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Edited Transcript of HY earnings conference call or presentation 2-May-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hyster-Yale Materials Handling Inc Earnings Call

CLEVELAND May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Hyster-Yale Materials Handling Inc earnings conference call or presentation Tuesday, May 2, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred Marshall Rankin

Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President

* Christina Kmetko

Hyster-Yale Materials Handling, Inc. - Former Manager of Finance of NACCO Industries Inc

* Colin Wilson

Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc

* Kenneth C. Schilling

Hyster-Yale Materials Handling, Inc. - CFO and SVP

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Conference Call Participants

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* Joseph Mondillo

Sidoti & Company, LLC - Research Analyst

* Michael Shlisky

Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2017 Hyster-Yale Materials Handling, Inc. Earnings Conference Call. (Operator Instructions) Thank you.

Christina Kmetko, Investor Relations, you may begin your conference.

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Christina Kmetko, Hyster-Yale Materials Handling, Inc. - Former Manager of Finance of NACCO Industries Inc [2]

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Thank you. Good morning, everyone, and welcome to our 2017 first quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at Hyster-Yale.

Joining me on today's call are Al Rankin, Chairman, President and Chief Executive Officer of Hyster-Yale Materials Handling; Colin Wilson, President and Chief Executive Officer of Hyster-Yale Group; and Ken Schilling, our Senior Vice President and Chief Financial Officer.

Earlier this morning, we published our first quarter 2017 results and filed our 10-Q. Copies of the earnings release and 10-Q are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

I would also like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q.

Also, certain amounts discussed during this call are considered non-GAAP. The non-GAAP reconciliations of these amounts are included in our earnings release and available on our website.

Now let me discuss our results for the first quarter. I will discuss the highlights first and then get into the details. Global lift truck markets were strong in the first quarter of 2017 and increased significantly over the prior year first quarter in all of our geographic segments. In this strong market, we saw a 13.7% increase in our first quarter lift truck shipments, and we continue to have a very strong backlog of orders coming out of the first quarter. On a consolidated basis, our revenues increased 18% to $713.1 million, up from $604.2 million last year. Our operating profit increased 141.2% to $23.4 million from $9.7 million last year and our consolidated net income increased 81% to $18.1 million from $10 million last year. These consolidated amounts include revenue of $41.6 million, operating profit of $2.3 million and net income of $1.5 million from Bolzoni, which we did not own until the beginning of the second quarter of 2016. Both the lift truck business and Bolzoni results were better than we anticipated, while Nuvera's results were generally in line with our expectations.

At our lift truck business, first quarter 2017 revenues went up 11.3% to $672.2 million from $603.9 million in the prior year first quarter. We saw an improvement in all of our geographic segments' revenues, mainly as a result of an increase in unit shipments in all areas. Operating profit also increased substantially to $30.6 million this quarter compared with $15.8 million last year and our lift truck operating profit margin increased to 4.6% from 2.6% in the prior year first quarter. These improvements were mainly driven by the Americas with modest help from JAPIC, which generated a lower operating loss of $700,000 in the first quarter of 2017, which was an improvement of $900,000 from a loss of $1.6 million a year ago.

Operating profit in the Americas increased substantially, primarily from an improvement in gross profit of $12.7 million, mainly as a result of production efficiencies driven by higher unit volumes, favorable currency movements of $3.8 million and improved pricing, partly offset by modest increases in material cost. The higher unit volumes in the Americas were driven by shipments of our new Class 5 internal combustion engine standard truck and increased shipments of higher-capacity 3.5- to 8-ton Class 5 trucks as well as higher shipments of Class 1 and Class 2 electric trucks.

Despite an increase in revenues, EMEA's operating profit declined $500,000 this quarter compared with the first quarter of last year. An increase in operating expenses, primarily higher marketing costs, more than offset the modestly improved gross profit. Benefits realized in gross profit from higher shipments and related production efficiencies were almost fully offset by unfavorable currency movements of $3.1 million.

Those are the significant factors affecting our lift truck operating results. Now let me turn to the lift truck business outlook. I'm just going to discuss the high-level lift truck outlook. Details regarding the outlook for our individual geographic segments is outlined in our earnings release.

While the first quarter of 2017 was strong, we believe that the full year -- for the full year, the global lift truck market is expected to grow modestly overall compared with 2016. Sales volumes and unit and parts revenues in our lift truck business are expected to increase during the remainder of the year compared with the same period last year. And we continue to expect the full year increase to be more than the anticipated market growth rate due to anticipated market share gains resulting from share gain initiative. However, as a result of the strong first quarter, revenue growth in the second quarter is expected to be more modest, with growth expected to increase again in the second half of the year. We expect the lift truck operating profit to increase in 2017 over 2016 as a result of enhanced margins through pricing net of material cost increases while maintaining headcount near current levels. However, a more modest operating profit improvement is anticipated in the second half of this year compared with last year, primarily because of the substantial operating profit increase this quarter combined with an anticipated softer third quarter. Overall, we expect full year 2017 net income to increase moderately over last year's anticipated benefits from the improvement in operating profit are expected to be partially offset by a higher income tax rate and the absence of tax benefits recognized last year.

Moving to Bolzoni. As I previously mentioned, this segment contributed incremental revenues of $41.6 million, operating profit of $2.3 million and net income of $1.5 million. Both operating profit and net income include $1.4 million of pretax expenses related to the amortization of acquired assets. We have now owned Bolzoni for a full year. And as a result, we are finally able to provide you with a full 12 months of U.S. GAAP results. For the 12 months ended March 31, 2017, Bolzoni reported revenues of $157.2 million, operating profit of $2.2 million and net income of $1.2 million. Bolzoni's trailing 12-month results include $2.7 million of onetime purchase accounting adjustments and $6.4 million of expenses related to amortization of acquired assets. As we've previously stated, the majority of Bolzoni's revenues are generated in the EMEA market, primarily Eastern and Western Europe, and to a lesser degree, in the North America market. As a result of anticipated growth in the EMEA markets, recent major customer commitments and the implementation of sales enhancement programs, we expect Bolzoni's full year 2017 revenues to increase modestly over its revenues for the 12 months ended March 31, 2017. In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growth, we expect the implementation of several key strategic programs to generate substantial growth in Bolzoni's operating profit and net income in 2017 compared with operating profit and net income for the 12 months ended March 31, 2017. The absence of onetime purchase accounting adjustments recognized last year will also contribute to the improvement in results. However, the acquisition-related amortization costs are ongoing and are expected to be approximately $1.5 million each quarter based on current -- on currency conversion rates.

Finally, on Nuvera segment. We have an update on the Nuvera lift truck integration. But first, let me explain the quarter results. Nuvera reported revenues of $2.6 million this quarter compared with revenues of $300,000 last year. The 2017 revenues were generated from the sale of 2 hydrogen generators. As a result of the ramp-up of inventory for increased production of Nuvera's Fuel Cell System units, Nuvera's operating loss increased in the 2017 first quarter to $9.5 million compared with a net loss of $6.1 million in the 2016 first quarter when the product was still in its development phase. However, the current quarter operating loss declined from the loss of $12.6 million that we realized in the fourth quarter of 2016. The larger loss from the prior year first quarter was due to an increase of $1.7 million in development and production start-up expenses. In addition, Nuvera had increased marketing and employee-related costs as it continues to transition from product development to commercialization.

Considerable progress was made at Nuvera in 2016. And as a result of this progress, we concluded that fully integrating Nuvera and the lift truck business was appropriate, with each business focusing on its respective strengths through a new organizational alignment designed to enhance the overall strategic positioning and operational effectiveness of our fuel cell business.

Going forward, Nuvera will focus its efforts on leadership and excellence in the technology, manufacturing, sale and service support of fuel cell stacks and engines. That business will become a supplier of fuel cell stacks and engines, providing service support to our lift truck business in the same manner as an internal combustion engine supplier. We expect Nuvera to develop a full range of fuel cell engines for lift trucks and consider joint ventures or other structures for nonlift truck applications while also maintaining responsibility for its hydrogen generation appliances and its electrochemical compressor program.

Our lift truck business will have full design and manufacturing responsibility for integrating fuel cell engines into lift trucks, either in fully integrated solutions or battery box replacement solutions in a similar manner to the integration of internal combustion engines and electric motors into our lift trucks today. The lift truck business will also have responsibility for sales and service of lift trucks powered by fuel cells, just as it does with other lift truck power solutions. And it will have a specialized sales support group for fuel cell powered trucks, similar to other specialized groups supporting telematics, automation, warehouse and big trucks.

The integration of Nuvera and the lift truck business is currently being implemented. New, integrated and battery box replacement product development packaging solutions are now the responsibility of our lift truck business. Nuvera's product development team is now focused on developing a full range of new generation 2-stack and engine solutions for lift trucks. Sales responsibility for fuel cell-powered lift trucks is being moved to the lift truck business' sales units around the world, with Nuvera sales efforts focused on being a supplier of fuel cell engines. Basic service responsibility is also in the process of moving from Nuvera to the lift truck business initially to our existing fleet management group. Over time, day-to-day service will be provided by the dealer field service representatives in North America. Our lift truck business will also provide sales support activities, including financing solutions for fuel cell-powered lift trucks. We expect the lift truck business to integrate fuel cell manufacturing, whether for fully integrated fuel cell solutions or battery box replacement solutions into its existing manufacturing plants initially in North America and eventually to our other plants over the long term. We also expect Nuvera to manufacture fuel cell engines and phase out of battery box replacement production during 2018. Nuvera will have additional support for its fuel cell engine business from the lift truck business' supply chain and quality enhancement units. Until Nuvera's target cost structure for its fuel cell engines is in place through supply chain and manufacturing efficiency, we expect inventory cost to result in continued inventory adjustments to reflect current selling prices but at a decreasing rate. And we expect Nuvera's losses to progressively decrease over 2017 and '18.

The net impact of added operational expenses on the lift truck business is expected to be modest as existing resources are redeployed to focus on the sale, development and manufacture of battery box replacements and integrated solutions. This organizational alignment of Nuvera and the lift truck business based on their respective strengths is designed to enhance the company's strategic fuel cell positions, particularly against competitors who lack a lift truck platform, and strengthen the fuel cell business profitability position more effectively and more quickly. Nuvera's focused on lowering the cost of manufacturing the fuel cell engines and enhancing their reliability increasingly over future quarters, with the objective of reaching quarterly breakeven during 2018 by achieving target costs and target fuel cell engine volumes. The lift truck business expects to reach the sales levels of fuel cell-powered lift trucks in 2018 that will position Nuvera to achieve its volume objective.

Before I open up the call for questions, I wanted to make a comment about our cash position and cash flow expectations. At the end of the first quarter, our cash position was $65.3 million, which was up from the year-end balance of $43.2 million and our debt balance was much lower than at year-end. In 2017, we expect our consolidated cash flow before financing activities to be positive and increase significantly compared with last year, excluding the cash paid for the Bolzoni acquisition and adjusting for the unfavorable effect of an unplanned systems-related acceleration of supplier payments in December 2016, which caused the lower cash and higher debt balances at the end of the year.

That concludes our prepared remarks. I will now open up the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mig Dobre of Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Several questions here. I guess, maybe we can start with this discussion on pricing. I know you guys have been signaling now for a little while that you're looking to improve pricing going forward, and it came across in this quarter's performance at least versus my own expectations. I guess, I'm looking to get a little more color here as to, first and foremost, what you're seeing in your end markets. Is this driven by your own internal initiatives to improve pricing? Or is this simply that the market can bear better pricing given that demand seems to be a little bit better?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [3]

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Let me start on that. I think about the answer -- both the question and the answer in quite a different way than you framed it. Pricing in the general market for us is not materially that variant, either plus or minus from the target levels that generally we hope to achieve. The reasons for lower margins at certain points in time is the shipment of trucks, where we've been working to develop new customer relationships and we have to provide trucks for the first time to those customers. The margins initially on those are slimmer than our target margins, but we expect over time to make adjustments to the cost structure of those trucks and to more directly tailor them to the particular application that they're involved in and generally improve the margins. So it is not a general market phenomenon. It's a highly selective pricing decision that appears in certain quarters at certain times when trucks for those very few particular customers are shipped. That's -- and it's very important, I think, to think about it that way. And what you see in this particular quarter has less to do with having price increases or pricing that is significantly better than inflationary cost increases than it does with the fact that we had quite a few of those trucks shipped at the end of last year and very few of those trucks shipped in the first quarter of this year. So those shipments will appear from time to time over the course of the year ahead, but I think the basic positioning in terms of margin in the first quarter reflects the fundamentals of our pricing as being reasonably satisfactory. You want to add something, Colin?

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [4]

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There's also a sort of a fuzzy line between -- sometimes between pricing and product mix. And as much as the market demand for a particular product is down, which it was in -- particularly for our bigger trucks in 2016 and then starts to come back in 2017, we can hold the same level of pricing. But it appears in our financial results as improved pricing because we're selling more of our higher-margin units.

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Kenneth C. Schilling, Hyster-Yale Materials Handling, Inc. - CFO and SVP [5]

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Yes. And when you think about it, the offset to the pricing is we did begin to experience some material price inflation. So on a net basis, that pricing issue is probably the smallest of the positive net drivers of our improved performance. It was really production efficiency, manufacturing effectiveness in our plants that drove it as much and the volume drive -- drove is more than -- more of a benefit than simply the net margin.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [6]

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Ken makes an important point that my comments were really associated with what we internally call our adjusted standard margins. And he's pointing out that the numbers that you're looking are closer to gross margin level, which includes our manufacturing variances. And therefore, the improvement in the productivity in the manufacturing plants was quite substantial in the first quarter. They did a terrific job.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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Okay, I appreciate the color. I guess, the way I was thinking about it based on what I could infer from your filings, if I'm looking at the 10-K, for instance, it spells out a, call it, roughly $27 million headwind that came from pricing. And also in your filings, you talk about a deal-related headwind, basically that -- the new product introduction that you referred to. And back of the envelope math on that suggests that out of that $27 million, roughly $20 million was related to this new product. As -- what I am wondering about, though, is as we're looking at 2017 embedded in your outlook, is it fair to say that you have a meaningfully different assumption surrounding these 2 items than what you've experienced in 2016?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [8]

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Well, I think we've given you the outlook, which outlines what we think will be happening. And of course, we've got very different pressures operating in different parts of the world. We have FX that has been a real headwind for our European operations and something of a benefit for our American operations -- North American operations. So there are an awful lot of factors that come to bear. I think I'd just say we had a good fourth quarter. It was a strong performance in the factories and, as Colin suggested, the mix and Ken suggested the productivity in the manufacturing plants and relatively few of the special trucks -- or the selected trucks. We will have some of those as the year goes on, and so you're going to see some fluctuations here.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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All right. Maybe if we can talk a little bit at segment level in Americas. I'm trying to understand, first and foremost, how you're thinking about growth because obviously you're talking about more modest growth in the second quarter for the company as a whole. I'm presuming, correct me if I'm wrong, that this includes the Americas segment. And at least based on what I can see, your comparisons are actually getting easier sequentially. So I'm trying to figure out exactly how to get to this growth deceleration that you talked about.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [10]

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Well, you had a pretty big pickup in the first quarter. And so I think we're talking about decelerating from the large quarter-to-quarter increase, right, Ken?

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Kenneth C. Schilling, Hyster-Yale Materials Handling, Inc. - CFO and SVP [11]

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That's right. Our -- the quarter-over-quarter -- year-over-year, quarter-over-quarter benefit is going to decline in our forecast. We're still expecting positive results for the full year. But we're not going to beat the subsequent quarters as we -- our expectation is we won't beat the subsequent quarter like we beat the first quarter.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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I guess, maybe then we can talk a little bit about what was, if you would, unusual about the first quarter. Is it -- are we talking about channel inventory dynamics here in terms of stocking of new product at dealer level? Or is there anything else that might have made this quarter unusually strong?

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [13]

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Well, I think they got back more than normal in the first quarter. I think retrospectively, it was -- we had a lot of headwinds and unusual events that we called out in our earnings calls last year. But I would say we were sort of more back to a typical quarter from what we would expect going forward. Some of our stronger markets started to come back. Some of the industries in which we're successful in started to come back. We saw modestly improved results in places like Brazil. So I think it was a turning of the winds, Mig, from what we saw in 2016.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [14]

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Yes. But at the most fundamental level, we shipped 23,300 units in the first quarter. We shipped 20,500 units in the first quarter of the previous year. Now we've been building backlog over the course of the year. So you have to take into account our backlog situation. And we don't run our business to automatically produce and sell the same level of trucks that we book. And we take a long-term view and we run our factories to try to maximize our productivity when we have confidence that the backlog will be maintained and we will minimize open slots. In the first quarter we had very minimal number of open slots and the result, as you could tell, flowed through in good productivity in the plant performance. But even in the first quarter, we booked 23,700 units, so we're still operating at a level that is slightly below the booking level. And in fact, as Colin was suggesting, the mix of the booking level was significantly greater. And so the value, which we call out in the earnings release, of about $550 million compares to $490 million. But they're only 200 truck difference in the number booked. So it's a big portion of the variance. It really has nothing to do with what's going on in the dealer channel or -- as we monitor those levels, and our dealers haven't changed their habits in terms of inventory in any significant way. Remember that a very large portion of our business is basically built to customer order. It isn't sold from stock. We're very different from the construction equipment business. And so the biggest driver here was a significant increase in the units that were shipped.

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Kenneth C. Schilling, Hyster-Yale Materials Handling, Inc. - CFO and SVP [15]

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And Mig, I think when you look at our backlog that's still embedded in that backlog going forward, average sales price in the backlog going into the second quarter is about $23,200 per unit. When you look at it compared to the first quarter of last year, it was only $20,800. That's about 11%, 12% increase in average sales value of the value of the backlog per truck. So you're seeing that mix shift back to the industries that are recovering and heavier-duty trucks being booked.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Right. And I guess, I'm wondering on this very point, what is your view with regards to the sustainability of these trends based on what you're hearing from customers in terms of mix.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [17]

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They have a reasonably optimistic point of view, and we don't -- wouldn't have our plants operating at the level that they were operating at to produce the shipments that they operated at unless we felt that this was sustainable and we had an adequate backlog. So I think it also points to why the quarter-on-quarter increases will not be as great. We don't expect our shipments in the second, third and fourth quarter last year in comparison to the next second, third and fourth quarter are likely to be much closer together than they were in the first quarter, where we had the large increase in shipments.

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [18]

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And the recovery on some of -- I mean, if you take our bigger trucks, everything -- bigger trucks, talking about everything over 4 tons, up to and including the trucks we -- what we call our jumbo trucks, those markets are not back to where they were, but they have recovered from the low points of 2016. So it's not that we're forecasting these markets being back to where they were at the peak, which was actually back in 2014. But we certainly are seeing a brighter outlook than we had in 2016.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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I see. Two more questions, and then I'll be back in the queue. I guess, from a market share perspective, and I'm looking specifically at the U.S. and maybe Latin America, Brazil, can you sort of give us a little bit of color as to how you think you're doing vis-à-vis your large competitors?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [20]

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I'd just say that from kind of an overview point of view that if you look at the full year 2017, we feel comfortable that our share gain programs will have traction. In any given quarter, that's not so easy because a large portion -- I said before, that a large portion of our trucks are made to order. Furthermore, a large portion of those trucks that are made to order go to very large accounts. And the bookings that lead to those shipments are lumpy. And so we tend to look at market share from a full year point of view. And we feel reasonably good about year-on-year increases, particularly in the U.S. They'll be more modest in some of the other areas of the world, but we feel that we have good solid programs in place. Do you want to add anything, Colin?

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [21]

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Just that the specific new products that we called out in the earnings release are selling very well. Those will be contributors to what we're projecting to be an improved market share position.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [22]

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So let me elaborate on that. I think we told you that we had a new Class 5 truck that was introduced into the market last year at the lower capacity levels. That truck, we would call an outstanding standard duty truck. It supplements the outstanding premium truck that we had. So the position that we're in now is that we don't have to sell an overengineered product with narrower margins into standard truck applications. And we can win more trucks -- bookings because the product itself has the right cost structure for us to be fully competitive in terms of the environment -- competitive environment. So that's an example -- very specific example of the type of situation that Colin is talking about. And that particular truck is -- so far has outperformed our expectations in terms of the dealer -- conclusions that it really fits the need out there and makes us more competitive in terms of our total product offerings. So that's the type of thing that Colin is noting by calling out the product comments.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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I see. Great. And last question for me. Maybe talk a little bit about cash, definitely good performance this quarter. And your net debt is coming down. So 2 questions here. Any updated thoughts on the optimal capital structure for the company? And how are you thinking about deployment of cash going forward? I'd love to get your view on any level at which share buybacks might actually make sense.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [24]

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Well, we really don't comment on the pace of share buybacks and the timing or the inclusions that we ought to enter into those programs. I would just say in a general sense the following, that we always want to keep our eye out for opportunities to reinforce the strategic programs we have through various kinds of investments, and we'll continue to do that. That ends up being a very opportunistic activity, but it does mean that having the cash available for such opportunities, should they come along, is an objective that we have. We had cash available. We bought Bolzoni. It's been a terrific fit. You saw the numbers this quarter. And I'd emphasize, as Christie called out in her remarks, that the numbers included $1.5 million for the quarter alone. That's a $6 million annual rate of real underlying earnings that are not counted under GAAP treatment. So from our point of view, the business is really performing, I think, Colin, you'd say in a way that exceeds our expectations. We're very pleased with that. So that's an example. We -- of course, keep in mind that the first quarter cash flow includes the correction of the prepayment to our suppliers, which occurred in the last very few days of 2016, and the money flowed back in, in 2017. That was a computer error, so we called it out very separately. It wasn't a normal thing. It was a good solid quarter from a cash flow point of view, as you suggest. And we've had a pattern over time of continuing a good dividend flow, increasing our dividends to our customers -- to our investors. And so we look at all of these things. And as just share buybacks specifically, an awful lot depends on our perspective on having enough cash for the opportunities, the opportunistic opportunities that we come across and also the price in the marketplace because we want to make sure that anything we do is highly accretive to our shareholders. So those are the general comments I'd make.

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Operator [25]

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(Operator Instructions) Your next question comes from Mike Shlisky of Seaport Global.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst [26]

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I do have a few lift truck questions, but I wanted to start off first with Nuvera. I'm just a little concerned that it's getting a little bit tough right here to truly judge whether you're breaking even or getting closer to it as you change the sort of business model here. So I guess, first thing there is, is for Ken. I mean, as soon as you start this, when do you -- is there a method as to how you plan to do intercompany pricing for the systems to the lift truck group? I mean, this is a somewhat brand-new product. Can you give us a sense as to how you're planning to assess what the appropriate price to charge the lift truck group will be going forward?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [27]

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So let me just comment that as far as the prices are concerned that we have set 2 targets for ourselves. One is target margin on the product. Two is target cost for the product. And obviously, it varies depending on which particular stack, engine combination you're talking about. So we will be, as we begin to have internal or indeed external sales, we will be establishing prices on the basis that I just described that will serve as a transfer price or conceivably an external price. And then as we outlined in some detail in a press release, over time, we expect to bring the target cost down so that we can achieve the target margin. But we've determined, roughly speaking, what our prices ought to be. And now the challenge is to execute the programs that we have in place to meet our target cost. We've set the target costs at levels that our supply chain, quality and engineering people all believe we can achieve. So that's the basic mechanism that's used there. As we said, on the other side of the equation, we really are only absorbing in the business the same set of costs that we incur for essentially any other product -- lift truck product that we produce. So we're in the business of producing trucks with internal combustion engines, with motors and with fuel cells. And the engineering group has a lot of experience in integrating various different kinds of engines into our vehicles. We have a very large number of types of internal combustion engines, and they all require different bells and whistles in order to integrate them effectively into the truck. So those costs are simply -- for example, we've been spending a great deal of time and effort recently -- engineering time and effort recently on upgrading our internal combustion engines to beat the Tier 4 and other environmental standards that are typical in developed countries, and those are abating. And now we spend some of our time integrating fuel cell engines again. So it's kind of a shift of resources that is part of an ongoing level of effort in our engineering side. There'll be some modest increases in specialized capabilities in our sales and service organization. But in general, they will simply go along with the margin structure of the forklift trucks that are sold with fuel cell engines in them. And we expect many of the customers -- a very important point, many of the customers for our fuel cell engine trucks are customers that we don't sell trucks to today. So it's a real opportunity to reinforce our share gain program out in the field in the core forklift truck business by having that type of power solution to offer to them and also, as we emphasize in our press release, leaves us in a very flexible position where we can have integrated solutions not done in battery boxes but actually a truck that is built up much more in the way that an internal truck -- internal combustion engine truck would be built up. That gives us the opportunity to enhance quality, enhance performance. The packaging is better, easier, lower cost. We will, however, continue to have a full line of battery box solutions in the fuel cell business and particularly for the installation and competitor trucks.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst [28]

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Well, I guess, my question was a bit more holistically. So I think, as an example, in your comments, you mentioned that you're going to be moving the service from the Nuvera products to the lift truck segment. I mean, that could be a pretty good number of cost that gets shifted out of Nuvera going forward, and it could make that segment appear more profitable than it is or get to breakeven a little bit faster than you're expecting. So I guess, what I'm wondering is, is there an accounting charge in Nuvera?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [29]

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No, we service internal combustion engine trucks every day, and it's just a part of the regular business. It's not a part of the engine business. It's part of the regular service business. Now the only -- don't misunderstand. Nuvera will continue to provide some service capabilities. But it will only be the kinds of service capabilities that, let's say, a Cummins engine company would supply to us as an engine provider. There are times when a service is required on internal combustion engines, which is not within the competence of us as a forklift truck company. In those cases, we turn to the engine supplier. We will do the same with Nuvera. But it'll be -- that tends to be very limited. And also, keep in mind, it's not Hyster-Yale that will be servicing these trucks in the field. It's going to be our dealers who are providing the service for these trucks. This is a tremendous advantage because we don't have to put in place a service network to provide the service for fuel cell trucks. We will have that work done by the very, very large number of service people that we have out in the field. I'm not sure I remember exactly what that...

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [30]

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About 5,000 in the U.S.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [31]

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In the U.S., we have 5,000 servicepeople. Well, they do the service. It's not people at Hyster-Yale that are going to do that regular service. Now sure, at Hyster-Yale, there will be oversight of the efforts. There'll be preparation of appropriate manuals. There'll be basic service protocols that we put in place. There's going to be parts supply. All of the conventional things that we do for internal combustion engines, we'll do for fuel cells. Let me come back to the core point. We have -- there are a variety of competitors in this business. There are competitors who provide lift truck solutions, but there are competitors who are providing engines and stacks -- fuel cell engines and stacks. And we are really shaping ourselves around a model that's already out there of companies that are specialized in the fuel cell itself, not in the integration of a fuel cell into a forklift truck. Colin, do you want to add anything at this point?

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [32]

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No, I think you said it well. It's -- I mean, our dealers will be out servicing things like the cooling fans, the electronics, the pipings, just same type of things they're doing with lift trucks. So they have the competency. Now they won't have the competency to mess about with the stack. That is the same analogous to not having the competency to really get into the engine in the field. So our dealers are perfectly capable -- with some training, perfectly capable of servicing what I would call the balance of plant, whereas Nuvera will be providing the specialist service support for the engine, which is really the stack and associated components.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [33]

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And let me just emphasize -- I mean, it's in the news release, but what we are trying to do here is to have a bigger, deeper fuel cell engine and stack business, which is highly specialized, has a larger number of engineers and capabilities so that we can ensure that we can build on a fully and quickly on the -- what we believe to be a superior design concept. At the same time, we want the Hyster-Yale Group to do all the things that it does for every one of our other trucks, just like internal combustion engine trucks. They know how to do that. It's not in our -- our conclusion was we had to get the product commercialized in a single location. But in the end, the vision was to drive the economies of scale in the forklift truck business by doing forklift truck-type stuff, that is taking an engine and installing it in a truck, as Colin mentioned, a fan. Well, we don't want to develop fan expertise in Nuvera. We already have it in our Hyster-Yale Group development center. So what we want to do is have that kind of knowledge and expertise and supply chain capability focused on forklift truck-type activity. And in that regard, much of the supply chain activity has suppliers that are more similar to suppliers that are familiar to Hyster-Yale Group and the lift truck business. Then the area that Colin was talking about, if you're talking about fuel cell stacks and the membranes and the other items, they're rather specialized suppliers and they're not so much suppliers that our people have in the forklift truck business have used. What we believe is that our quality people and indeed our supply chain people can bring professionalism to dealing with those suppliers. But that's not on the basis of previous relationships, which is a little bit different from the other components. Hopefully, that gives you kind of a perspective that this is not -- this is a highly strategic move in our business to allow us to move more quickly with higher quality, in integrating fuel cell engines into trucks both in battery boxes and in -- fully into trucks and then to expand and deepen our expertise on the engine and stack business by having a company that is truly an engine, stack provider.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst [34]

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Well, no, that's great color. But I guess, the bottom line question is, though, there will be some sort of warranty accrual in the Nuvera results going forward as well as any service and training and parts cost that has to be done, that will still be in the Nuvera segment, so we can help to judge whether it is a (inaudible) move or not.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [35]

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For the fuel cell stack and engine, but not for the comment that Colin was making, the balance of the product. The balance of the product, whether it's a fan or all that, that's a warranty obligation that is just like the current one relative to an ICE engine. So for example, we go back to Cummins or other engine suppliers for certain kinds of warranty if that's necessary. And -- but it's a much more constrained kind of focus. But you're absolutely right, they will have a total P&L for the engine and stack.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst [36]

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Okay, that was really the main crux of the question. Perfect. Got it. Just moving on quickly to then -- to the lift truck business. I've got 2 questions. First, your backlogs were up only a little bit in the quarter; as far as the units go, basically flat. At the trade shows recently, it appears as though -- it looks like Hyster-Yale isn't the only company that's looking to gain share this year. And there are other companies that are trying to come down from the high end of the market the way you are as well. So I guess, I'm kind of wondering what gives you the confidence that you'll actually get some reasonable share growth this year. I mean, clearly, there is some competitive response going on. Give us some kind of thoughts as to what you're seeing today that gives you confidence for the rest of the year.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [37]

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Well, there are a couple of things I'd say. First, we have -- these are not new programs. These are programs that have been in place for 3, 4 and 5 years to enhance our position in the marketplace. So it's far more the maturing of an effort that we've had in place than it is something that's brand new. It is not price based. I gave the example earlier of the standard truck in the small end of the internal combustion engine Class 5 business and why that has given us a lever for share gain. But another big lever for us lies in the fact that our market share position for the customers that we call on is pretty good. But we, in no way at this time, are calling on an adequate number of customers. So the whole process of identifying out in the field who is buying lift trucks, doing the kind of analysis of when they're ready to buy, establishing relationships with new customers, it's not so much about winning more with the customers that we've already been doing business with. As you suggest, that's a fairly -- it's established. The competitive positions are established. And sure, some of those target accounts that we were referring to earlier, we have been able to establish relationships with of real substance, major breakthroughs for us in some of the large warehouse product users in particular. But a very large portion of these maturing programs will come from a deeper penetration either by our own specialized salespeople, but more frequently, by helping the dealer to identify new account opportunities that they can call on that will enhance their position. And I emphasize, too, that we're not going to go out there and, as a primary focus, take on the toughest competitors in the marketplace. There are plenty of people out -- plenty of competitors out here that are languishing, that don't have the economy of scale, that haven't kept up the product line. There are competitors who have not been able to, because of their small economies of scale, have not been able to adopt the Tier 4 engines throughout their product lines. Well, their customer base is up for grabs. We try to do a very thorough job of identifying who those customers are for those competitors and go and offer our products. And very often, we're successful at that. So it's not a direct confrontational attack through price. It's a far more thoughtful, balanced program. We've put together -- or it's better said, we are putting together, in some cases, complete, but in others not, thoughtful strategies for the different industries that we compete in. So the theory is, if you have good solutions industry by industry and then you call on all the customers in that industry or, let's say, customers that account for 70% or 80% of the business, we think we can be in a very good position to gain share. So our premise is, if we see some of that opportunity coming to pass over the course of this year -- but don't misunderstand, it's a multiyear program, and it'll build over an extended period of time, and certainly our hope that it will get stronger and stronger. It is a consolidating industry and we want to do -- play our part in helping it to consolidate from our vantage point.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director of Machinery and Trucks and Senior Industrials Analyst [38]

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Got it. That's great color. My last one here just really quickly, if you could give me any kind of comments or thoughts as to when you think the JAPIC segment might turn operating profit positive? Will it be sometime this year, you think, or possibly next?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [39]

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It's going to be a while. We have -- we're taking a lot of steps to enhance our utility and standard product positioning in many areas. And that's a little tough for me to answer the question in a generic way because we have some pieces of that segment where we don't report the revenues, that's our domestic Japanese business, because it's in a 50-50 joint venture. We have a very different situation in the Pacific region, Australia and New Zealand mainly, in comparison to Asia. China is yet again different. But it's not going to be a huge player for us in the immediate near term. It's much more important to think about a lot of the things we do in Asia as part of a network that supports our total business around the world. The utility trucks that are -- could come from China are used globally. They're not just used in China. They're not just used in Asia. They're used around the world to meet those needs. We have a lot of programs that are underway to take products we produce in other areas of the world and produce more, do a more complete job of us fabricating and assembling those trucks in our Chinese plants. So many of those things are underway, but they're going to take a while. I just don't think it's going to be a big impact for the immediate future.

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [40]

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Right. I mean, as we said in the earnings release, we're expecting results to improve as we go through the year. Part of that is, again, product mix of the type of products that we're expecting to sell. We source products in the Asia Pacific market from different parts of the world. And currency plays a big part in what our margin is at any particular point in time. We can switch sourcing depending upon currencies, but that takes a little bit of time. But part of the reason for the improved outlook as we go through the balance of '17 is based upon improving product mix.

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Operator [41]

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Your next question is from Joe Mondillo of Sidoti & Company.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [42]

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Just one. I might have missed this, but wanted to get your outlook on and sort of talk about the big trucks. Have we -- it seemed like in the release in a couple of different geographies, that was still sort of a negative maybe perhaps. Could you give us a sense of what you're seeing there in terms of orders and what your sort of outlook of that part of your business?

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [43]

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Well, in the release, we called out lower big truck shipments in the first quarter in the Americas. But actually, yes, we increased backlog. Clearly, with big trucks, it's a much longer lead time. And so we see the -- I mean, Ken talked about the increase in value of the average order in the first quarter. So we see a turn in the big truck business. And typically, we talk about big trucks being everything over 8 tons, but it really starts at 4 tons. We see an improving level of customer demand, and we've seen higher levels of bookings, which clearly all goes well for those flowing into shipments through the balance of the year.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [44]

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Okay, and 2 other questions. Is there -- have you been recognizing any onetime-type costs that may be not necessarily highlighted related to Nuvera or any other part of your business? And then also, in addition to that, I wanted to ask about capital allocation. Just it seems like the balance sheet is a little underlevered. Wondering what your thoughts are with M&A or anything else that you're thinking about utilizing the balance sheet.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [45]

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I don't know exactly what one would call a onetime cost for this purpose. But I would say that from time to time, we have field product improvement expenses that we incur. We had some of those in the first quarter. We absorbed them and still did well. We had...

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [46]

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Bad debt from time to time.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [47]

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We had bad debt from time to time. And we had a couple things that probably in that sense detracted a little bit. On the other hand, they happen unpredictably but with regularity in a sense that there's a little bit of this and a little bit of that in each quarter, but it's not the same.

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Colin Wilson, Hyster-Yale Materials Handling, Inc. - CEO of Hyster-Yale Group Inc and President of Hyster-Yale Group Inc [48]

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Yes. I think on the comparison that we had -- we had a bad debt in the first quarter of last year and then we had some -- an FPI in the first quarter of this year. So I think they more or less balance out.

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Kenneth C. Schilling, Hyster-Yale Materials Handling, Inc. - CFO and SVP [49]

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Yes. I think your bigger trend is really just the overall environment for increased costs, as you see health care cost increasing and you see just general inflation in the -- based on your workforce. But it's not that heads are growing that fast. It's just simply the normal inflation going through that.

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [50]

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In fact, on headcount, I'd just reiterate what I think I said in the last earnings call that we've set targets for what we believe are the appropriate manpower levels to undertake the share gain programs that we've discussed quite a bit here in this discussion or this earnings session. And at this point, we just have some open slots here and there that are part of the regular process of needing to -- people leave and then they have to be replaced. And so we're under by a few people what we want to be, but the basic effort has been taking place. And now we're dealing with sort of the normal attrition, hiring process with a few exceptions. So as we've said, in order to accomplish the share gain programs we have, we had to put in place the level of effort that was required to do that. That involved a deeper set of capabilities, particularly in the sales and marketing area. With regard to your question about the capital structure, I guess, the way I'd look at it is we built up a pretty good reserve and then we made the Bolzoni acquisition. Well, we certainly aren't back to the position that we were in before we made the Bolzoni acquisition. So if we want to be in a position to be opportunistic, we have to continue to generate the cash while paying attention to our shareholders in terms of dividends and potentially, we look at it from time to time, share buybacks. But that's kind of the general approach that we have at this point is to take into account the fact that we bought Bolzoni last year for a very considerable amount of cash.

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Operator [51]

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And I see no further questions over the phone at this time. I'll turn the call back over to the presenters.

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Christina Kmetko, Hyster-Yale Materials Handling, Inc. - Former Manager of Finance of NACCO Industries Inc [52]

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Okay. Any final comments?

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Alfred Marshall Rankin, Hyster-Yale Materials Handling, Inc. - Chairman, CEO and President [53]

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None from me.

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Christina Kmetko, Hyster-Yale Materials Handling, Inc. - Former Manager of Finance of NACCO Industries Inc [54]

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Okay. Thank you for joining us today. We appreciate your interest. If you do have any follow-up questions, feel free to give me a call. You can reach me at (440) 229-5168. Thanks, and have a great day.

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Operator [55]

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You may access the recording of this conference as of 1:30 p.m. Eastern Time today, May 2, 2017. To do so, please dial (800) 585-8367 or (416) 621-4642. This concludes today's conference call. You may now disconnect.