Welcome to today's Hyster-Yale Q3 2022 Earnings Conference Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Christina Kmetko to begin. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us today. Welcome to our 2022 Third Quarter Earnings Call. I am Christina Kmetko, and I'm responsible for Investor Relations at Hyster-Yale. Yesterday evening, we published our 2022 third quarter results and filed our 10-Q, both of which are available on our website. Today's call is being recorded and webcast. The webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. These risks include, among others, matters that we have described in our earnings release issued last night and in our 10-Q and other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Speaking on the call today are Al Rankin, Chairman and Chief Executive Officer; Rajiv Prasad, President; and Scott Minder, our new Senior Vice President, Chief Financial Officer and Treasurer. In addition, Ken Schilling, our former CFO, now the Special Financial Advisor to the Chairman, is also on the call. As many of you already know, Ken announced in mid-August that he would be retiring at the end of 2022. He has been working closely with Scott to ensure a seamless transition of the CFO role, and we appreciate him joining us to participate in the Q&A session of his final earnings call with the company. With the formalities out of the way, I'll turn the call over to Rajiv.

Thanks, Christie, and good morning, everyone. You might notice that we've changed the speaker lineup this quarter. I'll start by giving you the operational perspective and will also provide some color commentary on our markets. As you'll hear, we've made progress, and we expect this positive trend to continue in the fourth quarter. Scott will provide you with the detailed financial results, and now I'll close the call with strategic perspective and take us into Q&A. While Scott will give you the financial pluses and minuses, it's worth noting that our third quarter results were ahead of last year and despite significant currency headwinds. Additionally, these results exceeded our expectations largely due to ongoing cost discipline and enhanced effective pricing that led to improved adjusted standard margins. Those efforts helped to reduce the effect of inflation and supply chain shortages that have constrained our production along with others in the industry. I'll start by providing an update on our production rate and where we stand with ongoing supply chain challenges, first, the positive news. We are seeing component shortages moderate, and we're experiencing fewer supply chain constraints than in the previous quarters. However, certain critical components such as microprocessors, hoses, weldment and stampings are still difficult to source and our global supply chain remains constrained, particularly those supporting materials from China. As a result, while third quarter 2022 shipments grew over the prior year, component availability prevented us from achieving our planned capacity utilization level in the U.S.A. and in Europe. We are working diligently to increase our production rate quickly as the supply issues around critical components are resolved. Looking ahead, we expect our fourth quarter production and shipment volumes to increase over third quarter levels. Building on that momentum, we anticipate full year 2023 production and shipment volumes…

Thanks, Rajiv. I'll start with some high-level comments about our consolidated financial results and then add perspective on the individual businesses. In the third quarter, our consolidated revenues of $840 million increased by 12% or more than $90 million versus the prior year. This growth was due to a 13% revenue increase in the Lift Truck business, which more than doubled the 6% shipment growth rate over the same time period. Revenue growth outpaced shipment growth due to higher pricing and increased parts volumes. This was despite $30 million of unfavorable currency headwinds. On an absolute basis, our shipments decreased modestly from second quarter levels. Combined with the lower third quarter bookings, our backlog decreased by 3% sequentially, ending the third quarter at 18,200 units. The company reported a consolidated operating loss of $24.9 million for the third quarter compared with an operating loss of $54.3 million in the third quarter of 2021. The operating loss for 2021 included $24.8 million of noncash charges taken at Nuvera. On a net basis, we reported a consolidated loss of $37 million for the third quarter compared with a net loss of $77 million in the prior year. In addition to the Nuvera charges last year, the net loss in 2021 included a $38 million charge to establish valuation allowances on deferred tax assets. Now let's look at the results by business. First, the Lift Truck business generated an operating loss of $15.3 million in the third quarter compared with an operating loss of $21.3 million in the prior year. This 29% improvement exceeded our expectations and was driven by price increases of $82 million, which more than offset our total material and freight inflation. Higher unit and parts volumes also helped drive this favorable comparison. Third quarter operating results improved year-over-year despite…

As you just heard from Rajiv and Scott, we're making progress, both operationally and financially. Our third quarter results reflected the improving quality of our backlog, and we continue to have solid bookings and a robust backlog. Looking forward, on a consolidated basis, we continue to project a modest operating profit and income before tax in the fourth quarter of 2022. However, we expect a modest tax loss due to tax expense on profits in areas where a valuation allowance is not provided. In future periods, we believe that we'll be able to recognize tax benefits that are currently offset by valuation allowances. Global taxation challenges aside, our ongoing efforts to work through the improving but lower-priced, lower-margin backlog layers in the fourth quarter and early 2023 are expected to lead to improving margins and a return to solid operating profit and net income for the full year 2023. While we continue to work through this transitional period in our backlog, we're laser-focused on improving our cash flows and maintaining adequate liquidity. To achieve our objectives, we've tightly managed capital expenditures, operating expenses and production plans. Working capital continues to be an area of intense focus as inventory levels remain elevated due to production delays created by part shortages. We're working diligently to build trucks that reduce on-hand inventory while limiting new purchases to those materials that are in short supply. As a result of these cash conserving actions, the company expects solid cash flow for financing activities for the full year 2022 compared with a significant use of cash in 2021. We expect our disciplined approach to capital allocation to continue, including timing delays in some strategic investments. We remain focused on executing our core strategy over time, and we'll continue to invest for long-term profitable growth. Our strategic…

[Operator Instructions] Our first question today comes from Chip Moore from E.F. Hutton.

Just first, I'll reiterate Ken, congratulations. It's been great to work with you and welcome Scott to these calls. So I wanted to ask about -- It feels like there's light at the end of the tunnel right on supply chain. Obviously, still challenges, but more curious if you can expand on your commentary about backlog really potentially serving as -- I think you call it a shock absorber in any downturn. This kind of feels like a unique environment or you be unique position. Maybe if you look back to the prior cycles, how those have fared and what's unique about your current positioning?

Well, let me comment and then others can add on. I think the starting point is to recognize that the bad side of all of this has been that the component shortages have led to a much larger backlog than we ever would have liked. And frankly, uncompetitiveness in terms of serving our customers in the time frame that we would like to between the booking of an order and the delivery of a shipment. So now as economic times are weakening, that extended backlog is, in our view, something that will work in our favor in quite a significant way. We have some considerable number of our production lines that are fully booked through not only the end of this year, but all the way through 2023 and into the early parts of 2024. That's not true for absolutely all. We have a few mines that have much shorter cycles than that. But in the main, the high-value items are all of these extended backlog areas. On the one hand, it makes us less competitive in the marketplace. And you've seen our focus on ensuring that the orders that we do take in this, in the context of these long lead times and high backlogs is at margins that we think are favorable. Of course, we're putting a substantial number of booked trucks into the backlog every month. And we're not producing a huge amount more than we're putting into the backlog. So even if the markets fall off relatively quickly, as they sometimes do in the forklift truck business and usually temporarily as well. It's a fairly short cycle of steep downturn, we should be well positioned to keep on adding to our backlog in a very profitable way and still have plenty of production all the way through 2023 and into 2024. So I guess the bottom line is at a very difficult situation over the last year. We hope is turning into a protective advantage and also confidence in the security of our forecast as we look forward. Do you want to add anything? I think that's our answer collectively.

Yes. No, that's perfect, Al. And I guess just fair to say that you've never experienced anything like that in your history, just like the past few years, I would say.

I think, Ken, I give him a chance to give his parting comment here, you've never experienced anything at 31 years or like that, right?

Never anything like this. It really does provide us with unique opportunity if we end up in a recession.

So normally, we might have what Ken? We might have had 5 months...

Typically 4 months, 25,000...

And some lines might have been 5 and longer lead time.

Yes. I mean our big trucks are typically 5 months, but we're trying to get our ideal lead time for our most trucks is 12 to 16 weeks.

So the answer is you're quite accurate. This has not happened before.

Got it. Yes, that steps on benefit from the pain of what you've been through.

We are ready for...

Yes, you guys deserve it. My follow-up is around your comments around electrification of all tech trucks, obviously, important for fuel cells as well in hybrid applications. So just if you could expand on what you're seeing there and then also just Nuvera specifically the Port of L.A. and.

Well, it's an intentional focus and I'd ask Rajiv to comment on all that.

Yes. I think our electrification plan, which we laid out a few years ago because we saw this trend coming, that was part of why we acquired Nuvera, is now starting to really trend as we expected, probably delayed by a few years, but we see a huge amount of interest from our customers on wanting a zero-emission solution for products that have typically had internal combustion engine trucks. It's particularly strong right now for our biggest trucks that serve the port equipment and some heavy industries, but we're increasingly seeing the same interest in our medium-sized trucks. As we've just said, we're now -- we have our initial products out in the marketplace going through an evaluation phase with some key port customers, both in North America and we will have in Europe. And then we are delivering medium-sized electric trucks running on lithium-ion batteries to customers currently. So, those are now starting to trend and especially with some of the energy challenges we're seeing in Europe, we're seeing intensification on efforts, both by government as well as users and other OEMs to find solutions for that market, which Nuvera is getting more and more involved in.

I think too, Rajiv, that the refreshment of some of our products, including the modular scalable electric trucks were not exactly qualifying as electrification does reflect an enhanced commitment and those products will be coming out at relatively near years in the future. Do you want to say any more about that.

Sure. So we have launched the internal combustion engine variance of those products in Europe, and we're just about to start shipping the trucks in North America. But they will also have electrified versions of those trucks, which have traditionally been internal combustion engine trucks, aside from -- We will be introducing the same strategy on electric trucks which exist today, but there will be electric versions of the ICE trucks in the future.

Interesting. Okay. So some it may be a lot to talk about at the next Investor Day, perhaps some of the stuff.

Absolutely. That's going to be a big team.

Absolutely. I mean, I think if we can begin to convey the -- Both, I guess, a combination of quality, and really, almost -- I think our word has been transformative impact of these new modular scalable products. We've really got to focus on communicating that effectively at our Investor Day because it's very, very important to the future of the company, and we've made an enormous investment in that. It's worth focusing and noting here, and I'm sure that Rajiv and others will elaborate on it at the Investor Day, but a great deal of the pain of developing these new modular scalable trucks occurred in the context of the heart of the line 1 to 3.5 ton internal combustion engine trucks. Now as you move towards, as Rajiv indicated, using many of those components and the structures of those trucks with the electric components, the task becomes significantly easier and the number of new components in these new trucks goes down radically as we're reducing the number of components, types of -- or individual product numbers in our system, in a quite a radical way.

Yes, for sure. Very interesting ramifications. But maybe if I can just sneak a last and I got to sneak one in for Ken, given your background just on the tax situation in Q4 and the pretax income and moving to a loss. Just help us there.

Yes. No, I think as we work through periods, we have, obviously, jurisdictions we're making money in. Those taxes are dropping to the bottom line and become the provision. There's jurisdictions where we're losing money and where we have the requirement to book a tax reserve called the valuation allowance. Of course, that benefit is still there. It's still going to be available on a carryforward basis in the periods when those tax jurisdictions, our businesses in those tax jurisdictions return to profitability. So it's just a matter of timing and how the books recognize it.

Let me say, in addition, and you can check me if I get any of this wrong, that the segment reporting doesn't really do a good job of revealing the legal reporting, which governs the tax provisions that we have. So, it's a difficult and complicated area with a lot [tactics], a lot of expenses associated with the U.S. in effect. Therefore, we have to generate substantial profit in the U.S. in order to take the benefit of those tax reserves. I would just add that you don't have to look in much detail at our financial reports to understand that the biggest driver by a significant margin of profitability for our company has always been the Americas. That's where we'll get a big impact and have, for a period of time, we hope and expect, outsized after-tax income in due course as we start to use that. Did I misstate anything, Ken?

No. And I think, Al, you just stated exactly the case why from a segment perspective, we stock at operating profit, the confusion and complexity of dividing up taxes between the segments really misleads the reader. I think that's what we need to follow. In the Lift Truck segment, in particular, we have geographic locations that are very profitable and others that we're working through those low-priced trucks. As we work through the low-priced trucks and get to the trucks with higher prices and higher margins, we'll restore the profitability in those jurisdictions we sell from.

Our next question today comes from Steve Ferazani from Sidoti & Company, LLC.

Very I appreciate all the color on the call. Sorry if I repeat something, I missed a little bit of it with phone difficulties. When I think about cash on the balance sheet, obviously, you're carrying significant inventories, you'd like to see them draw down, particularly as sales pick up. But in the near term, given demand as it is, would you expect to end up having to utilize some more capacity of the revolver?

Let me start just with a couple of comments. I think more demand really isn't quite the right way to think about it. As we said earlier, we're working through our backlog. The market demand is really going to affect our production way in the future. So, what we are doing in effect, is using up inventory that came in when we didn't have a full understanding of the magnitude of the component shortages that we're going to reduce our production levels. We've now reduced our production levels to levels that we think the suppliers can sustain. So what we're doing is using up the backlog that is on the balance sheet. Using up the inventory that is on the balance sheet and making sure that we don't have any more inventory coming in than those few parts that we need in order to build the trucks that we have. So, the whole dynamics of cash generation are really contained in that little construct that I just gave you. Now some other things happen as well, of course, as we begin to work through the -- bring our inventories levels down and order in a more normal basis, we'll have more payables offsets that actually in effect adds to our cash position because we've already paid for parts that we have on our balance sheet today. So those are the things that I would focus on in answer to your question.

Okay. Okay. That's fair. When I think about the backlog, which has appeared to remain extremely sticky, how are you thinking about it from a geographic perspective, knowing that Europe clearly is going into a slowdown a lot sooner?

Yes. So our backlogs in both locations. On a percentage basis, it's higher in North America than in Europe. But Europe has quite extended backlogs. In fact, there are now new orders, are being slotted in kind of well into the second half of 2023 for the primary lines. Those are the big truck lines and our counterbalanced production line. We feel good about the backlog in both of those geographies, and we feel fine with the backlog we have in Europe to get us through a downturn that we're already seeing in Europe.

Remember, too, is that, especially in the case of these new modular scalable products that we started producing earlier in Europe than in the U.S. As we ramp up production, those are global products, and we can ship them around the world to wherever they're needed which can keep the European business operating potentially at a higher level in terms of performance than the actual market in Europe might drive. However, the overriding factor is the backlog structure that Rajiv outlined.

Okay. Great. When I think about -- obviously, we see some seasonality this quarter. But I'm just thinking about given the massive almost a year of backlog or so, I would assume that from my modeling perspective, and I know you don't guide that far out, but I would expect to see a lot less seasonality just in trying to get the timing of deliveries? Or is that really on the customer side?

The timing issue of seasonality is much more driven by vacation schedules in our manufacturing plants and therefore, lack of absorption during the mid-summer period what received July or August, depending on the plan.

In North America, late June, early July and in Europe is July and August. So, during those periods, our plants typically shut down for a two-week period. We still plan to do that in 2023. We'll see that seasonality still speak.

Okay. Then should I -- how should I think about sort of the Thanksgiving to December holidays type scheduling?

Again, we have a break over the Christmas holidays. So Thanksgiving is typically a two-day stop.

The fourth quarter is generally a strong quarter, but December internally is always weaker because of the Christmas, New Year's holiday period, I think that would be the right way to put it.

Our next question comes from Brett Kearney from Gabelli & Company.

Provided a lot of great color on the benefits that the modular and scalable programs unlocking for Hyster-Yale. Curious as it's been in place in Europe and now rolling out into the Americas. Also what you're hearing in terms of customer response and the benefits you're hearing on that end?

Let me -- Rajiv already has a smile on his space. You can't see it, but let me ask him to answer your question.

No, that's -- firstly, I've spent a lot of time driving this truck myself and they're quite a big improvement over our current product, which was already very good. That's the feedback we're getting from customers that they appreciate the ergonomics, the visibility on the new truck, the controllability of the truck, the productivity they can get out of it. It definitely has a very positive impact on the fatigue factor that sets in over a shift, which then leads to issues late in shifts. So we're seeing all those improvements, but there's one thing us seeing it. Recently, we were recognized in Europe and the U.K. with a [Nachi] award for the ergonomics of the truck. It's nice to get that recognition externally as well.

And uptime and reliability and quality.

Yes. It's still early days, but we're seeing very positive trends in -- for a new product introduction that has a lot of new content. We're seeing quality levels, which are very consistent with very mature and very high-quality products that we ship today. So, that's been a pleasant surprise because we were expecting a bit of a blip as we launch the new product.

Terrific. And then just one quick clarification. Great to see progress on working capital and the reduction in debt in the quarter. The short-term debt of $141 million at September and that's primarily the foreign lines of credit. Any specific maturity dates or conditions around that portion of the balance sheet?

These are long-term revolvers. Yes. The short-term quarter.

You're talking about the line on the short-term portion of debt?

Right.

Those are mostly one-year arrangements that roll over. And we haven't had any issues with rolling over our debt and mostly offshore, as you noted. Our two primary domestic facilities, our revolver is going to be shown in current when it's going to be paid down in the next 12 months and when it's going to be held for more than 12 months than it's shown in the long term. I think you see it on the balance sheet in a single line. When you look at the Term Loan B, that's predominantly going to be long term.

You're talking about the consolidated numbers. So Ken, you want to bring Bolzoni into this and how that affects it?

Bolzoni would have some of the debt in that other current line as well, where they are able to access the European market and have done a nice job of securing and recently rolling into more longer-term arrangements from shorter-term arrangements on their own.

Our next question comes from William Nicklin from Circle N Advisors.

My question evolves specifically around Nuvera. And major -- from what I can say, major fuel cell manufacturers, they're putting strong emphasis now on electrolyzers. It appears that the electrolyzer, which is the supply side of the green hydrogen equation. I will experience more rapid growth in the fuel cell side, which is the demand side of the hydrogen equation. What sparked my question is I saw an IEA projection that there would be 85x growth, 85x and the size of the market for electrolyzers within 8 years. Now, we know that the hydrolase technology is very similar to the fuel cell technology. So my question is does Nuvera have any aspirations of being involved in the electrolyzer business?

Now our current strategy is all around building the power unit, the uses the hydrogen, the other side of it. We do expect the electrolyzer to become a key part of the hydrogen supply chain, and we're working with hydrogen providers who will use that technology. That's not the focus of Nuvera. Nuvera is very much focused on developing engines that can be used in power units, both for mobile equipment, but also now increasingly looking at stationery and kind of recharging type systems that.

We think in the broadest sense that this is a time to have Nuvera fuel cell technology focused on very specific applications where fuel cells are really required to do the job because battery electric will not provide the power capability to do it. We're focused on segments where that is true on the one hand, but it's reinforced by the fact that we think that these particular segments have the biggest opportunity for significant growth as we go to the future. So, from our vantage point, it's focused and get the job done in the areas that have the greatest likelihood of significant commercialization the soonest and where the demand will be driven by the nature of the application, and that's the strategy we're going to stick with.

Yes. That seems like the low-risk extending strategy and that's a good one.

That concludes today's Q&A session. I will now hand you back over to Christina Kmetko for closing remarks. Thank you.

We'll close with just a few final reminders. A replay of our call will be available later this morning. We will also post a transcript on our Investor Relations website when it becomes available. If you do have any questions, please reach out to me. My phone number is on the earnings release, and I hope you all enjoy the rest of your day. I'll turn it back to Drew to conclude the call.

Thank you. The recording will be available until Wednesday, November 9. The phone number to call that on is +44-204-525-0658 and the access code for that is 901518. That concludes today's conference call. You may now disconnect your lines.