Hyster-Yale Materials Handling's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Hyster-Yale Materials (HY)

Hyster-Yale Materials Handling, Inc. (NYSE:HY)

Q1 2014 Results Earnings Conference Call

May 01, 2014 11:00 AM ET

Executives

Christina Kmetko - IR Consultant

Al Rankin - Chairman, President and CEO

Analysts

Mig Dobre - Robert W. Baird

Operator

Good day ladies and gentlemen and welcome to the Quarter One 2014 Hyster-Yale Materials Handling Earnings Conference Call. My name is Mathew and I’ll be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And now I’d like to turn the call over to Ms. Christina Kmetko. Please go ahead.

Christina Kmetko

Thank you. Good morning everyone and thank you for joining us today. Yesterday, a press release was distributed outlining Hyster-Yale’s results for the first quarter ended March 31, 2014. Copies of our earnings release and 10-Q are available on our website at www.hyster-yale.com.

Our conference call today will be hosted by Al Rankin, Chairman, President, and Chief Executive Officer of Hyster-Yale Materials Handling also in attendance are Michael Brogan, Vice Chairman and Chief Executive Officer of NACCO Materials Handling Group, and Ken Schilling, Vice President and Chief Financial Officer. Al will provide an overview of the quarter and then open up the call to your questions.

Before we begin, I would like to remind participants that this conference call may contain certain 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. Additional information regarding these risks and uncertainties are set forth in our earnings release and in our 10-Q.

In addition, certain amount discussed during this call are considered non-GAAP numbers. The non-GAAP reconciliation of these amounts are included in our 2014 first quarter earnings release available on the website.

I would now turn the call over to Al Rankin. Al?

Al Rankin

Good morning. Hyster-Yale Materials handling had revenues of $676 million and net income of $22.1 million or $1.31 a share for the first quarter of 2014. And that compared with revenues of $645 million and net income of $24.6 million or $1.47 per share for the first quarter of 2013.

Operating profit was $31.6 million for the first quarter and that compared with $32.1 million for the first quarter a year ago. Income before income taxes was $31.6 million in 2014 and $30.7 million in 2013. Company's cash position was $107 million on March 31 that compared with $175 million at December 31. And debt March 31st was decreased to $33 million from $69.5 million at December 31 of 2013.

Our revenues increased in the first quarter of 2014 compared with the first quarter of 2013 primarily due to an increase in sales with higher priced lift truck in all market segments, the favorable effect of unit price increases implemented in 2013 primarily in the Americas mainly to offset the impact of weakness in the Brazilian real and increase in fleet services in parts volume in the Americas. Revenue increase was partially offset by a slight decrease in unit volume and an unfavorable currency movements. Fewer unit shipments in Europe more than offset unit shipment increases in the Americas and Asia-Pacific. Unfavorable currency movements in the first quarter of 2014 compared with the year ago quarter resulted from the weakening of the Brazilian real and the Australian dollar, which was partially mitigated by the strengthening of the euro against the U.S. dollar.

In the first quarter of 2014, worldwide new unit shipments were approximately 20,600 units compared with shipments of approximately 20,800 units in the year ago first quarter and 22,700 units in the fourth quarter of 2013. Worldwide backlog was 28,900 units, or approximately $715 million, at March 31, 2014 compared with approximately 27,500, or approximately $684 million, at March 31, ‘13 and approximately 28,200, or $717 million, at December 31, ‘13.

Gross profit improved by $2.5 million from the first quarter a year ago. This increase includes a $6.6 million pre-tax improvement, mainly due to the favorable effect of price increases, an increase in parts volumes and lower material costs, all primarily in the Americas, which was partially offset by significant unfavorable foreign currency movements of $4.1 million pre-tax and a shift in sales mix to lower-margin units also primarily in the Americas.

However, despite the improvement in gross profit and reduced the interest expense as a result of lower debt levels and lower interest rates during the first quarter of 2014 compared with 2013, only a slight increase in income before income taxes compared with the prior year was realized as these benefits were largely offset by higher employee-related expenses mainly attributable to increased headcount and marketing and engineering to support the company's five strategic initiatives.

Higher income tax expense in 2014 resulting from a higher effective income tax rate and the absence of favorable tax adjustments from changes in certain U.S. and foreign tax laws recognized in the prior year resulted in a reduction in net income.

Looking forward to global outlook for forklift trucks is expected to grow moderately in all major global regions for the remainder of 2014 compared with year earlier. Although strength in certain developed western markets is expected to be partially offset by some weakening in the developing markets.

As a result of this anticipated market growth, combined with expected increases in market share and a strong ending backlog, the company anticipates an overall increase in unit shipments and parts volumes in 2014 compared with 2013.

The majority of this increase is expected to come from the Americas, with smaller increases in the Asia-Pacific unit shipments. Due to current political and economic uncertainties in Eastern Europe and new dealer transitions, an increase in 2014 European shipments appears less likely than had previously been anticipated.

While sales are expected to increase moderately in 2014 compared with 2013, the company expects to generate an increase in operating profit, excluding the anticipated gain on the sale of the company's current Brazil plant, in excess of the rate of sales increase, with a decrease in the first half of 2014 compared with 2013 that is expected to be more than offset by improvements in the second half of 2014. The favorable effect of anticipated increased unit volumes resulting from the company's strategic initiatives, increased parts volumes and product enhancements are all expected to contribute to this improvement.

In addition because it is not anticipated that the market price of the company stock will increase if the rate experienced in 2013. Lower estimated equity incentive compensation is expected to contribute to the improved operating profit. These favorable items are expected to be partially offset by the full year impact, the marketing and employee costs associated with the investments in strategic initiatives that were made over the course of 2013 and by unfavorable foreign currency movements in the Americas and in Asia Pacific.

After excluding the estimated pre-tax gain from the sale of the company’s Brazil plant in 2014, and after excluding the $12.8 million valuation allowance release taken in 2013, net income is expected to improve moderately compared with 2013.

The effective improved operating profit as well as lower interest expense due to lower debt outstanding and lower interest rates under its new revolving credit agreement are expected to be partially offset by higher expected effective income tax rate.

The higher effective income tax rate in 2014 is expected to result primarily from the effect of higher United Kingdom income taxes due to the 2013 valuation allowance release combined with an anticipated increase in income from the Americas operations, which have a higher tax rate.

Full your 2014 operating profit results excluding the anticipated gain on the sale of the Brazil plant are expected to improve minimally in the Americas segment, which includes the North America, Latin America and Brazil markets with anticipated increases in units and parts margins largely offset by unfavorable foreign currency movements from an expected strong euro and slight material cost increases.

Our operating profit in the Europe segment which includes the Middle East and Africa markets is expected to increase in 2014 compared with 2013 due to anticipated benefits of the current strength of the euro and slightly lower material costs. These improvements are expected to be partially offset by the full year effective marketing and employee costs, which gradually increased throughout 2013.

Asia Pacific results for 2014 are expected to be lower partially due to the weakness of the Australian dollar and weaker industry demand in Australia despite the favorable effect of expected increased volume.

Cash flow before financing activities for 2014 is expected to decrease from 2013 primarily due to an increase in capital expenditures, largely driven by construction of a new plant in Brazil. These capital expenditures will be partially offset by the final cash payment which is expected to be received in mid 2014 when the sale of the current facility is expected to be finalized.

The company remains focused on gaining market share over time as well as on improving its margins in its internal combustion engine business through the execution of its five strategic initiatives, all of which are outlined in overview in our earnings release.

To meet the specific application needs of its customers, the Company is focusing on developing utility, standard and premium products. To this end, development programs are underway for its electric-rider, warehouse, internal combustion engine and big truck product lines. The Company is in the process of launching a new premium spark-ignited engine for the 2 to 3.5 ton cushion and pneumatic internal combustion engine trucks as part of its 2014 Model Year program. This new 2.5 liter engine is expected to improve productivity and fuel economy together with using new software controls to better match the truck's performance to a given customer application.

The 2014 Model Year program is also expected to include new introduction of fuel hydraulic tanks on the 4 to 4.5 ton internal combustion engine cushion trucks. It is anticipated that this feature will significantly reduce the working temperature of the hydraulic system leading to improved reliability and lower cost of ownership for customers.

The company has started production of the 4,500 pound heavy duty industry and pedestrian pallet truck at it Greenville, North Carolina plant. Overtime, this platform is also expected to be produced in other regions it's a maximized design and component commonality.

In the second half of 2014, the company will continue with its Model Year updates for the electric rider platforms and expects to introduce its Tier 4 final diesel emission solutions for big truck models. As stated previously, the Model Year programs will keep the company's platform [soundly] positioned in the market overtime.

Further new platforms are expected to be developed and launched over the next few years based on longer term segment needs or technological change opportunities. In mid-2011, the company introduced into certain Latin American markets UTILEV branded 1 to 3.5 ton internal combustion engine pneumatic tire lift truck model to meet the needs of lower intensity users. This UTILEV branded utility truck was gradually introduced in the global markets during 2012. During 2013, the company expanded the UTILEV branded series of lift trucks by introducing a 1 to 3 ton ICE cushion tire truck in North America and a three wheel electric rider truck globally. The UTILEV branded series of lift truck is expected to continue to gain market position in 2014.

The company offers one model of standard Internal Combustion Engine lift truck for medium-duty applications in both pneumatic and cushion tires for both Hyster and Yale. The company expects to launch additional trucks in the standard ICE model series in future years.

All of these new products and upgraded products, including the new Reach Truck and new Big Truck models introduced in late 2013, are expected to help increase market share, to improve revenues and to enhance operating margins. In addition, stricter diesel emission regulations for new trucks began to go into effect in 2011 and will be fully in effect by 2015 in certain global markets. The company has launched and expects to continue to launch lift truck series over time that will meet these new emission requirements.

And that completes my first quarter update and I will be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Mig Dobre of Robert W. Baird. Please proceed.

Mig Dobre - Robert W. Baird

Good morning.

Al Rankin

Good morning.

Mig Dobre - Robert W. Baird

Let's see, several questions for me. I guess maybe the place to start is your Europe outlook. Can you give us maybe a little more color as far as what sort of led to the slowdown, maybe in the quarter versus your expectations? At least to my knowledge, your exposure to Eastern Europe is fairly limited, but perhaps I'm mistaken there. Fairly limited, but perhaps, I'm mistaken there?

Al Rankin

Well, we actually have some significant volumes in Eastern Europe, Russia in particular. And the conditions are certainly unsettled there, both in terms of currency availability of credit and the unpredictability at this point of the market size to a significant degree.

And I think, probably in some other countries, in Eastern Europe there is slowing down because of the turmoil associated with the other countries that are threatened perhaps by Russia's actions and internal discontent.

Mig Dobre - Robert W. Baird

Can you maybe parse out, I mean, $700 million worth of revenue, how much of that revenue in EMEA is related to Eastern Europe directly versus Western or other area?

Al Rankin

We really don't get into that level of detail, I think perhaps the important thing is that. As we look forward, we do see unit volumes improving in the rest of the year compared to the previous year. And all other some adverse product mix in likely that later in the year as well, because we're the good product mix in Europe. But we do see modestly improved volumes in total for Europe by the year.

Mig Dobre - Robert W. Baird

I appreciate that, Al, but I'm trying to figure out exactly why it is that you see that, because if the issue is Eastern Europe who knows when the situation is going to be solved, and it might get worse over there. That's why I'm asking about the exposure.

Al Rankin

Well, and I don’t think we're prepared to provide any more detail than what I really outlined at this point.

Mig Dobre - Robert W. Baird

Sure; okay. I'm also looking at inventory. Your finished goods inventory has picked up. My understanding is that's probably helped with some cost absorption in the quarter. But apparently this is all driven by Europe. How should we be thinking about this finished goods inventory through the year and maybe the impact that's going to have on margins?

Al Rankin

Well, if you look at our inventory in terms of day sales outstanding, its actually better the end of first quarter and was a year ago. So the absolute numbers increased and certainly I think that over the course of the year, we see them coming down, we have put in place some strategic inventory buys particularly in the engine area, but we expect inventory requirements to moderate as we go through the rest of the year, and but this is looking forward in terms of the production cycle, this is a heavy period in terms of the inventory require to service a future volume. And so really what we watch particularly carefully is indeed the day sales outstanding and our cash conversion cycles actually will better in first quarter.

Mig Dobre - Robert W. Baird

I see. Then if we can switch to the Americas. Can you provide any more color on your comment as far as a shift in sales mix to lower-margin units in the Americas?

Al Rankin

Well we have some pretty good I really love to little more check in but my recollection is we have some pretty good big truck volumes and some of the areas where we expect to be improving our position are much lower unit priced units and those trucks but we do see volume picking up overall in terms of units nicely in the Americas just as it did in the first quarter.

Mig Dobre - Robert W. Baird

I see. So here's what I'm wondering here. When you're talking about some of the share gains, and you're talking about maybe some of the electrical products, I've always sort of wondered exactly what the impact on margin over all would be, are you guys building share in that part of the market? I'm wondering if that's what happened here in the quarter and that's what you're highlighting (inaudible) gaining share.

Al Rankin

No, no I don’t think so. I think the biggest change for us as we called out was in the comment is currency in terms of margin. It’s not we actually had even in the first quarter pretty good improvement performance in margins and a good portion of that was stripped the way by adverse currency movement. So, no, I don't think it has -- it's really not related to the factor that you're talking about.

Mig Dobre - Robert W. Baird

Okay, I see. And as far as developing world demand, I'm wondering, we know about Eastern Europe, that's clear. But what are you sort of seeing demand wise in other emerging markets?

Al Rankin

Well, so far China continues to be a very large market, but it's clearly our view is that the growth is moderated significantly in China. Our share as a share of total market is low although our share of the foreign brand market in China is quite respectable. And, but I think we don't see the explosive growth in China that is characterized the last few years.

In Asia, I think, we see a year that is up a little bit, but Pacific is likely to down a little bit. We see demand falling off in Australia. And so the whole Asia-Pacific area in total is probably pretty flat excluding China and Japan which are up a little bit. Western Europe, I think went through very difficult period in parts of last year. And the market is turning up in Western Europe as we see it.

On the other hand, as I suggested earlier, Eastern Europe is turning down; Middle East and Africa we think is going to be up as well, so the total market for the Europe, Middle East and Africa is up. And we see the U.S. market up moderately; Latin America is probably down little bit; Brazil is down a little bit. So in total for the Americas, we see it’s just modestly up because you got some plus and some minuses. I think it gives you some flavor.

Mig Dobre - Robert W. Baird

No, I appreciate that, it certainly does. I guess my last question really is kind of a competitive dynamic question. One of your bigger competitors Kion has been now as a public company has been vocal about laying on the strategy to get a little more involved with utility type product, they are also looking to gain share or gain share in the Americas and they’ve been vocal about that.

I am wondering sort of your thoughts about that and are you seeing change in competitive dynamics that you can highlight.

Al Rankin

Well, the other two big companies in the world Toyota and Kion are both very good competitors. They are tough, they’re tenacious and determined. And that with regards especially to your comment about utility trucks for Kion, they do have Chinese source and they are introducing those trucks in various parts of the world to complement their other offerings just as we are. And so, but I haven’t seen anything major on horizon that changes things. And with regard to your comment about the Americas, I would simply say that Kion’s had, it’s a high on the Americas for a very long period of time, there is nothing particularly new there. The question is how do they do it? And I think that's the complex question that they have to sort out and at this point, distribution position and others it's not really designed to give them the position that they really probably like to have in the Americas.

So, I'm sure they try to work all kinds of things to change that. But at this point, I don't see major changes that have occurred as of now.

Mig Dobre - Robert W. Baird

Sure. And I'm presuming that you're still sort of seeing older layers behave quite rationally at this point in the cycle still, there's no change to turn that, right?

Al Rankin

No change in the competitive dynamics that I think we've seen for some period of time. We have some competitors that are pretty aggressive on price and others that are little more disciplined. And but has anything fundamentally changed? I don't think, we feel it’s behaviors are -- have changed dramatically at this point.

Mig Dobre - Robert W. Baird

Alright, that's great. Thank you Al.

Al Rankin

Yes.

Operator

Thank you for your question. (Operator Instructions).

Al Rankin

Okay. Thank you all very much. We appreciate you joining in on this first quarter conference call. Christy?

Christina Kmetko

Thanks for joining us today, we do appreciate your interest. If you do have any follow-up questions, please give me a call. My number is 440-229-5168.

Operator

Thank you, Christina. And the reminder ladies and gentlemen, if you wish to listen the replay of this call, you may do so by calling number 617-801-6888 and the access code is 93232006. Thank you very much for participating in today’s conference. This concludes presentation. You may now disconnect. Good day.

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