Manitowoc Company, Inc. (The)

Good day, everyone, and welcome to Manitowoc Company first quarter 2021 earnings conference call. Today's call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Ian Warner, Vice President Marketing and Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's first quarter 2021 financial performance and business update as outlined in last evening's press release. Participating on the call today are Aaron Ravenscroft, President and Chief Executive Officer, and Dave Antonik, Executive Vice President and Chief Financial Officer. Today's webcast includes a slide presentation, which can be found in the investor relations section of our website under events and presentations. We will reserve time for questions and answers after our prepared remarks. I'd like to request that you limit your questions to one and a follow-up and return to the queue to ensure everyone has an opportunity to ask their questions. Please turn to slide two. Please note our safe harbor statement in the material provided for this call. During today's call, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 are made based on the company's current assessment of its markets and other factors that affect its business. However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings. The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statement, whether the result of new information, future events, or other circumstances. And with that, I will now turn the call over to Aaron.

Thank you, Ion, and good morning, everyone. Please turn to slide three. I would like to start by thanking the Manitowoc team for a job well done. I was really pleased with our performance in the first quarter. Adjusted EBITDA and cash flow from operations exceeded our expectations. Frankly, this was accomplished in spite of a myriad of production and delivery issues created by the current supply chain and logistics environment, not to mention the ongoing challenges created by the COVID-19 pandemic. Nevertheless, the team persevered and delivered a very strong start of the year. In terms of orders, we were pleasantly surprised with the quarter. Our orders were up 26% versus the same period last year, and we ended the first quarter with a backlog of $663 million. Starting with Europe, the tower crane business was unusually strong during the period. I attribute this to three dynamics. First, certain European countries, such as Italy, implemented tax incentives to promote capital investments, which drove orders, particularly for self-erecting cranes. Second, we had several key dealers place partial orders during the fourth quarter winter campaign due to economic uncertainties. As the economy reopened, these dealers placed follow-on orders in the first quarter. Lastly, as we implemented price increases to offset material cost increases, some dealers placed additional orders in advance of the price change. Unfortunately, however, the mobile crane business in Europe was not as robust and was more reflective of the cautious tones that we hear out of the EU. Net-net, we were genuinely surprised by the performance of the region during the first quarter. Moving east, we continued to feel good about the general activity in the Middle East and Asia-Pacific. The project pipeline in the Middle East is encouraging, and China, South Korea, and Australia posted strong bookings during the quarter. Finally, I wanted to end in the Americas to ensure that nobody jumps to the conclusion that our total performance for the quarter was reflective of a significant change in the U.S. market. The order increase in North America was high single digits, which is great news, but we remain tempered with our outlook on the U.S. market. The signals that we see in the marketplace don't necessarily match all of the positive information that you see in the news these days. Clearly, the vaccine news is positive, and there is a lot of speculation around the U.S. infrastructure bill. However, the major crane rental houses are still holding tight to their purses. Big oil companies are still cautious to invest even as oil is back above $60. And on top of that, used equipment prices still remain depressed. Finally, when I look at our dealer inventory levels and consider their orders that are on the books, I would say that our dealer network is well positioned to seize the opportunity for an uptick in business. So we have a measured view of the North American crane market. Given the volatility of the crane market, it's essential for us to keep investing in the Manitowoc way to continuously improve the flexibility of our operations. As I mentioned, demand for self-recting tower cranes has been surprisingly strong over the last two quarters. In order to meet customer demand, our team in Niella, Italy, is in the process of executing several Kaizens to increase our production by 30% with minimal capital investment. Using standard work, the team will rebalance the main assembly line and create a few offline production cells to ensure that we can meet the overall tack time. In terms of capital investment, we will install a couple of manipulators, but really this is as much about improving safety as it is about increasing productivity. As always in lean, a little elbow grease and creativity can take us a long way in meeting our unpredictable spikes in the crane business. A big thank you to Peter Domenico and his team in Niella. With that, I'll pass it to Dave to provide details on our financial results. Dave? Thanks, Aaron, and good morning, everyone. Let's move to slide four. Our first quarter orders totaled $474 million, an increase of 26% compared to $375 million of orders in the same period last year. On a currency neutral basis, Q1 orders were up $78 million, or 21%. Orders improved in all of our segments, driven by pockets of higher customer demand within each region. Our March 31st backlog of $663 million was better by 27% over the prior year and up 23% on a currency-neutral basis. Backlog also increased across all of our segments with over 85% scheduled to shift within the next six months. Compared to year-end, backlog was up 22% and on a currency-neutral basis, up 25%. Net sales in the first quarter of $354 million increased $25 million, or 8% from a year ago. Stronger results in the URAP and MEAP segments were partially offset by a decline in the America segment. Net sales were favorably impacted by 5% from changes in foreign currency exchange rates. On an adjusted basis, SG&A expenses increased by approximately $1 million year over year. The increase was primarily driven by unfavorable foreign exchange rates, higher short-term incentive compensation expense, and increased insurance and legal costs, mostly offset by a decrease in marketing and travel expenses. As a reminder, the 2020 marketing expenses were higher due to the triennial ConExpo trade show. Our adjusted EBITDA for the first quarter was $21 million, an increase of approximately 29% year-over-year. Higher volumes and a favorable product mix drove the year-over-year increase. As a percentage of sales, adjusted EBITDA margin improved to 6%, an improvement of 100 basis points over the prior year, primarily due to leveraging of our fixed costs over a higher sales volume. First quarter depreciation of $10 million increased $1 million compared to the prior year, reflecting the higher level of capital expenditures in the second half of 2020. In 2021, we anticipate total capital expenditures between $35 million and $40 million, which includes the investment in our European rental fleet. Our provision for income taxes in the first quarter was $4 million and driven by income in non-U.S. jurisdictions. As a reminder, the company has tax valuation allowances established for certain countries, and therefore losses in those countries are not available to offset income tax expense in profitable jurisdictions. Our GAAP diluted loss per share in the quarter was 9 cents. On an adjusted basis, diluted loss per share of 6 cents improved by 12 cents from the prior year, driven by increased operating income and partially offset by higher income tax expense. Moving to liquidity, we generated $41 million of cash from operating activities in the quarter compared to a use of $79 million in the prior year. Capital spending in the quarter amounted to $8 million, of which $7 million related to the European Tower rental fleet. As a result, our free cash flow in the quarter was $34 million. The primary driver of our positive cash flow was a net decrease in working capital. We ended the quarter with a cash balance of $159 million, an increase of $30 million from year end. Our total liquidity as of March 31st was $443 million, with no borrowings on our ABL. With that, I will now turn the call back to Aaron. Thank you, Dave. Please move to slide five. As I communicated last quarter, I see 2021 as a year of transition. The COVID-19 pandemic is long from over, in fact. Our crawler production was significantly impacted during the first quarter when a few of our colleagues at the Shady Grove campus tested positive for COVID. We took immediate action to protect our workforce and to minimize the possibility of spreading the virus, which resulted in a temporary shutdown of certain production areas. And in Pune, India, hospitalizations have recently spiked due to COVID, which has resulted in an oxygen shortage. We have temporarily closed our welding operations in an effort to help conserve the local supply of oxygen for medical uses. Turning to the economy, as we predicted, the return to normalcy is creating a multitude of dislocations throughout the world supply chain. A quarter ago, the industrial world forecasted steel prices to spike in the first quarter, and to capitulate as the year wore on and capacity was added. Unfortunately, today, the general view is that steel prices will remain at high levels for the entire year. We expect to see costs for steel, logistics, and transportation increase as much as $30 million year over year. We are raising prices to mitigate the impact, but there is always a lag between raw material date times and the effective date of the price increase. The second major complication is the semiconductor chip shortage, which has created significant issues throughout our supply base. For example, the shutdowns in the heavy-duty truck industry will impact our boom truck shipments during the second quarter. So while we feel positive about border and backlog trends, we are nervous about inflation and the likely supply chain complications. In light of this and other headwinds that we discussed on our last call, such as insurance increases, short-term incentive plans, and non-recurring COVID relief benefits, we anticipate our year-over-year contribution margins to be lower than normal in the second half of 2021. With that, we are introducing full-year 2021 adjusted EBITDA guidance of $90 million to $105 million. Please move to slide six. Looking beyond 2021, though we still have some questions about how the European tower crane market may cycle, we generally believe that momentum is building in the overall global crane market. Moreover, we believe that our four strategic initiatives will put us in a strong position to take advantage of the cycle. Number one, our European tower crane rental fleet strategy is on track. During the first quarter, we invested approximately $7 million in CapEx on this initiative, with most of these cranes already rented and in service. We plan to expand the fleet by another $8 million during the year. Number two, our Chinese tower crane business continues to move forward. We just launched the fourth new model designed by our China team, the Proton MCT138. More than 100 customers visited our factory for this product launch, and the customer feedback was excellent. While this strategy helps grow our position in China, it also permits us to grow our market share in the Belt and Road regions. Number three, In our all-terrain crane business, we are investing an additional $4 million during 2021 in an effort to fill in product gaps. While several of these new cranes will be launched at BAMA next year, this is a five-year strategy. Over the last three years, the main focus of our engineering team and the AT business was to improve our quality on legacy machines while updating designs to meet regulatory requirements, such as Tier V emission standards, among a few others. It's a nice change in pace to refocus our attention on innovation. In addition, I'm very pleased to speak publicly about Grove Connect. This is a remote diagnostic technology that our engineering team picked off during the fourth quarter. We are currently testing it and expect to launch the first phase of this new technology by the end of this year with additional capabilities to follow. Adding Grove Connect to our all-terrain cranes will significantly improve the serviceability of these complex machines. Number four, last but not least, we continue to pursue acquisition opportunities that will drive substantial long-term growth. In closing, the team has performed well under very difficult conditions. As we stated several months ago, 2021 will be a year of transition as the economy and our supply chain normalizes. We will continue to lean on the Manitowoc Way to guide us through these challenging times. Concurrently, we are confident that our four-point growth strategy will improve our ability to deliver greater value to our customers while generating greater long-term returns for our shareholders. With that, operator, please open the lines for questions.