Q2 2023 Hyster-Yale Materials Handling Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the high Street <unk> second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Christina <unk> Investor Relations. Please go ahead.
Thank you good morning, everyone and thanks for joining US today welcome to our 2023 second quarter earnings call I'm, Christina telling I am responsible for Investor Relations at Hyster Yale joining me on today's call are al Rankin Executive Chairman, Rajiv Prasad, President and Chief Executive Officer and Scott.
Under our senior Vice President Chief Financial Officer and Treasurer.
Yesterday evening, we published our second quarter 2023 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.
Remarks that follow including answers to any 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've described in our earnings release and in our 10-Q and other SEC filings. We may not update these forward looking statements until our next quarterly earnings conference call with the formalities out of the way I'll turn the call over to Rajiv. Thanks.
Thanks, Christy and good morning, everyone.
I'll start today by providing the operational perspective, and some high level observations on our robust second quarter results and why they exceeded our expectations.
Ill conclude with some color commentary on that market Scott.
Scott will follow with a detailed financial results and outlook and then I will conclude our prepared remarks with his strategic perspective and open the call for any questions.
Second quarter consolidated revenue increased by 22% or $195 million year over year, while operating profit advanced by almost $75 million from a prior year loss.
This large profit improvement was driven by product margin increases above our initial estimates.
Our better than expected product margins had several drivers first we experienced a favorable mix shift towards higher margin sales channels.
Second material costs were lower than anticipated and finally, our supply chain conditions in the Americas continued to improve we eliminated the first week of the plant to.
Plant shutdowns at the end of June .
The North American plant use this extra time to reduce inventory and backlog units and.
Ultimately shorten lead times six extra production week helped Americas increased shipments by 14% over the first quarter.
These positive factors were.
More than.
These positive factors more than offset the negative impacts from the challenges in sourcing certain critical components.
Third party component shortages and related production.
Impact continues to be a headwind but have moderate.
Compared to the prior year.
Globally, our second quarter unit shipments increased nearly 10% year over year and sequentially.
This was principally due to Americas supply chain improvements, partially offset by production.
Short falls in our EMEA factories.
While the environment has improved many of our factories still experienced production complications due to ongoing skilled labor shortages and shortages of critical critical components.
These challenges resulted in several production lines falling below their plan planned second quarter rate increased targets.
Looking ahead, we're expecting improving production rates in both Americas and EMEA.
But still below potential due to continued labor shortages in Europe ongoing component supply constraints are likely to negatively impact production rates in the third quarter. However, we're expecting an improvement in the fourth quarter.
These ongoing production challenges, we anticipate improving production and shipment volumes as the labor and supply issues continue to abate in the second half of 2023 compared to 2022 and first half 2023 levels.
In the second quarter.
Labor in certain material costs continued to increase compared to prior year levels, principally in EMEA, but the rate of increase slowed substantially forward economic indicators suggest stabilizing inflationary pressures throughout the second half of this year.
On past, earning calls we have called out the combination of inflation and our aged lower priced backlog as profit margin constraints.
At the end of the second quarter, we are we.
We have essentially worked through all lower margin backlog units booked prior to price increases implemented in 2021 and early 2022.
In the second half of 2023, we expect further stabilizing of material costs, improving production rates and higher priced truck production.
These benefits should drive increased lift truck gross margins compared to prior year.
Particularly in Americas, and EMEA, we expect this improvement to continue into early 2024 will continue to monitor our material and labor costs closely including the potential impact from tariffs and competition and we will adjust pricing as needed to maintain momentum towards.
Our long term unit margin goals.
Shifting to a global market views the latest available market data shows that the first quarter of 2023.
New unit volumes were down in all.
Major geographies.
This compares to a strong first quarter of 2022 levels.
Our internal estimates suggest.
But the market decline accelerated in the second quarter with all major geographies experiencing booking declines compared with prior year.
Looking ahead, we expect the full year 2023 lift truck market to decline in all regions compared to the prior year.
Anticipated this year over year decline to accelerate in the second half of 2023 in all markets. Despite.
Despite this deterioration.
Market should remain reasonably strong in most regions when compared to pre pandemic levels.
Lift truck bookings decrease.
Currently in the second quarter compared to both first quarter and prior year levels are healthy, but declining global market and a continued focus on booking orders with solid margins contributed to the drop while our bookings decrease we increased market share in the second quarter compared to the prior year.
As our strategic programs gain traction.
Looking forwards.
Second half 2023 booking levels are projected to be comparable to the prior year. This is due to as so far steadier than expected market and further market share gain.
We remained focused on booking higher margin orders, we work, we will look to balance our pricing and booking rates based on production lead times on a line by line basis, all to maximize profitable growth and free cash flow over time with.
With the combination of increased production and lower booking during the quarter, we reduced our backlog by 6% from the first quarter of 2023 and by 19% from the early 2022 peak.
However, it remains well above optimal levels we.
We are projecting our unit backlog and lead times to trend towards normal levels over time, as our production rates increase and booking levels. Moderate. However, both are likely to remain above preferred levels for some time.
Our focus on strong bookings margin and.
Building the older lower margin backlog units has led to high higher average unit margins in our remaining backlog in the second quarter. The average sales price for our backlog units increased 23% year over year and 5% sequentially. We expect these positive year over year.
Margin trends to continue.
The remainder of the year and into the beginning of 2024 and support continued improvements in our financial results.
While the global economic outlook remains uncertain, our current $3 $6 billion backlog of higher margin trucks, representing almost a full year of revenue will support our remaining 2023 production schedules and dose in the first half of 2024.
This high backlog levels could also serve as a shock absorber.
Bookings declined more rapidly than expected.
Before I hand, the call over to Scott I'd like to add a few thoughts on our working capital and overall cash performance. We remain focused on mitigating the continuing impact from our supply chain and manufacturing challenges, which have increased our inventory abnormally.
We will diligently work to reduce our inventory levels.
And improve cash flows by tailoring production to available supply levels.
While inventory levels remained elevated they are now decreasing.
We've got a strong team focused on how to make the most <unk> in the shortest amount of time, while maximizing the use of on hand material.
We are collaborating with our suppliers to minimize disruptions ensure ensuring an efficient and consistent flow of material.
Labor and supply constraint remain and can cause isolated production shortfalls and inventory increases. However, we expect continued improvement in 2023 and in early 2024. We're also working closely with our dealer partners to balanced order and delivery timing.
With the customers' needs.
We are committed to increasing our cash flow and maintaining adequate liquidity. Our teams are laser focused on mitigating the continuing challenges and we're making progress.
Now I'll turn the call over to Scott to update you on our financial results and provide our financial outlook Scott.
Thanks, Rajiv as noted the overall business generated strong second quarter financial results well ahead of our expectations. These results added to our improving performance trend since returning to profitability in the fourth quarter of 2022.
Starting with revenue, we reported $1 $1 billion in second quarter sales. This marked an increase of 22% or $195 million over the prior year.
This growth was driven by a 23% increase in lift truck sales significantly outpacing the 10% shipment growth rate over the same period.
We remain focused on selling a rich mix of trucks with pricing that reflects the value our products deliver to our customers.
We are working toward increased production and shipping rates as supply chain constraints lessen in the second quarter, we shipped 27700 units, increasing 10% versus both the first quarter 2023 and the prior year.
As Rajiv noted improved component availability allowed our north American factories to work through a portion of their planned summer shutdowns, increasing production and shipments versus expectations for the quarter.
Second quarter bookings remained at a healthy level of 21300 units, but decreased by roughly 9% year over year, and 5% sequentially due to slowing market trends.
As a result of our elevated production and lower bookings our backlog declined to 92800 units at the end of the second quarter.
This favorable decrease helps to improve lead times on key products, some of which remain longer than 12 months.
Moving to earnings the company reported second quarter operating profit of roughly $60 million.
This compares to an operating loss of nearly $16 million in the prior year.
The company has returned to profitability in late 2022, we've maintained cost discipline as we've steadily grown revenues as a result, the second quarter's operating profit improvement rate outpaced the revenue growth rate, resulting in a 38% incremental margin for the quarter.
Second quarter net income and earnings per share were <unk> $38 million and $2 21, respectively.
These compared to losses of $19 million and $1 15 per share in the prior year.
I'll spend the next couple of minutes covering the results by business, which provide additional color to our consolidated results.
First the lift truck business generated a second quarter operating profit of approximately $63 million on sales is just over $1 billion, resulting in a 6% operating profit margin.
This compared to an operating loss of roughly $12 million last year with substantial year over year improvement was due to a positive price to material and freight cost ratio and improved sales mix and additional volumes in the quarter.
The positive second quarter pricing impact helps to offset accumulated net inflation from prior periods. It provides a buffer against projected labor cost increases and uneven material cost trends in certain products and geographies.
The second quarter employee related costs were above prior year levels, it's worth noting that overhead or SG&A cost stated as a percentage of sales were in line with the prior year.
The lift truck business remains vigilant over its cost and continues to seek out more efficient ways to leverage its assets as the business grows.
Turning to <unk> the business reported an operating profit of $5 $4 million in the second quarter, 59% ahead of prior year sales increased by about 12% over the same period.
Revenue and profit growth was aided by price increase benefits and higher sales volumes.
Like the lift truck business, the bulk zoning team controlled costs, particularly at their manufacturing sites.
<unk> second quarter 2023, operating loss increased by about $1 million year over year to $9 2 million.
Elevated employee related and product development costs, including those for the larger higher power 125 kilowatt engine accounted for this change.
Looking ahead to the balance of 2023, we expect our robust backlog of higher margin trucks to support significantly improved revenues and operating profits compared to the prior year at.
At the product level, we anticipate fewer component and labor shortages to drive increased manufacturing efficiencies.
Ultimately this should lead to higher lift truck and attachment production and shipments.
At the cost level, we expect stabilizing material and freight inflation.
Ongoing benefits from our cost savings programs and pricing discipline to counter any additional inflation, including labor costs.
Finally, our strategic programs, which al will touch on in a moment should further enhance margins as they mature.
As Rajiv noted, we're gaining traction with these initiatives.
Evidenced by our improving market share.
Breaking 2023 second half in the quarters, we anticipate a normal seasonal slowdown in the third quarter largely related to July plant shutdowns around the globe.
As Rajiv noted earlier, our north American plants work the first week of their planned shutdown in June benefiting the second quarter's output.
As a result, we expect third quarter operating profit and margins to decrease sequentially from the strong second quarter results.
This is largely due to normal seasonal patterns and ongoing EMEA production challenges.
Fourth quarter results are anticipated to increase meaningfully versus the third quarter largely due to the absence of planned production outages and anticipated <unk> improvements.
Moving to <unk>, we anticipate a modest revenue decrease in second half 2023 compared to the first half of the year due to due to a projected market decline, particularly in EMEA.
As a result second half 2023 operating profit and margins are expected to moderate from the strong first half performance.
Despite the sequential decline results should significantly exceed the second half of 2022 due to bolt on these ongoing margin improvement efforts.
Finally, <unk> sales are expected to increase in the second half of 2023 versus prior year due to booked orders from current customers anticipated.
Anticipated sales growth benefits are likely to be moderated by higher costs.
As a result, 2023 second half operating loss is expected to improve versus the prior year and first half 2020 threes operating losses, taking.
Taking a longer term view product demonstrations continue to ramp up and provide real life testing opportunities.
These lay the foundation for fuel cell engine technology adoption and improved financial returns.
As Rajeev highlighted earlier, our second quarter financial results included progress on our cash focused objectives.
We're gaining momentum on our cash generation and working capital reduction efforts second.
Second quarter net debt decreased by 4% year over year to $477 million.
Largely due to working capital improvements.
As we move through the second half of 2023, we expect our inventory optimization efforts to continue driving improved results.
We ended the second quarter with available borrowing capacity of approximately $216 million above the first quarter's level in part due to a temporary revolving credit facility expansion to better accommodate current working capital levels.
Despite the increased borrowing capacity, our second quarter debt level declined by 3% from the first quarter.
As a result of our improved profitability and lower debt financial leverage measured by debt to total capital decreased by 300 basis points versus the first quarter of 2023.
In the second quarter total inventory decreased by 4% or $35 million sequentially, while our days inventory outstanding metric improved by three days.
Finished goods and raw materials inventory both decreased aided by the additional north American production week while.
While we're making progress we remain focused on further working capital improvements. These include increasing inventory efficiency and reducing inventory days on hand is our production rates continue to rise.
Before I hand, the call off to al I'll close by saying, we're focused on what we can control, namely our overhead costs working capital.
Cash flows, including our capital expenditures and our market positioning.
We're prepared to manage the factors that we can't control leveraging our extensive unit backlog to sustain our business should global demand be negatively impacted we will keep you updated as the rest of the year unfolds.
Now I'll turn the call over to al for his strategic perspectives.
Before I talk specifically about the business.
I'd like to note that different executive titles Kristi you mentioned.
In her opening remarks.
As part of our long term succession planning and many Rajeev was appointed President and Chief Executive Officer of Hyster, Yale materials handling our public company.
In addition to this new role. He also continues to serve as president and CEO of one of our operating companies Hyster Yale group.
As part of the succession planning process I have now moved to the role of executive Chairman.
Rajeev in his new role will lead the company's operating and strategy activities I will supporting with a particular focus on strategic matters.
Any oversight of key staff positions and board leadership I'd like to congratulate Rajiv on this new role.
Moving now to our Hyster yields earnings you just heard from Rajiv and Scott that the first half of the year has gone very well and that we continue to make significant progress both operationally and financially <unk>.
Including working down our elevated inventory balances.
Our second quarter earnings reflect the improved profit quality of our robust backlog and we continue to have reasonable bookings despite softening market conditions.
Looking forward, we expect our second half 2023 operating profit and net income to be significantly higher than the second half of last year.
However, seasonal plant shutdowns ongoing production challenges in EMEA and an anticipated shift in sales and channel mix are all expected to have an impact on the lower third quarter results Scott Smith Scot mentioned.
That said Rajiv.
I did note that we've essentially completed the build out of the lower priced lower margin backlog units held over from prior periods. As a result, we expect continued year over year margin expansion in the second half of 2023, particularly in the Americas and EMEA.
This in combination with our improving production rates is expected to generate substantial operating profit and net income for the 2023 for the year. In this context, we are anticipating solid progress toward our 7% operating profit margin.
Goal and greater than 20% return on capital employed goal at both the lift truck and <unk> businesses.
I would add a word of caution this outlook, while the year has started strong and while we are maintaining our positive full year view on certainly certainly as a cautionary factors in several areas, including fragile EMEA supply chains, continuing labor availability issues stubbornly.
And other cost inflation and possible cost increases for some critical components.
In that context, we will be proceeding carefully.
In managing our business in the second half of 2023.
As a result of the operating initiatives that we had that had been outlined by Rajiv and Scott we expected significant increase in 2023 cash flow before financing activities compared with 2022, and we expect this trend to continue in 2024 is.
As our cash flow and liquidity improve we will expect.
Reduced debt levels and invest in the strategic growth and efficiency programs that were slowed some.
Some water over the past few years.
Executing our core strategies remains a key focus area.
Continue to invest for long term profitable growth.
Making solid progress toward our long term operating profit margin and return on capital goals at both the lift truck and Paul Soni businesses as we return to more normal operating conditions. We expressed as we expect this trend to continue in the second half of 2023.
<unk> strategies remained generally consistent with past descriptions, but I do want to provide a few key updates for each business the.
The lift truck business is primary strategic focus continues to be on launching its new modular and scalable products globally as well as on projects geared towards truck electrification and implementing advanced technology capabilities.
Also transforming our sales process around an industry focused approach that better meets our customer needs and we're working to further enhance our independent dealer capabilities.
We believe we are making good progress on all of these programs. Our initial set of modular scalable lift trucks were introduced.
In EMEA and Americas markets in 2022, and we expect to introduce them.
The Jay pick markets during the second half of 2023.
Over the longer term these products should reduce supply chain costs, and working capital as well as better meet our customer needs.
Hydrogen fuel cell powered.
Powered container handler, which uses <unk> fuel cell engines and is now being tested in the port of Los Angeles continues to perform well.
Lift truck business is also developing an electrified fuel cell reach stacker for the point of port of Valencia in Spain and.
In addition, you Vera in the lift truck business are working jointly with a large German customer by two heister electric container handling vehicles. These vehicles include the first ever empty container handler powered by <unk> fuel cell technology, and the first highest your terminal tractor in Europe .
Each of these trucks are expected to be delivered to their customers for testing in the second half of 2023.
Our Big truck group is also exploring options for other electrification projects, especially within the European Union.
<unk> continues to work on streamlining and strengthening its operations as a single integrated operating entity.
The company is.
Particularly focused on increasing its revenues in America.
In the Americas will also more generally enhancing its ability to serve key attachment industries and customers in all global markets.
In conjunction with this call Sony is working to expand its broad industry sales marketing and product support capabilities.
Humira continues to focus on placing 45 kilowatt and 60 kilowatt fuel cell engines and heavy duty vehicle applications, where battery only products did not provide adequate solutions. These applications are expected to provide significant new.
Near term fuel cell adoption potential <unk>.
<unk> is also focusing on developing a heavy duty 125 kilowatt engine, which can operate in more power demanding applications.
<unk> has announced several products with third parties in the past year, who.
Who are testing our planning to test <unk> engines and targeted applications. These include the trucks being worked on with the lift truck business as well as marine applications in the Netherlands and bus applications in China. Additionally.
Additionally, <unk> plans to launch modular fuel cell power.
Power generators for stationary and mobile applications.
In summary, we believe the improving 2023 results are due to actions we've taken since COVID-19 pandemic began the implementation of key strategies and projects we have in place.
And significant process improvements made over the past few years.
We believe all of these factors position our company for substantial longer term growth.
Our more mature lift truck and <unk> businesses are the foundation for this improvement.
While the <unk> fuel cell business has substantial growth prospects.
Yet to be realized.
We expect in the remainder of 2023 to build on our progress to date.
While we have more work to do in executing our key strategic programs to achieve our long term goals. We believe that we have the right business structure in place with the right core strategies to achieve our strategic and financial goals over time.
I will now turn to any questions you may have.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad again that is star one for any questions. We will pause for just a moment to compile the Q&A roster.
Okay.
Sure.
Okay.
Okay.
And we have no questions at this time I'll turn the call back over to Christina <unk>.
Okay. It looks like we do not have any questions. We will close with a few final reminder, a replay of our call will be available online. Later. This morning, we will also post a 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 on the press release I Hope you enjoy the rest of you.
Jay and I will now turn the call back to Regina to conclude.
This call will be available for replay beginning today and approximately two hours after the completion and will run through 11 59 PM Eastern time on August nine 2023.
Number to dial to access the replay is 807 700.
030.
64736 to 9199 the conference I'd number to access the replay is eight Q1 seven four that will conclude today's conference call. Thank you all for joining you may now disconnect.
Okay.
Okay.