Hyster-Yale Materials Handling, Inc. (NYSE:HY) Q4 2023 Earnings Call Transcript
Hyster-Yale Materials Handling, Inc. (NYSE:HY) Q4 2023 Earnings Call Transcript February 28, 2024
Hyster-Yale Materials Handling, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Hyster-Yale Materials Handling Q4 and Full Year 2023 Earnings Analyst Conference Call. [Operator Instructions] This call is being recorded on Wednesday, February 28, 2024. I would now like to turn the conference over to Ms. Christina Kmetko. Thank you. Please go ahead.
Christina Kmetko: Thank you. Good morning, everyone, and thank you for joining us for Hyster-Yale's 2023 fourth quarter earnings call. I'm Christina Kmetko and I'm responsible for Investor Relations. Yesterday evening we published our fourth quarter and full year 2023 results and filed our 10-K. These documents are available on the Hyster-Yale website. We are recording this webcast and a replay will be on our website later this afternoon. The replay will remain available for approximately 12 months. I'd like to remind you that our remarks today, including answers to any questions, will include comments related to expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forward-looking statements due to a wide range of risks and uncertainties that are described in our earnings release, 10-K, and other SEC filings.
We may not update these forward-looking statements until our next quarterly earnings conference call. We will also be referencing numbers that may be considered non-GAAP. Those reconciliations are available in our earnings release on our website. Our presenters today are Al Rankin, Executive Chairman; Rajiv Prasad, President and Chief Executive Officer; and Scott Minder, our Senior Vice President, Chief Financial Officer, and Treasurer. With the formalities out of the way, let me turn the call over to Rajiv to begin.
Rajiv Prasad: Thanks, Christie. Good morning, everyone. We had an excellent fourth quarter. For the third consecutive quarter, we reported revenues of over a $1 billion. Fourth quarter operating profit improved 146% year-over-year, leading to a consolidated operating profit margin of 4.7%. Discontinued quarterly earnings growth led to full year 2023 net income of $126 million which is a $200 million increase over the prior year, and that was after additional expense of $9.6 million or $0.47 per share related to the equity component of the company's fourth quarter stock price appreciation. And if we add that to our published performance, that would have been $1.90 a share for the quarter. Our revenues grew modestly over both the previous quarter and the prior quarter despite fourth quarter shipment decreasing compared to 2022 and third quarter 2023.
The year-over-year decline was mainly due to large decreases in EMEA and JAPIC shipments, while few Americas shipments drove the sequential decrease. The lower shipments were primarily due to the impact of product launch challenges and component supply issues mainly in EMEA. The lower 2023 JAPIC shipments were largely due to strong prior year deliveries. This led to regional dealer overstocking levels in Q4 of 2022. Despite some specific production challenges, we still shipped approximately 102,200 units in the full year of 2023. This represents the highest number of units we've shipped in a given year and compares with approximately 100,800 units in 2022. Ongoing skilled labor challenges in many of our factories impeded progress on planned production rate increases and shipments during both the quarter and the full year.
Our 2024 production and shipment rates are expected to improve in all regions compared to 2023. We anticipate an increased production cadence on new products and lingering components and labor constraints to dissipate. We remain focused on maintaining a full production pipeline across our facilities. In general, 2023's global economy outpaced market estimates from early last year. Our core Lift Truck market remains strong and above pre-pandemic levels in most regions. However, external factors continue to create uncertainty in the global economic outlook. This includes ongoing geopolitical instability, most recently evidenced by tensions in the Middle East. These factors coupled with robust industry volumes between 2020 and 2022 created a decline in global market activity across full year 2023, particularly in EMEA.
The latest publicly available Lift Truck market data shows that global third quarter 2023 booking activities decreased compared with strong 2022 levels. Declines occurred in all major geographies except China and India. Our internal estimate suggests that quarter four 2023 global Lift Truck market bookings also decreased compared with prior year. We estimate that the rate of decline slowed in the EMEA, but accelerated somewhat in Americas. With the fourth quarter decline full year 2023 market estimates show a double-digit decrease from robust 2022 levels. In 2024 the global Lift Truck market is expected to stabilize and be comparable to 2023 levels. Within 2024 market volume should remain strong with a first half booking decline offset by a second half increase.
Looking at Hyster-Yale we continue to prioritize audits with strong margins given our extended backlog position. This focus combined with a broader decline in market demand resulted in an 8% decrease in Lift Truck fourth quarter 2023 bookings compared with the third quarter bookings decline 20% from stronger prior year levels. These decreases were largely seen in the Americas markets. For 2024, we expect full year bookings to increase versus 2023. Anticipated market share gains in each 2024 quarter are driving this improvement within a flat global market overall. Market share gains are expected largely because of our emerging technology solutions for warehouse-related markets. Our technology solutions business had very strong 2023 growth rates.
We expect to build on that momentum in 2024. As we head into 2024, we expect to be price-competitive in the marketplace. We'll look to maintain targeted bookings margin as our backlog levels are reduced. Reduced booking contributed to lower backlog levels in the fourth quarter. From year end 2022, our extended backlog has decreased by 23% to its lowest level since early 2021. Planned 2024 production increases combined with an anticipated market decline in the first half of the year should allow us to further reduce extended lead times and backlog levels. This will help us bring our backlog closer to pre-pandemic levels in 2024. Given current expectations, our lead times and backlogs will likely remain above optimal levels on certain product lines for an extended period.
Some areas, such as our warehouse trucks are expected to return to normal lead times and backlog levels within 2024. At the end of the fourth quarter, our backlog value was approximately $3.3 billion. This represents approximately ten months of revenue and should serve as a cushion for the business if bookings decline more than anticipated. It's worth noting that global industry cancellations, which can impact backlog levels, trended up modestly in 2023 than prior year rates. However, our cancellation rate remained substantially below the industry average. The shift towards higher average unit prices and margins in our backlog continued in the fourth quarter. This was largely due to our focus on booking orders at strong margins and benefits from prior year pricing initiatives to offset inflation.
Our average sales price per backlog unit increased 16% over the prior year and 2% over the third quarter. Q4 2023 average booking prices on the other hand decreased compared with third quarter 2023 and prior year as expected. We continue to make progress on expanding our market share in the warehouse market. Warehouse trucks are generally lower priced and have shorter lead times. Additional sales in this market segment increase the opportunity to sell advanced technology solutions. These can greatly enhance the value of the truck for the customer and to Hyster-Yale. We continue to balance our pricing and booking rates with production lead times on a line-by-line basis, maximizing profitable growth and free cash flow while we continue to make progress on our strategic objectives.
Material and freight cost projections are a significant factor for setting our backlog pricing. In 2023 material costs decreased modestly. In 2024 material costs are generally expected to stabilize and labor costs are projected to increase moderately. As a result of geopolitical unrest, we expect elevated freight costs throughout 2024, particularly in the first half of the year. In this context, our strong price-to-cost ratio is expected to continue in the first half of 2024 as we ship higher priced backlog units. This combined with an anticipated increase in unit volumes, is expected to lead to higher gross margins and improved operating profit in the first half of the year compared with 2023. Tariff exemptions are set to expire in late May 2024.
This combined with shipment of trucks ordered in 2024's more competitive pricing environment and the mix effect of increased warehouse product shipments are likely to temper unit margins in the second half of the year. For the full year, gross profit margins should be comparable to 2023 levels. We'll work to reduce the impact from externally driven factors through improved manufacturing productivity and ongoing expense control. We'll continue to monitor labor and material costs closely, as well as the impacts from tariff and competition, and we'll adjust forward pricing accordingly. Before I turn the call over to Scott, I'll comment on our working capital levels and cash flow. We continued to improve our cash flow throughout the year. We've made progress on reducing working capital, specifically our inventory levels.
However, our inventory levels remain higher than we would like, largely due to lingering production challenges I mentioned earlier. We'll continue to focus on an efficient and consistent flow of material, building more units with on-hand inventory. These actions should significantly reduce excess inventory levels across 2024. I'm pleased to report that we've already seen some additional progress in January 2024. We've made significant progress reducing potential supply chain and labor constraints that can still cause isolated production shortfalls and increase inventory. Our efforts extend to our dealer partners who carefully balance order and delivery timing with their customers' needs. Together, we expect significant improvements throughout 2024.
We are committed to further cash flow improvements. This is a key deliverable for me and for all of our business leaders. It is also an area closely monitored by our Board. Now I'll turn the call over to Scott to cover our quarterly financials and 2024 outlook in more detail.
Scott Minder: Thanks, Rajiv. Good morning, everyone. I'll start by echoing Rajiv's positive comments around our strong fourth quarter and full year results, as well as the pace of improvement in our business. Once again, our quarterly revenues topped $1 billion, increasing by 4%, or $42 million versus the prior year. Consolidated revenue growth was mainly due to a 5% increase in Lift Truck sales due to the favorable effect of previously implemented price increases in all regions, a favorable sales mix shift toward higher priced, higher capacity trucks, increased part sales used to service our growing installed unit base, and a favorable currency effect of $18 million, primarily in Europe. These benefits were partly offset by lower shipments in all three regions.
In Q4, we shipped 23,600 units, down 8% sequentially and 16% versus the prior year. Q4 unit bookings were 16,700 and were lower than both prior periods. These declines were within healthy but lower markets in our major geographies. As a result of solid production output and lower booking levels, our backlog decreased to 78,400 units with a value of roughly $3.3 billion. This decrease helps improve lead times and overall customer satisfaction. For the full year, we reported revenue of $4.1 billion, marking a 16% improvement over 2022. All three businesses contributed to this increase. Overall, our year-over-year growth significantly outpaced global GDP growth. Moving to earnings. Our consolidated fourth quarter operating profit increased by 146% to nearly $49 million.
This resulted in a 4.7% operating profit margin and a nearly 70% incremental margin as our year-over-year operating profit improvement outpaced our quarterly revenue growth rate. Full year operating profit was $209 million improving nearly $250 million versus the prior year. Operating profit margin for the full year was 5.1%. Q4 net income was $25 million, or $1.43 per share. This compares to prior year net income of roughly $8 million and $0.44 per share. Fourth quarter results included a $10 million, or approximately $8 million after tax of additional incentive compensation expense related to the equity component of the company's fourth quarter stock price appreciation. This reduced our fourth quarter earnings per share by $0.47. For the full year, the company generated $7.24 of earnings per share compared to a loss in 2022.
For some additional perspective, I'll discuss our results by business. The Lift Truck business generated $982 million of revenue in Q4 growing by $44 million year-over-year. Operating profit of $54 million expanded by $27 million over the same time period. This 62% incremental margin led to a 5.5% operating profit margin, demonstrating growth with disciplined execution. Significant product margin increases in the Americas and EMEA were the principal drivers. Product margins benefited from a favorable price-to-cost ratio, largely due to prior price increases implemented to offset inflation, along with more recently moderated material costs, as well as a favorable mix shift toward higher margin products, mainly in the Americas, and a shift to higher margin sales channels.
Lift Truck's Q4 profit growth was tempered by higher employee-related expenses, including elevated incentive compensation attributable to strong 2023 results and stock price appreciation. We remain vigilant over our day-to-day expenses and continue to seek more efficient ways to leverage our assets as the business grows. Turning to Bolzoni. The business reported revenues of $87 million, $5 million lower than prior year. Operating profit increased to $2.6 million from $2.0 million in the prior year. 2022's operating profit included a $2.4 million loss on sale of a business. Excluding the effect of that sale, operating profit decreased year over year due to higher operating expenses, including incentive compensation, as the business continues to position itself for growth.
Bolzoni's product margins improved over the prior year while gross profit dollars were comparable. Price increases implemented in prior years along with favorable currency movements were offset by a mixed shift to lower-margin products and reduced sales volumes. At Nuvera, Q4 2023's operating loss was less than prior year, primarily due to lower product development costs as a result of receiving a new U.S. government funding to support fuel cell R&D expenses. Fourth quarter revenue declined versus prior year due to fewer engine shipments. Looking ahead to 2024, we expect Lift Truck revenue and operating profit to increase over 2023 levels. First half 2024 operating profit is projected to improve significantly over prior year, largely due to anticipated higher unit volumes and an ongoing favorable price to cost ratio due to anticipated higher unit volumes and an ongoing favorable price to cost ratio despite anticipated higher freight costs.
Second half 2024 operating profit rates are expected to moderate compared to the first half due to the anticipated expiration of Section 301 tariff exemptions and the mix effect from increased warehouse product volumes. The latter aligns with our strategy to increase market share in this important sales channel. I'll take a moment to recap the tariff situation for context on how it applies to Hyster-Yale today. In 2018, the U.S. government enacted tariffs on certain products imported from China. Subsequently, exemptions were applied for and provided for on some of these tariffs. These exemptions have been extended multiple times. It is expected that in May 2024 these exemptions will expire. If that occurs, the company will be required to pay the full tariff immediately, increasing our material costs.
We continue to argue that these exemptions are warranted and should remain in place while we work to reduce their impact on our product margins over time. Moving to Bolzoni. 2024, revenues are anticipated to increase modestly compared to 2023. Higher attachment volumes will be partially offset by lower legacy product sales to the Lift Truck business as they begin to phase out production of these components. Operating profit is expected to improve year-over-year as higher product margins and anticipated manufacturing efficiency gains should more than offset higher material and operating costs. At Nuvera, we're focused on increasing customer product demonstrations and bookings in 2024 as well as expanding our presence in Europe and China. Orders from current customers are booked and are expected to result in higher year-over-year sales in 2024.
These increased sales, coupled with higher development costs related largely to Nuvera's new, more powerful 125-kilowatt engine should produce operating results comparable to 2023. Longer-term increasing engine demonstrations should significantly strengthen the foundation for continued fuel cell engine technology adoption and improved financial returns. At the consolidated level, we expect 2024 operating profit to increase. We anticipate net income to be comparable to strong 2023 levels due to a higher projected income tax rate in 2024. The expected higher tax rate results from fully utilizing our U.S. net operating losses in 2023, combined with the impact from ongoing capitalization of R&D costs for tax purposes in 2024. The U.S. Congress is currently debating an important tax law change that could reverse the ruling to capitalize R&D costs, thus treating them as a period expense.
If this occurs, the company's tax outlook would likely change materially. Overall, we anticipate continued strong product margins to drive year-over-year profit growth in the first half of the year. This is due to shipments of fixed-price backlog units partially reduced by the impact from higher freight costs. The anticipated expiration of tariff exemptions, and shipments of orders placed in 2024's more competitive pricing environment will likely temper second half results. We'll continue to focus on ways to efficiently manage our production levels along with ongoing component, labor and overhead cost. We'll adjust as needed during the year. In 2023, we made substantial progress toward our long-term goals. Our 16% year-over-year revenue growth rate significantly outpaced global GDP growth rate, and we achieved a greater than 20% ROCI or Return on total capital employed.
We also made significant progress toward our 7% operating profit margin goal. At our November 2023 Investor Day, we established a working capital target at 15% of sales. We improved our performance on this metric in 2023, but more work is required to achieve our long-term objective. We expect further progress on our financial goals in 2024, and we are working to make these results more sustainable over time. We also made progress on another critical metric, cash generation. The company generated cash flow from operations of almost $46 million in Q4 and we used that cash to reduce net debt by $17 million, or 4% compared to third quarter levels. This increased cash comes from higher profits and our ongoing efforts to improve working capital efficiency.
For the full year, we generated cash from operations of $151 million. This compares to $41 million in full year 2022. We ended 2023 with $79 million of cash on hand and approximately $270 million of unused borrowing capacity. As a result of our significant profitability and lower debt balances, our financial leverage, as measured by debt to total capital, was 56%. This marks a 500 basis point improvement versus Q3. As we generate additional cash, we expect further leverage reductions and opportunities for accretive capital deployment. We continue to push for working capital reductions, specifically through lower inventories. Q4 2023 Days Inventory Outstanding, or DIO, decreased by one day versus third quarter levels. We remain focused on improving inventory efficiency as production rates increase.
We are deploying technology tools to help us maximize the use of on-hand inventory, ultimately reducing excess inventory levels, while supply and labor constraints can cause intermittent challenges, we anticipate significant inventory improvements in 2024. 2023 capital expenditures were $35 million compared to an initial projection of $65 million. We maintained strict capital discipline in 2023 due to ongoing economic uncertainty. Capital expenditures are anticipated to rise to $87 million in 2024. This significant increase compares to restrained 2023 levels and includes a return to investing for business growth and network efficiency. Similar to 2023, we'll keep a close eye on economic conditions and adjust our spending accordingly. In summary, we are making solid progress on our objectives.
Our financial results clearly show it. We'll continue to focus on things we can control and leverage our process discipline to effectively work through the things that are beyond our control. Now I'll turn the call back to Rajiv to discuss the progress we've made on our core strategies and programs. Rajiv?
Rajiv Prasad: Thanks, Scott. We held our Investor Day this past November where I explained our vision is to transform the way material moves from Port to Home. We plan to do this through two customer promises, first, by providing optimized product solutions, and second, by providing exceptional customer care. Our strategic initiatives and supporting key projects will drive success on these two promises. In 2024, we'll invest in and execute on our core strategies that support long-term profitable growth and sustainable cash generation. I'll provide a few updates on these key projects at each business. The Lift Truck business's primary strategic focus remains on launching its modular and scalable product globally. This business is also working on several other key projects to increase and enhance Lift Truck electrification, increase the adoption rate for our advanced Lift Truck technologies, and expand global sourcing options for our container handlers using both our Nijmegen, the Netherlands, and Fuyang, China production facilities.
We're making solid progress on these programs. Over the last two years, we launched our modular scalable two to three ton internal combustion engine Lift Trucks in EMEA and Americas market. Production of these key products is accelerating and we expect to launch these products in the JAPIC market during the first quarter of 2024. We are making similar enhancements to the two to three ton electric truck platform and expect these products to launch globally over '24 and '25. The modular, scalable product platform is expected to enhance the business in several ways. First, by reducing cost and working capital level as our supply chain shrink and move closer to our core factories. Second, by helping to optimize our worldwide manufacturing footprint, and finally by increasing sales volumes by providing customers with a more customizable product that better meets their needs.
On electrification, we now have two big truck electric -- big truck in third-party testing a fuel cell container handler currently operating at the Port of Los Angeles and a fuel cell Reach Stacker in the Port of Valencia, Spain. We anticipate delivering two new electrified fuel cell products, a terminal tractor, and an empty container handler to a customer in Hamburg, Germany in 2024. Our big truck group is also actively exploring additional electrification projects within the European Union and the United States. The Lift Truck business has key projects focused on increasing demand for our on-truck technologies by applying next-generation advancements to its operator assist system and automated Lift Truck solutions. During the third quarter, we entered into a joint development agreement with a leading technology service provider to enhance our robotic software technology for vehicle automation.
Finally, dual source production and supply chain for our container handlers will help the company better meet the needs of the global market. This should provide customers with time-efficient delivery for economically viable trucks. Bolzoni continues to work on streamlining and strengthening its operations as a single integrated operating entity. The company is focused on increasing its Americas' attachment business while also strengthening its ability to serve key industries and customers across global markets. As part of this effort, Bolzoni is working to expand its broad industry sales coverage, breaking into new markets and regions. They're currently expanding their product offerings and support capabilities for the recycling and port-related areas.
Nuvera continues to focus on placing 45-kilowatt and 60-kilowatt fuel cell production engines for demonstrations into niche each heavy-duty vehicle applications where battery-only electrification does not fully meet the market's need. These applications are more likely to have near-term fuel cell adoption potential. Nuvera is also developing a new, larger 125-kilowatt fuel cell engine for even heavier-duty applications, which is projected to be available in 2025. We've announced several projects with various third parties to test Nuvera engines in targeted applications beyond the Hyster port equipment I covered earlier. In January, Nuvera announced a joint project with Helinor Energy for maritime zero-emission energy solutions. Nuvera also expects to have additional products in test application in China, India, and in Germany by mid-2024.
Additionally, Nuvera is working with customers to launch modular fuel cell power generators for stationary and mobile applications over the next two years. These initiatives are top priority and I'm pleased with the progress we have seen so far. Now I'll turn the call over to Al for closing remarks. Al?
Alfred Rankin: Thanks, Rajiv. In closing, I'd like to note that the company significantly improved 2023 results are due not only to our global team's ongoing execution of its strategic initiatives but also to actions taken to offset external headwinds and improve business resiliency. Our results continue to affect a healthy backlog and demand for our products and solutions. These actions should better position our company for substantial, profitable growth over the longer term. Our mature Lift Truck and Bolzoni businesses are the foundation for a strong, profitable business, while we believe that the Nuvera fuel cell business has substantial growth prospects in future years. I want to emphasize a point that Rajiv made earlier.
Our 2023 full year net income is $200 million higher than a year ago. The team has done an outstanding job moving the business forward and laying the foundation for sustainable profitability over the long term. As customer demand and supply chains return to pre-pandemic norms, we are likely to experience short-term cyclicality in our markets. However, I'm confident that we have a sound plan for long-term growth, profitability, and cash generation in our core businesses. In addition, we expect that the Nuvera fuel cell business in the longer term will be a major growth contributor for Hyster-Yale. I firmly believe we have the right team and business structure in place to execute our strategic programs, to deliver strong 2024 performance, to achieve our long-term financial goals, and to provide differentiated total shareholder returns over time.
We covered all of this in detail during our November 2023 Investor Day. If you haven't had an opportunity to view those materials, I'd encourage you to listen to the replay or review the event transcript, both of which are available on our website. We'll now turn to any questions you may have.
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