Q2 2022 Hyster-Yale Materials Handling Inc Earnings Call
So the quarter Christine.
Thank you al.
I'll start with high level comments about the consolidated operations and then provide some perspective on the individual segments in the second quarter. Our consolidated revenues increased 17% to $895 4 million from 700, $765 $6 million last year because of <unk>.
Pricing in our lift truck and <unk> businesses, and higher unit and parts volumes in the Americas and EMEA. These improvements were partially offset by unfavorable currency movements from the strengthening U S. Dollar shipments for the quarter were 25300 units an increase of 11, 5% over the prior year second.
Uh huh.
However, as al mentioned, while the lift truck market continued to be healthy. It has shown signs of moderating as a result of this and other factors Rajiv will discuss in a moment.
We saw a significant decrease in bookings in the second quarter compared with the prior year second quarter and the first quarter of 2022.
We ended the second quarter with approximately 112000 units in backlog still very high but down modestly from the historically high level at the end of the first quarter.
Despite the increased shipments in higher revenues the company reported an operating loss of $15 $7 million compared with operating profit of $5 $9 million in the prior year, which included $6 3 million of income associated with a favorable court ruling. We also reported a consolidated net loss of $19 4 million.
Ian.
For the second quarter of 2022, compared with net income of $1 9 million last year.
Decline in profitability was mainly due to significant material and freight cost inflation and manufacturing inefficiencies, primarily in the Americas and EMEA totaling $85 9 million.
These unfavorable variances more than offset the favorable impact of improved pricing and $59 9 million and higher unit and parts volumes.
Looking at the individual segment results, our lift truck business generated an operating loss of $11 7 million in the 2022 second quarter compared with operating profit of $15 $4 million in the prior year, primarily due to a decrease in gross profit in all three geographic segments, but most significantly in.
EMEA as well as higher operating expenses in the Americas. The decline resulted from the specific factors I mentioned in the discussion of our consolidated results.
While all three of the geographic lift truck segments were affected by higher costs and production delayed EMEA was affected the most the Americas was able to fully offset the increase in material cost with price improvement, whereas EMEA pricing did not fully cover cost increases.
And <unk> also experienced significant unfavorable currency movements and JP generated lower margins because of the shift in mix to lower margin products.
<unk> second quarter revenues increased modestly and operating profit improved to $3 4 million from an operating loss of $400000 last year.
These improvements were primarily due to a 19, 6% improvement in gross profit and a substantial increase in gross margin, resulting from a shift in sales mix to higher margin products and benefits from price increases net of material and freight cost inflation as well as lower operating expenses.
Finally at <unk> revenue of $300000 was comparable to the prior year second quarter and the operating loss decreased to $7 9 million from $9 million in the prior year the.
The lower operating loss was due to improved margins from lower production costs in 2022.
That completes the update of our financial results for the quarter now, let me turn to Rajiv who will provide an overview on our operations and our strategic projects.
Thank you Christie.
The global lift truck market grew in the fourth quarter of 2022.
As al indicated appeared to decline significantly in the second quarter compared to the high level.
Second quarter of 2021.
Fourth quarter of 2022.
As a result of the market decline as well as our focus on accepting only orders expected sound margins looking into the second quarter of 2022 decreased substantially from the robust levels of 2022 first quarter 2021 second quarter.
However, the average booking sales price.
Our unit increased 23, 8% and the.
2022 second quarter over the first quarter and 43, 6% over the prior year quarter because of price increases.
A shift in sales mix and our focus on executing on the order through the expected margins.
Over the remainder of 2022, we expect the global lift truck market to continue.
The decline from historical highs of 2021, but remain.
Above pre pandemic levels.
As a result of this market outlook.
<unk>, we have where are you.
Using an order acceptance.
Anticipate a substantial decrease in bookings during the second half of 2022.
<unk>.
Second half of 2021, particularly in the Americas.
Despite growing parts shortage and supply chain disruptions, which continued to constrain production.
Lift trucks in the second quarter, we experienced higher shipment levels done in the prior year second quarter, and 2022 first quarter because of an increase in production rate over prior.
<unk> levels were solid.
Reported by a moderately reduced impact of component shortages.
Nevertheless, with higher shipments and lower bookings done in 2022 first quarter, our high backlog levels.
The delivery lead times.
That remained well above historical norm began to decrease in the second quarter of 2002 and two.
First time since the beginning of the pandemic.
Some moderation in the number of suppliers with shortages occurred in the first half of this year with shortages are anticipated to continue through the remainder of 2022 and then decline in 2023.
However that could change based on China, Lockdowns in Russia, Ukraine conflict development.
As a result, we have reduced our planned production schedule for the second half of 2022.
In 2023 from what we expected.
Hey.
Time of last quarter's earning release.
We continue to focus on managing margins in our backlog, especially on new orders.
As a result of the Ukraine, Russia conflict material costs continued to increase in the second quarter.
However, our recent science have suggested some relief from additional material and freight cost inflation in the second half of this year.
As a result of the cost inflation, but has already occurred.
And what is expected over the remainder of 2022.
We have implemented several price increases both last year and in the first six months of this year.
Many of the orders in the backlog slotted for production in the third and fourth quarters do not reflect.
The full effect.
Yes.
On the other hand, our sales team is pricing new bookings or close to the target margin based on anticipated future costs at the time of production.
Further the renewal of tariff exclusion is expected to partly offset.
The anticipated higher material cost inflation in the back log over the remainder of 2022.
Due to the lag between when price when unit price increase go into effect and when revenue is realized.
The units of ship as.
As we work through our low margin backlog in the second half of 2022 and in early 2023, we expect margins to improve specifically in the 2022 fourth quarter when the higher margin already booked trucks are expected to be produced and shipped.
We continue to focus on our strategic initiatives, which are laid out in more detail in our earnings release.
Our lift truck business primary focus continues to be on introducing new modular scalable products and transforming ourselves approached by using an industry based approach to meet.
Customer need boson.
<unk> continues to work on streamlining and strengthening operations, while increasing its Americas business and expanding its industry. So.
Marketing another product capability, and Nevada continues to focus on ramping up demonstration.
And bookings of 45 and 60 kilowatt engine.
Overall, we continue to believe we have the right strategies in place with sound long term financial results. Once we can achieve resolution of component shortages.
Relative stabilization and then decline in material and freight costs.
I'll now turn the call over to Ken for an update on future quarters and liquidity Ken. Thanks Rajiv.
As you've heard from both Allen received significant supply chain disruptions continue despite relentless engagement with our supply base.
These disruptions are reducing our production plans and shipment levels.
Substantially lower than what we would like and increasing manufacturing inefficiencies.
We have also been faced with higher material and freight costs.
All of these factors are having an impact on our expectations for the second half of 2022 and into 2023.
However, given our robust backlog and actions put in place to mitigate the impact of supply chain constraints and shortages, we still expect full year 2022 shipments to increase over 2021. Despite the normal third quarter plant shutdowns of course. This is all with the expectation that supplies of.
<unk> or commodities or not further.
Great.
We are hopeful that availability will improve and consequentially fraction can increase over our current forecast for the remainder of 2022 and into 2020 Three's production schedules.
As Rajiv discussed we are focusing on pricing new bookings closer to target margins based upon anticipated cost at the time of expected production.
Increased prices have translated into a substantial increase in the current average sales price per unit.
Within our backlog.
Over time, we expect improved margins as prices and costs come into line.
In the meantime, we continue to work aggressively to manage component availability to increase production rates and continue to adjust prices as costs change.
As a result of these factors along with our core strategies increased shipment volume potential of our current backlog and expected bookings during the remainder of 2022 and enhanced prices and the renewal of tariff exclusions, we expect lift truck business, we expect the lift truck business to move from a.
<unk> operating loss in the first half of 2022 to an operating profit in the fourth quarter.
Because of manufacturing inefficiencies expected in the third quarter due to our normal seasonal plant shutdowns and reductions in production volumes, resulting from the continued supply chain constraints.
As well as unfavorable currency effects, we expect a significant operating loss at the lift truck business in the third quarter that is higher than the operating loss in the prior year third quarter.
Then an increase in substantial operating profit is expected in the fourth quarter, but one that is slower than was anticipated at the time of the 2022 first quarter earnings release.
Anticipated operating loss in the second half of 2022 at the lift truck business is expected to be significantly lower than the operating loss in the first half mainly driven by strong operating profits in the fourth quarter of 2022 in the Americas segment.
Over the second half of 2022, we are projecting the.
The stabilization of product and transportation costs and continued improvement in component and logistics availability.
Although this could change if the availability of commodities and our components continues to be seriously affected by various market forces, including a potential economic recession, the lockdowns in China, and the ongoing Europe , Russia, Ukraine conflict.
We're also anticipating the continued introduction of additional modular and scalable product families and the continued implementation of cost saving initiatives over this period and into the longer term.
As a result of lower sales and inefficiencies expected from the normal third quarter seasonal plant shutdowns and reduced demand for legacy components for the lift truck business and additional material inflation caused by the Russia, Ukraine conflict, we expect bolt zoning to achieve near breakeven.
Results in the third quarter of 2022 with a return to profitability in the fourth quarter as component shortages moderate efficiencies return and benefits are realized from pricing actions.
We expect solid operating profit at bolt Sony in the second half of 2022 compared with an operating loss in the second half of 2021.
However, operating profit in the second half of this year is expected to be significantly lower than it was in our in the first half of 2022.
Excluding the impact of the inventory valuation and fixed asset impairment charges taken last year, we expect moderately reduced losses at <unk> in 2022, because of enhanced fuel cell shipments and expected lower production cost although losses in the second half of 2022 are expected to be higher.
In the first half as a result of higher operating expenses.
On a consolidated basis, we expect a larger net loss in the third quarter of 2022 than previously projected but a return to net income in the fourth quarter of 2022.
However, I would note that the fourth quarter net income is not expected to offset the losses generated in the first nine months <unk>.
Generally results in the second half of the year are expected to be lower than anticipated. When the 2022 first quarter earnings release was issued.
Mainly due to the adjustments we made to our production schedule because of continued supply chain constraints.
Current expectations are based on the anticipated reasonable resolution of component shortages.
The relative stabilization of material and freight costs are.
<unk>, our expectations could be lower if supply chain and inflation conditions worsen or if conditions improve we.
We continue to monitor the factors contributing to our revised outlook for the year and we'll provide an update on our next earnings call.
We carefully manage our capital expenditures are operating expenses and our production plan for 2022 in a manner designed to protect liquidity. We have implemented a program of strict controls over operating expenses to reduce cash outflow, including delays in the timing of certain of our strategic program investments.
While we expect over time to make these capital expenditures and investments in the business maintaining liquidity will continue to be a priority.
During 2021, and the first half of 2022, our ability to build and ship trucks was.
It was significantly constrained by parts shortages of certain critical components, while the remaining components needed to build trucks were received and added to inventory.
Causing inventory levels to increase substantially.
We expect to reduce inventory substantially by using current inventory to build trucks for which production has been significantly delayed due to critical part shortages and receiving components as they are needed for production.
That process has resulted in reduced inventory over the last two months with further reductions expected monthly.
At June 32022, we had cash on hand of $75 6 million and debt of $586 million.
Compared with cash on hand of $65 1 million and debt of $479 million at March 31, 2022 and.
And cash on hand of $65 5 million and debt of $518 5 million at December 31, 2021.
As of June 32022, we had unused borrowing capacity of approximately $156 million under our revolving credit facilities compared with $218 million at March 31.
I will now return the call back to al.
As we look to that.
Remainder of 2022, we're continuing to focus on managing effectively in this challenging environment.
What we are facing near term supply chain challenges.
Dynamics remain strong we've taken numerous pricing actions to recover margins. Additionally, we have updated our production plans to better match. The current environment in terms of supply of components and believe we have a realistic outlook.
Back half of 2022.
We have innovative products and we're implementing the right programs in this highly inflationary environment.
We remain confident that the actions we are taking will enable us to return to profitability in the fourth quarter of 2022 and in 2023 further we continue to execute our midterm.
And long term strategies, our strategy for the longer term is clear.
And transformative are key projects as well as the explicit objectives for the lift truck, both Sony and numerous businesses.
Port This long term strategy, we will now turn to any questions you may have.
As a reminder to ask a question that you can press star one on your telephone keypad.
Your question you can press Star Pizza.
Please ensure your unmetered lately when asking your question.
First question for today comes from Steve <unk> from Sidoti.
Steve Your line is now open.
Great. Thank you. Thanks, all I appreciate all the detail on the call.
There's a lot there.
Start out by obviously, one congratulations on the pick up on deliveries in the quarter given all the volatility itself.
Impressive certainly well above what we're expecting in terms of shipments deliveries.
How youre thinking about the second half of the year.
<unk>.
Are you seeing and this wouldn't be different from what we're hearing from other companies, including much larger ones.
Component shortages in the near term gotten worse now versus how you were looking at some three months ago or in terms of how youre guiding for at least three Q is it more the typical European slowdown and just higher material prices or is there a material impact in terms of shortages.
Yes.
Let me ask Rajiv in a minute to make a comment to comment on your question.
But I'll just preface his remarks by saying that it's important to keep in mind.
Our objective has been to increase our production of over.
Prior levels, we have or backlog in which we very much would like to do that so.
We have.
Increasing demand for our products as well as just component availability issues to meet current levels.
So let me with that perspective in mind, let me turn to Rajeev for more detailed answer.
Yes sure. Thanks al. Thank you for the question.
What we see right now is a little bit of variation in the two regions.
In North America, we do see improvement.
The number of delayed shipments from our suppliers is definitely reduced.
From the first quarter to the second quarter.
We expect and we forecast that to continue to improve but not be flawless, we still expect.
<unk> worked hard with that buyer to meet the delivery target.
In Europe .
We're seeing a little bit of a worse situation driven by the.
The Russia, Ukraine conflict.
And then as we've gone into the summer shutdown period in.
In August .
So again I would characterize it.
Improving in Europe , but not to the level, we are seeing improvements in North America, so still more challenging to get out parts in Europe , hopefully that gives you a sense for it.
Okay.
I appreciate that but what it does.
It does mean is that.
What it does mean is as we said very clearly in the earnings release is that.
We are bringing our production planned production levels in line with what we see as supplier of capabilities.
At this point.
And we're.
We're not going to assume we can ramp up the way, we would like to and the way we had anticipated our suppliers could ramp up we're going to wait until we really have clear evidence that they can ramp up and then we'll move up beyond the more moderately increasing levels that we now have in our current production.
<unk>.
Plans, so we're trying to be conservative in our aspirations.
And R&R are planning production levels and the consequent inventory that's coming in.
But if things improve.
From what they are now.
We certainly have the backlog to respond to those improved availability.
Two and improved availability situation if that occurs.
When I look at book.
Bookings and backlog.
Dollars per unit.
It's hard to figure out how much of that mix versus.
How much.
It's just straight pricing and also as I look at the.
Dollars per unit in backlog how much of that is you've moved a significant portion now of the older price backlog and that is going to help you moving forward.
If you can sort of help out with the sort of the per unit dollar amount in both bookings and backlog and if I can throw one other piece to that is when we see the bookings coming down how much of that demand versus <unk>.
Strongly holding the line on pricing and willing to give up business to make sure you get the margins you want into next year.
Maybe Rajiv starts and then turn it to Ken.
Yes.
Thanks.
So what in terms of backlog.
We are I mean, you can imagine the backlog has some sort of chronicle element to it and so does our pricing in the inflation.
So we are working through the lowest margin trucks February and the backlog we did that in the <unk>.
Half of the year, we still have some to work through.
That's definitely an element.
In terms of the pricing of the trucks I think we've given you the percentage of price increases we have made in.
In 2000 and over the last 18 months and those numbers are significant and you can imagine how that has an impact on the price of the trucks that we're booking right now I would say the mix is a slight impact.
We did ship more class III, which is our smaller warehouse trucks.
In the first half than we had planned in that backlog to come down a little bit more than the other trucks, but I would say that the marginal part majority of it has to do with.
Sell in shipping.
Lower price trucks, which are lower margin and then booking really good.
<unk> trucks in terms of how the what the market dynamics is.
As we stated the market is just this.
This quarter started to come moderate as we were anticipating.
Now within within that we are.
I would call it a price leader.
Holding the price in line with what we expect not what today's product will cost, but our products that will ship out and you can see with our backlog in some cases by lead times are almost a year.
So we are forecasting ahead trying to understand.
The shipment.
And our kind of infer.
Inflation will be and.
Then pricing according to that.
At that meeting so that.
Also create not I don't think all of our competitors using those techniques.
So that's made us a price leader in the market right now and that's had some impact on the bookings.
<unk>.
Yes, I would agree with Rajiv comment we ship lower priced layers out of the backlog in the second quarter production, we booked trucks at higher prices during the second quarter as well and Steve Youre doing the math based upon the backlog and the backlog values and you've seen that we grew by about.
<unk> $3700 on the average trucks between the.
Between March 31, and June 30 in terms of average sales value for them over the trucks now some of that was that increase in price. Some of it was the shipping of the lower price trucks, but also.
There is a bit of mix, but you also have to consider that trucks that we sell overseas now stated in U S. Dollar value have actually gone down so in some ways. The backlog is now.
Not even showing all of the increase that we have because those born book sales in non U S. Currency are typically being translated at unfavorable conversion rate in the U S. Dollar. So I guess, that's kind of how you add up the bits and pieces.
That's helpful. That's helpful. Thank you if I could just one last one in obviously, you're really held the line on Opex.
How how how well can you do that as we start to start picking up production hopefully.
Over the next few quarters and Youre getting those stronger margins.
What are you thinking about opex, because obviously you've done a great job here over the last couple of quarters.
Rajiv.
So.
As he said we have held a tight ship as far as the Opex is concerned.
It has involved slowing down some of our key initiatives. The critical ones are still continuing and we funded them.
We think that the second because we brought down the production rates.
For the second half of the year I think we're still going to run a tight ship from an opex point of view.
Maybe with a little bit of flexibility on some of the next tier program.
And then again progressively.
Kind of.
Get back to some of the other programs in 2023 to a more normal levels.
That's useful to just keep in mind that there is some inflationary backlogs are inflationary impact that's occurring in <unk> as well as your other.
As well as in the components that we buy it.
I'm sure you've seen that in other companies but.
Our outsourced services.
Certain kinds of expenses are continuing to move up so there is an inflationary aspect that.
Apart from sort of the substantive question of.
When do we begin to undertake some of the projects that we've been deferring.
For a relatively short period, but nevertheless, deferring.
Okay great.
Great I appreciate all the detail thanks.
Thank you Steve Thank you Steve.
Thank you.
Next question comes from Chip Moore of Es Hudson Chip. Your line is now open.
Good morning, Thanks for taking the question.
<unk>.
Let's follow up on the reduced production production schedules for the back half of the year and into next year.
Can you give a sense maybe of your ability to flex those schedules out that if you do see some improvement on supply chain shortages.
Quickly do you think you could react.
Yes.
I guess I'll take that out but yeah. So.
Typical lead time for our highly engineered components is in that.
12 to 13 week kind of timeframe so about three months.
And we are using internal metrics to see how well we are receiving material that's the primary variable.
We have the capacity from a manufacturing perspective to build of trucks.
So that's not an issue.
So as those metrics.
Tell us that we could the security of supply is improving.
Then with about it.
I would say three.
For some of our bigger trucks full month.
Kind of ahead, we can start to ramp up so that that has that kind of ramp up lead time.
I would add to that that the sort of metrics, we're using internally.
Are very much focused on the levels of inventory that we have available to build trucks for the next.
Four days or so.
And whether we have all the components in hand.
And we also track very carefully the components that are available for the next 30 day build and our judgment as to the reliability of the supplier a forecast of what they are going to ship to us so when those metrics start to improve.
That'll be.
A real indicator that we can look forward in the way that Rajeev was was describing.
But we are in the meantime, we're going to be.
Carefully control because it's just not breaking open in terms of both supply availability as we had hoped.
Money.
Got it.
Very helpful.
And if I could ask another on sort of this being a price leader and a bit more selective.
On bookings.
It makes a lot of sense I think given the backlog position.
Any sense of.
Back to the competitive dynamics.
Whats, allowing maybe some of your competitors to be a bit more aggressive on price or any concerns on.
Fair or again is it such.
Such such strong backlog, but thats really youre focused right here.
Not.
The set of excellent share gain programs that we put in place and our market share position.
In 2021 was.
Sure.
Very strong and the programs are really paying off so we feel that as.
Two things happened one.
Costs come down as commodities ease over the next few months.
That our prices will become.
<unk>.
We'll be able to lower our prices and still have our target margins, but secondly, there is evidence in the marketplace that our competitors.
We're simply slower than we were to recognize the impact of.
Increased inflation costs and their own pricing and now so there's catch up going we think on both sides that will allow us to come become competitive when we need to based on the backlogs and we're monitoring our backlogs very much on a.
Our product type by product type basis. So.
<unk>.
The backlog levels are not the same for <unk>.
All trucks are more much more extended than others and so our objective will be as our backlogs come in line.
Two more competitive and appropriate levels, we expect to be competitive in our pricing in the meantime.
We're following.
The approach that you just outlined.
I guess, the only other thing I would add chip.
We're working very closely with our customers and dealers.
We've kept them apprised of what we're doing and why we're doing it.
<unk>.
We have had extensive discussions with them.
<unk>.
Those relationships are going to be intact through this process.
And then remember that.
The inflation is not just in the components that we buy the shipping costs boats.
Internationally and domestically have been.
Very elevated.
There is some sign of.
Moderation.
Both of those and we're hopeful that that will continue.
Continue and come.
Come back down to far more normal levels.
Yes.
That's very helpful perspective appreciate that but.
But maybe just one more.
Kind of longer term.
Update on.
New thereof, sort of pipeline and progress.
Maybe how to think about some of the perpetual.
Regulatory drivers there, whether I think California is talking about phasing out some of the bigger trucks.
Spark ignited trucks.
Obviously Europe has many initiatives underway.
Kind of an update on how you're thinking about the opportunity.
Sure Yes.
I'll take that chip so.
We certainly have seen activity I would say led by Europe .
<unk>.
With the constraints that are coming out of Russia.
Kind of carbon field.
Europe is really working hard to figure out what the.
Alternative fuel future for them looks like and hydrogen as a big part of that we've seen.
Okay activities accelerate in Europe .
We are also seeing that in India.
And the China with the lockdown to slow things down a little bit, but we expect them to come back strong and now we're seeing early signs of.
Kind of the same thing in North America, but as you state.
Starting with California, but we also know that.
Happens in California, the next kind of Green state.
Will.
Also go along with California So.
So activity level at Nomura is high.
But the numerous we've talked to you.
Over the last few calls about that Novartis, taking really segmented the market into what type of vehicles. We think fuel cells are going to be most effective in.
As a green solution versus let's say batteries.
Theyre very focused on.
And of those segments of the market.
Connecting theyre working with the key the.
The key Oems in that.
And those the SEC.
<unk> and <unk>.
What's become apparent is that.
Critical path too.
Industrialization of fuel cells is really going through a demonstration on a development path.
<unk>.
Essentially what we're doing internally within <unk>, we just brought up.
Port equipment into California depth arrived last weekend.
So.
And it's going to be tested with one of our key customers in the port in La and then later in the year. We will do the same thing in Valencia for instance, with our reach with another port equipment truck. So we're starting to rollout.
In our own products.
And then to have a long list.
In our buy segment.
Customers that they are earlier in the phase then of course, <unk>, but going through the same processes with those with those cut.
Customers starting with demo units.
I think our terminal tractor vent.
The venture is going very well we will have.
Believe rajiv.
Fuel cell terminal tractors up and running very shortly.
August .
<unk> is the is the plan.
And.
Hi.
I think the overall perspective, if you want to back away from the details is that.
Yes.
The.
Hi.
Gasoline prices diesel fuel prices and the shortage of natural gas.
Really significantly accelerated.
The.
The focus in development.
Perspective.
Both we and I think more generally the industry have on prospects over the next few years. So.
I think.
The overall perspective is a good one.
But we are clearly focusing on the segments as Rajeev said, where we expect early adoption because batteries alone will not get the job done in the heavy duty applications that we're focusing on.
Great I appreciate all the color thanks, everybody.
Thank you.
Thank you next question comes from Brett Kenney of Gabelli funds. Your line is now open.
Hi, guys. Good morning, Thanks for taking my questions.
Earning morning, so good morning, obviously.
Obviously, you've heard from a lot of companies.
Further stress, particularly from China, Lockdowns and warn Ukraine, putting on.
Supply networks.
Just curious your factories today and your inventories kind of what are the few critical components, most holding things up at this point and obviously understanding it's never a shifting list, but the.
The wire harnesses electronics still two of the larger bottlenecks.
Yes, so you pick the two top ones.
But then.
Stuff like houses then.
And Ah.
Sometimes I'm surprised that the things that we get in those shortages on and when we deep dive what the root causes is typically some sort of material availability.
And in some cases they have been COVID-19.
<unk> got a impacted by Covid, but that's starting to be a rare case now, it's mostly raw material out of sync with what people expected.
Congrats.
<unk> supply it seem to be doing better than the ones who are much more reactive suppliers are the ones that struggle.
Okay.
Okay, great Yeah, I would add only to that why would add one thing to that.
Sure.
And I just had to step away for a second so I don't think Rajiv commented on this but.
Yeah.
Part of it or the type of suppliers that you have asked about <unk>.
But we're also seeing random smaller.
Parts that are available here and there and.
And we've been putting in new processes to deal with that sort of random.
Unavailability of parts, because as you well know it only takes one part that's missing that to be able to complete the trucks. So.
It's not just the big large scale.
Parts, it's often.
To some degree.
Smaller and less important parts that are simply.
Unavailable, because our our suppliers are unable to get what they need from their suppliers and so there's a lot of random.
Stuff going on that's why we focus on.
Weather so strongly on whether we have the parts for the next four days to build all the trucks.
That we're planning to build for the four days.
When we get that working better it'll give us a lot more confidence about our ability to build and to build efficiently because it is it's not just the.
On the availability.
It's very difficult to run an efficient manufacturing operation.
You just don't have a reliable supply chain structure.
Yes, okay.
That's very helpful.
And then I guess.
With some of the geopolitical dislocations.
Eastern Europe potential.
Potentially also evolving now in Asia, I know, you've obviously done a tremendous amount work really the past few years managing through this.
Challenging supply environment, I guess longer term structurally do you think theres any adjustments coming out of this you might contemplate on some of your component sourcing or even finished products shipped out of China and other areas.
Yes.
To address that question, but let me introduce it by just saying that.
We have a lot of discussion with our board of directors about that particular issue.
And the general perspective is that we need to have backup plans.
For all of the components and some of the assembly operations that we have.
Around the world and those areas that are likely to have more political stress or issues.
Sensually so.
This is an area of considerable focus in which our board is taking a lot of interest in us.
General backup plan and risk management plan with that backdrop, let me turn the question over to Rajiv.
Okay. Thanks, Alan Thanks for the question Brian So.
Yes.
Was going to say.
Even before we got into the current.
Spikes in geopolitical.
End of issues.
With this.
Considered that we need a more resilient supply chain.
And that was kicked off in parallel to development of our.
And theories trucks, which is the modular scalable truck and we turned the phrase called center of gravity supplier. So just to give you a feel for it.
Over 700 suppliers today, but what we've integrated into Iris is a much smaller group of suppliers, but they're all large very capable suppliers with a very diverse footprint.
What I mean by that is a supplier that can build a pod in Asia that can build the same path in Europe . They can build the same path and in the Americas.
And we feel that will drive a lot of the resiliency.
But at the same time, we're heavily developing.
In other Asian countries.
Source of supplier.
As a backup to China.
Terrific. That's very helpful. I appreciate all the color.
Thanks, Brett.
Thank you next question comes from Benjamin Zealand of a race for capital Management Benjamin Your line is now open.
Yes.
Hey, guys. Thanks for taking my question.
Just had a question as it relates to your working capital. So it looks like this quarter, we saw pretty.
Sizable decrease in your payables, but also a subsequent increase in your receivables.
I'm wondering what you can do better to manage your working capital overall is there anything you can do to accelerate receiving your receivables from customers or extending your payment cycle.
And then also on the inventory side nice job using up some inventory inventory this quarter, but how should we think about that going forward. Thank you.
Let me just give you an overview.
Our receivables generally are managed to vary.
Tightly and.
We feel pretty good about the receivables.
The process that we have in place.
Our real focus is on inventory.
And with the production schedules, we've put in place.
We.
Believe that we can better match.
The inventory to the production levels that we have.
And.
The focus is on decreasing inventory in a significant way Rajiv would you like to expand on that.
Sure.
Not really.
Stabilizing our production plan and bringing it down and what I would call flattening it.
So that we wouldn't have working capital peaks and troughs, which are in a tough for us to manage and also tough for our customers and suppliers.
Suppliers, so thats going to be a big enabler, we have just completed that process.
So there is an intense focus on.
On inventory.
And bringing it down and essentially those two elements to it first one is we are pushing out the unneeded inventory in collaboration with our suppliers as well.
We've brought down the production rate. The other one is the build of trucks, we had planned.
It's not complicated so that's that's what we're very focused on the whole organization is focused on it and I think that we're winding up the intensity on that.
In terms of amazing the payables were managing it very actively.
And.
Working with suppliers to extend payables, where we in our niche.
So I think that whole dynamic is working our intense focus right now is inventory and getting it down.
Maybe.
Elaborate.
Can you elaborate just one one bid on the inventory I think of it in two components that Rajiv mentioned one is what we have on hand, we have a lot of the components that we need to build the production that we have planned over the next several months.
Hand in.
In hand way ahead of when we would ordinarily have had it in hand, because our production aspirations were higher than the ones that we put in place now.
So thats one piece of it is just working through the inventory that we have and the second is ensuring that nothing else is shipped to us that we don't need in order to build the trucks that we now have in the production schedule and Rajiv.
Im focused on that so.
We see a significant opportunity to bring down the working capital by focusing on inventory.
One priority as Rajiv outlined.
Got it thank you that's it.
Very helpful.
Following <unk> comment I mean that effort to reduce inventory of course is going to cause us all.
Or less in the current period and Thats been a put thats going to push our payables down as we reduce our inventory and buy less of the parts that we need.
In the current period to produce trucks in the current period.
So payables are going down because we're adjusting inventory levels down to more more.
Appropriate levels due to the excess inventory we have based upon the lack of those critical components to build trucks.
On the receivable side, we did have a bit of a.
Linearity, where we shipped more trucks towards the end of the quarter that affected receivables going up but we also had higher sales and higher sales values because of the increase in unit prices as we go through this price increase curve. So as prices go up we might be selling the same number of trucks, but if those trucks are selling for.
<unk>, 15% more we're going to see 15% more in receivables. So I think those are some of the drivers that we do have programs with receivables to floor plan as best we can if dealers for steel or stock.
And we've worked with.
Depending upon the mix of customers there may be different payment terms, but I think we do have a very active program to manage receivables as Alan pointed out.
And I think in terms of timeline and the best way to think about this is that we expect.
Inventory reduction programs in our working capital in general too.
Decline significantly over the next over the remainder of 2022.
Okay, and then could you put any.
Quantification around that so this last quarter it looks like you actually released.
$35 million roughly of inventory, which is phenomenal.
Should we kind of expect that run rate going forward and then.
How should we think about a normalized inventory level in terms of days of inventory outstanding.
Or just in terms of an absolute dollar amount in the past you guys have been around five.
$500 million to $600 million of inventories should we expect.
$290 million of inventory to be released year through that timeframe that you just laid out.
I think I'd go back there.
<unk>.
A lot above that but Ken why don't you elaborate as appropriate.
Yes, obviously, we're living in unique times with the.
A critical component availability challenges, causing us to not have inventory at the time, we need it but our goal of course is to return back to more normal normal levels.
Receivable days inventory days and payable days and I think if you go back and look at our history Youll see but where we're at what we're targeting now we don't believe we're going to achieve all of that this year, but we will achieve we will achieve a quite a bit of that at least that's what we expect and thats what were working towards.
And then of course as the supply chain evens out in 2023.
We're going to task our businesses to get back on to our targeted days of working capital in each of those categories.
I would add to that.
We did have more and more of the new scalable modular and scalable products that.
The inventory.
Carrying characteristics of those are significantly different from the products that we have today. So there are longer term.
And increasingly significant results that will come.
From that as well as we push forward.
Thank you Benjamin.
Thank you for the remaining questions. So please limit yourself to one follow up on one question. Thank.
Thank you. Our next question comes from Richard Dearnley of loan Pool Partners. Richard Your line is now open.
Good morning could you discuss.
In the advanced truck to hydrogen fuel cells and so on.
Your ability or your marketing strategy when folks like Amazon and Walmart are getting more from.
Various suppliers.
How do you deal with that.
Rajiv do you want to comment on that.
Sure I mean I think.
Difficult to comment on how and why others are doing what they're doing I mean I think.
Our strategy for marketing and developing this market if the work very closely with the.
With key customers because it's not just about the solution you need the infrastructure that goes along with it and are not just and as.
The truck the hydrogen, but then you need very skilled service capability service and support capability.
So we're kind of moving.
Our.
Customers, who have really put through this process understand it.
And so we're engaged with them in.
We will be following a normal kind of the way we interact with the market approach.
And obviously some of the venture companies, they're doing some unusual.
We're unlikely to do.
Alright, great.
Right.
Okay. Thank you.
Thank you.
Thank you our final question for today comes from William Nicklin Circle N Advisors. William Your line is now open.
Thank you and thank you for taking my question.
In line with the.
Prior Newberry comments and the comments you just made.
I noticed that in the inflation reduction act of 'twenty two.
That came out last week as infection type.
Titled Energy Security and Climate Act.
Within the drive quote grants to reduce air pollution at port funded at $3 billion.
For the purchase and installation of zero emission equipment and technology at Port.
$1 billion for clean heavy duty vehicles like school buses transit buses and garbage trucks.
Seem to be that that was.
You have great lobbyists or you've had.
Good fortune to have that in there could you give me your thinking on the respective effects of this and maybe also.
The.
New.
Act.
What if gold was build back better than something else, though that where they're talking about a $3 per kilogram credit on energy production.
I had a hydrogen production will have to see.
We'll have to see how all that plays out in final legislation, but I would say that the general overview. We have is that the kinds of things that you were talking about are playing to our strength.
We said earlier in this discussion.
Our focus is in applications, where batteries alone really are not suitable for.
Having a productive application for the end customer, that's particularly true in ports.
Heard Rajiv comment about specific.
Ports that were working with and I think there are others in Germany, including Homburg and.
That we're working very closely with.
I think.
That's going to be a key area and heavier duty vehicles, whether they are garbage trucks or.
To some degree of school buses and others.
Are certainly areas, where our technology and our product applications and where our focus of both marketing and product capabilities is strongest so we.
We consider all of those things positive and we'll be working to understand the details of any legislation that comes along to try to take advantage of.
National government policies, whether they are here in the United States or perhaps an even greater degree.
In Europe .
As well Rajiv do you want to add anything to that.
No I think that cover fit.
As you can imagine that those are our target areas anyway, both by our customers announced port being by far number one.
Because there is intense focus and I would say this is global not just North America that.
Moving to zero emission vehicles.
Is critical.
In those locations and then as Al said the heavier duty vehicles those are key segment for us.
So.
<unk>.
It kind of.
We understand why its being done this way because thats, where the need is and.
Also the toughest applications because once we can solve those.
It can then flow across the other other applications that the.
The cost to come down.
But this is why.
On that too.
This is why it's so important to pick up on Rajeev point earlier that this is not simply a matter of providing a product.
There is a whole support system that has to go along.
With these product set includes.
The <unk>.
Development of the application itself.
The vehicle.
From a total engineering point of view so.
It's a very complex process and we think it plays to our strengths and our capabilities we've been assembling.
And engineering very large equipment, especially in our nine Megan plant.
For heavy duty trucks and port equipment.
For many many years the weight of a lot of skills in this kind of.
Area and.
We're going to be using those to help end users really meet their real needs.
Thank you it sounds like you've got your arms around it and I appreciate it.
Thank you Bill.
With that we'll conclude our Q&A session.
Thank you to everyone for joining us that presence just a few final reminder, a replay of our call will be available online. Later. This morning, we'll also post the transcript.
On the Investor Relations website, when it becomes available if you have any questions. Please reach out to me you can reach me at the phone number in the press release I Hope you enjoy the rest of your day and now I will turn it back to Alex our operator to conclude the call.
Thank you a telephonic replay will be available until Wednesday August 10th.
In the U S and you'd like to Darling you can tell one eight double 6813, knowing full three and you see access code 149747. Thank.
Thank you for joining today's call you may now disconnect your lines.
Okay.
Yes.