefits, EMEA revenues dropped mainly due to unit volumes resulting from lower year-over-year market demand. In Q2 2024, lift truck operating profit was $103 million, increasing 65% year-over-year. Operating profit margins of 9.2% continued to outpace targeted levels, improving by 320 basis points versus the prior year. This increase was driven by higher unit margins primarily due to three factors: a larger percentage of units sold that included all prior price increases, a strong price to cost ratio, particularly in the Americas, and a mixed shift toward higher-priced, higher-margin Class 5 trucks in EMEA. Lower year-over-year operating profit in our JAPIC segment and increased operating expenses globally partly offset these year-over-year profit improvements. At Bolzoni, revenues increased 6% compared to both last year and sequentially as a result of higher sales volumes. This allows Bolzoni's manufacturing plants to run more efficiently, thus lowering per unit costs. Gross profit was comparable to the prior year as the favorable impact from higher volumes offset increased material and freight costs. Due to higher warranty and employee-related costs, Bolzoni's operating profit decreased versus the prior year. Moving to Nuvera, the business remains focused on increasing its sales pipeline. However, the hydrogen fuel cell industry is facing slower customer adoption. This is due to ongoing hydrogen supply constraints and delayed fuel cell vehicle development programs. Despite Nuvera's strong product demonstration efforts, these industry constraints are delaying Nuvera's bookings and reducing its overall engine shipments. As a result, Nuvera's Q2 2024 revenues decreased to $0.2 million from $1.0 million in Q2 2023. The resulting operating loss was above prior year, largely due to increased product development and lease costs. Before I move to our cash and balance sheet results, I'll detail the effect of taxes on our business. Our second quarter income before income taxes was up 77% compared to the prior year, while net income improved by 65%. The net income increase was tempered by an effective tax rate of 29% in Q2 2024, compared to a 24% rate in the prior year quarter. This increased rate results from the U.S. government's current R&D capitalization requirements. The company is unable to place tax assets on its balance sheet due to its U.S. valuation allowance position. Businesses that invest in R&D activities are required to capitalize these expenses and recognize them over time. This effectively increases taxable income over a five to 15-year period. Next, I'll turn to the balance sheet. The company's financial leverage continued to improve in the second quarter. Our 51% debt-to-total capital ratio improved 200 basis points from the March 31st level, mainly due to higher earnings. Net debt improved by 9% compared to the prior year, but increased sequentially as a result of additional debt required for working capital needs. In the second quarter, we had unused borrowing capacity of $217 million. This declined from the previous quarter due to the higher debt level and lower available borrowing capacity. The latter was due to the expiration of a temporary increase to the company's asset-based lending facility. As of June 30th, working capital represented 18.3% of sales. This metric improved over both the prior year and the sequential quarter, but remains well above our targeted level of 15%. We continue to focus on decreasing working capital, particularly through inventory reductions. In that regard, due to 2024 inventory decreased 6% from Q1 and 4% compared to prior year levels, both finished goods and raw material inventories declined. Looking ahead, we expect our consolidated full year 2024 financial results to improve compared to our prior projections due to the better than expected second quarter results and further financial improvements in the second half of the year. For the lift truck business, we anticipate continued year-over-year revenue growth in the second half of 2024, driven by shipments of higher price, higher margin backlog units. Cost inflation, particularly for ocean-borne freight, is expected to temper the favorable price-to-cost ratio in the second half of the year. Higher inflation and operating expenses are likely to reduce second half 2024 operating profit modestly compared with the prior year. For Q3, we anticipate revenues to increase with operating profit comparable year-over-year. Sequentially, lift truck's third quarter revenues and operating profit are expected to decrease from the strong second quarter results due to normal business seasonality and elevated freight costs. For Bolzoni, we anticipate higher gross profits in the second half of 2024, despite an expected revenue decline. Bolzoni continues to focus on increasing production of higher margin attachments while phasing out lower margin legacy component sales to the lift truck business. As a result, operating profit is expected to increase year-over-year with higher gross profits partly offset by increased operating expenses. At Nuvera, the business is working to increase customer product demonstrations and orders in the second half of the year. The combination of higher sales and lower operating expenses is expected to reduce the second half operating loss compared to the prior year. Nuvera shipments are anticipated to increase in the second half of the year compared to the prior year. This improvement is driven by current and expected customer orders from Nuvera's new hydrogen-powered zero-emission mobile generator first introduced in May of this year. We're excited about this new product. It's generated a lot of market interest since its debut at the Advanced Commercial Vehicle Technology Show. Nuvera developed the generator in collaboration with a major power management services provider to help meet the growing market need for clean energy solutions. This generator helps to fill a gap for onsite rapid recharging of electric vehicles in the need for onsite power in challenging environments such as those with limited access to grid power, located in emission-controlled zones, or operating in sub-zero conditions or noise-sensitive areas. We expect increased demand for this Nuvera product leading up to the California Air Resources Board zero-emission generator mandate, which begins in 2028. Sales of this product should help to bridge the gap to more robust customer adoption of hydrogen fuel cells and overall hydrogen availability. At the consolidated level, we anticipate second half revenues to increase while operating profit will likely moderate slightly compared to the second half of 2023. We expect net income in the second half of the year to be comparable to the prior year due to lower interest and tax expenses. Overall, a modest third quarter decline is expected to be offset by a fourth quarter improvement. The company's effective tax rate is likely to be modestly higher than prior year, largely due to the capitalization of research and development expenses, but below prior expectations due to a higher U.S. earnings base. For the full year 2024, we continue to focus on reducing leverage and improving cash flows through increased inventory efficiency. We expect 2024 capital expenditures to be $60 million down from a prior projection of $84 million. This estimated capital spending still includes substantial growth and efficiency investments while ensuring adequate liquidity. We continue to expect a significant increase in 2024 cash flow from operations compared to 2023.

Alfred Rankin, Executive Chairman

Thanks, Scott. Our strong second quarter results reflect the progress we've made in our mission to provide application tailored solutions to a broad customer base. This means we're not just selling lift trucks, but value-added systems complete with on-truck technologies such as operator assist systems and full automation. We are continuing the transition to modular and scalable products, which accomplishes many of our objectives, streamlining our production process, reducing supply chain costs, improving working capital levels, and delivering customizable systems in a timely manner. We've launched our one to three and a half ton internal combustion engine products globally, and we will further expand our one to three and a half ton modular and scalable product line later this year and next year. Additionally, we are continuing our efforts at Nuvera and Bolzoni to position those businesses as leaders in their industries. The growing opportunities for clean energy and application-specific solutions will be key drivers of our success. Reflecting on our business performance and outlook, I believe our second quarter results were excellent and our future prospects remain strong. With our current backlog and expected bookings, we believe we are well prepared to weather softening markets and volatility for the remainder of the year and into 2025. Now we will turn to questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question is from Chip Moore from ROTH Capital.

Chip Moore, Analyst

Thank you for taking my question. I would like to follow up on your previous comments. You mentioned that global production levels might slow down in 2025, and that bookings growth could normalize during the year. Could you elaborate on your thoughts regarding these trends and your strategy for approaching 2025?

Alfred Rankin, Executive Chairman

I think I'd ask Rajiv to comment and then I'll supplement with anything that I have beyond that.

Rajiv Prasad, President and CEO

Certainly. Chip, I believe the best approach is to consider the most current data regarding the North American market, as it appears to be the most volatile right now. Analyzing historical data and trends since around 2005 shows a steady growth when averaging the fluctuations. Typically, whenever there’s a peak above the trend line, there's a subsequent decline. Starting in mid-2021, we experienced a significant surge in order volume that continued for about two years, tapering off by mid-2023. Since then, we've observed a sharp decrease. During the pandemic, customers placed a tremendous number of orders as spending was directed towards goods rather than other services, leading to increased demand for material movement. However, there was a lack of additional capacity and suppliers were limited, resulting in shipments remaining at pre-pandemic levels despite the surge in orders. Customers are only now starting to receive the trucks they ordered in 2022 and 2023, and they are adjusting to the new environment, deciding how to utilize these trucks effectively. In the market, requests for quotes remain strong, yet decision-making is taking longer as customers evaluate how to manage the incoming trucks, preferring not to order too far in advance while lead times stabilize. This reflects the dynamics at play within the industry. Financially, the market doesn't show a significant drop; the PMI data indicates stability. While we see a drop in demand following the two-year spike, the decline is less pronounced in Europe and Asia, excluding China, where we expect a quicker normalization. North America, on the other hand, may not stabilize until early 2025. Our backlog, as mentioned in previous calls, is positioned to help absorb this downturn. Currently, our backlog stands at about $2.5 billion, which at current market rates and pricing, translates to roughly $850 to $1,000 in excess backlog that we still need to clear. Does that clarify things?

Alfred Rankin, Executive Chairman

Let me just add to that only in a moderate way, if I could. It's very easy in this industry to think that the market is directly and immediately associated with revenues and operating profit. But as Rajiv has outlined, when the market goes into a backlog and the backlog is in an excess position, the real question is what are the prospects for shipping, as it's shipping that turns into revenues. And as Rajiv indicated, we have a substantial backlog; we're continuing to receive bookings and particularly in North America where this situation is most significant. And between the existing backlog and the bookings levels we are receiving, we're filling the open slots in a reasonable fashion. There are relatively few open slots left for 2024. So the shipment levels and therefore the revenues and therefore the operating profits are pretty much within view for us. 2025, particularly in the second half, may depend on return bookings to more normal levels, but we think there's adequate time for that to occur unless there's a big downturn in the economy in general in the United States. And at this point, that's really not in anybody's economic forecast. Obviously, it could happen, but we view this as much more of an adjustment of factory bookings to get back, as Rajiv said, to normalized rates over time, and that our shipments can continue at the appropriate level. So our encouragement is to keep your eye on shipments and keep the bookings in perspective in terms of the lags that are involved before they turn into shipments.

Chip Moore, Analyst

Thank you. That's very helpful color, Rajiv and Al. I guess a follow-up on that excess buffer, the backlog still historically elevated. Can you talk about cancellations that you've seen and risks that those could accelerate?

Rajiv Prasad, President and CEO

Yes, to start with the industry, we've definitely noticed cancellations across the board. Generally, the main reason is that customers order trucks they no longer need. However, there are specific cases that I won’t detail, particularly regarding our competitors. For us, we experienced normal cancellation levels until about four months ago when larger cancellations began, mostly from third-party rental companies. These companies have seen a decline in their utilization, as well as in retail and some light manufacturing sectors. As you can imagine, a lot has changed in retail with new store openings or modernization efforts, and some of those plans have been scaled back, leading to cancellations and deferrals. In light manufacturing, they too have reduced their expansion plans. Despite this, we conducted a brief survey of our customer base, and we anticipate that things will normalize in the coming months. It's not a major concern for us.

Chip Moore, Analyst

Got it. Okay. No, that's very helpful. And maybe if I could ask one more so on the longer-term operating model, obviously we've got to get through some normalization here and potential cyclicality that we'll see what happens. But just as you look out, can you expand how you're thinking about the manufacturing and supply chain optimization piece? I think in the slides you talked about a 70% reduction in suppliers over the next four years; that definitely caught my attention. Just expand on that and how you're thinking about pre-cash flow generation in particular? When do you think we start to see that accelerate?

Rajiv Prasad, President and CEO

I’ll provide a high-level overview. We are phasing out our old platform for one to three and a half ton trucks globally, which currently has around 750 suppliers. In the future, that number will drop to about 150, representing a significant reduction in global suppliers. This means that existing suppliers will handle more business. We are also encouraging some of the larger suppliers to align closer with our key plans to deliver products just in time and in sequence. This change is expected to improve our working capital as it relates to manufacturing inventory. Additionally, near our major manufacturing sites, we are establishing modification centers where we can add custom features to trucks before shipping them directly, primarily for major accounts, which will help speed up our cash cycle. These are just a couple of examples among the many initiatives we have planned for the coming years.

Scott Minder, CFO

Maybe Rajiv, if I could add on the free cash flow generation. Chip, we have a significant goal in inventory or working capital reduction this year. And we made some progress on that in Q2; we said inventory was down about 6%, mainly on the working process and the raw materials where we're having some success and holding back incoming material and using that to build on hand. So while we're behind a bit from where we expected, I think you did see some progress in Q2, and we expect that to accelerate in Q3, which will help get us toward that goal of significant free cash flow or operating cash flow generation this year as compared to last year.

Alfred Rankin, Executive Chairman

I'd add to that that in addition to the effect on inventory that Scott just described, that payables are at a somewhat reduced level at the moment. And as we get back to a normalized situation in terms of the inventory reduction, the payables will also go up. So you have a significant net reduction with our target being to have that pretty much in hand, Scott, I believe by the end of the year.

Chip Moore, Analyst

Great, very helpful. If I could sneak one last one in just separately. Nuvera, you talked about some of the interest there on these newer generator products. That market seems to develop fairly rapidly. Just expand a bit on what you're seeing there and that potential opportunity?

Rajiv Prasad, President and CEO

Yes, sure. I think as we're working with a partner, we had put the prototype together, and we felt that this was an area that would be valuable to some segments of the market. And the team took that prototype, after testing it, they took it to one of the ACT shows, which is a clean air kind of show in California for vehicles. We got amazing response to that; I mean, from many segments that we hadn't thought about. We thought about the primary ones, which was recharging vehicles in the field and also in some of the high congestion in a rental environment, such as airports and major cities where there is electricity supply is a constraint for charging vehicles. But then, we started hearing about that people wanted zero-emission charging solutions, not really charging; it's mobile power solutions for film sets and for working in a city where there's noise and pollution constraints, pretty much all over the world in major cities. So now the team is really understanding the needs by segment, developing the prototype into a finished product, and kind of doing the initial launch early next year, and then we'll go into full production launch later on in 2025. So that's the plan for what we will call the hydro charge system.

Chip Moore, Analyst

Fantastic, appreciate all the color. I'll pack in the queue. Thanks very much.

Rajiv Prasad, President and CEO

Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

Christina Kmetko, Investor Relations

Okay, thank you so much. We appreciate everybody's participation. A replay of the call will be available later this morning, and we'll also post a transcript on the website when it becomes available. If you have any follow-up questions, please reach out to me. My information is in the press release. Hope you enjoy the rest of your day, and I'll turn it back over to conclude the call.

Operator, Operator

Thank you. A replay of this presentation will be available by dialing 888-660-6345 using the passcode 98465 until Wednesday, August 14th, 2024 at 11:59 PM Eastern time. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a good one.