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.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will now take our first question from Jerry Ravitch from Goldman Sachs. Please go ahead.

Yes, hi. Good morning, everyone, and congratulations on the strong quarter.

Thanks, Jerry.

Thank you very much. I'm wondering if you could talk about the order cadence that you're seeing at this point. Just expand on the comments you shared in the opening remarks. It sounds like the European tower crane momentum has continued into April. So maybe just touch on a little bit more in terms of what you've seen since quarter end by region and product.

Yeah, so I'll speak at a high level. I mean, April was a good month for us in terms of orders, but some of that is that we see orders coming in in advance of price increases that we've implemented.

Okay. So you purely see that as a pull forward, Aaron?

Yeah, I think so.

And then, you know, can you talk about the price-cost matching? So you folks have a lot of longer-term supply agreements as you're seeing this pull forward in orders. I'm wondering to what extent will your cost base actually – generally be okay. We've seen you folks manage, you know, pretty volatile input cost environment pretty well over the past couple of years. And I'm just wondering if the comments that you folks are adding about matching price with input cost inflation is just healthy fear of the supply chain versus, you know, anticipated, you know, price-cost drag in two cubes.

So I'm going to ask Dave to answer that question, but before he does, I'd just say that I would say over the last five or six years, we didn't see the systematic inflation that we see today. And even in an instance of steel back in 2017, when it increased, it was only up for a quarter and it came back down. So Dave, you want to take it in more detail than that? yeah sure so jerry you know we've uh we've we've actually done a nice job and into the first half of 2021 with our with our pricing and our buying of steel um which is causing you know the results to get there but as you know with with typical with like foreign exchange and everything over the long term you're going to get your cost up to the up to the market price and with the prolonged high steel prices uh in the short term it's going to have an adverse effect on our on our price cost comparison because we can't increase prices fast enough to offset the material cost increases which is why we're going to see a degradation in our in our flow through in the second half of the year and david can we just put a finer point on that so what's the price cost uh drag in in terms of um you know

hundreds of basis points? Is it less than that? And then based on price increases that you've announced, when do you think you're going to be right side up?

So, Jerry, I would say, you know, number one, we don't give quarterly guidance. So we're kind of, we've looked at the full year and we've kind of anticipated where we think we'll be in the full year. You know, 2021 will be challenging throughout the year. And I see 2022 as being the year that this will even out a little bit more. And I'd just add that the majority of it, we have more coverage into the second quarter when we get into the second half where the steel prices start to really have an effect on it.

And the order of magnitude of the headwind that's anticipated in the guidance, could you just put a finer point on that for us?

I'd just point to the $30 million that we commented on in the prepared remarks.

That's on a net basis, not a pricing. Okay. All right. Thanks.

We will now take our next question from from JP Morgan. Please go ahead.

Morning, Anne.

Please go ahead. Caller, your line is open. Please ensure your mute function is turned off to allow your signal to reach our equipment.

Thank you very much. My mute button was indeed on. Sorry about that. Could you talk a little bit about the operating pre-cash flow? You noted that it was positive versus seasonally it should be negative on the back of working capital. Can you just talk about what happened there and how we should think about that as we go forward the cadence of cash generation?

Yeah, so, I mean, the first quarter was unusual for us, historically speaking. Part of that had to do with the fact that we had high AR at the end of the year that converted over, so that helped us. And then the other side of this is just how we manage our inventory throughout the year. Right now we're at a lower level and building up as the year goes on. I think the question for us to really decide in the next quarter will be how we manage the fourth quarter. Normally we really pull down inventory in the fourth quarter, but as we see the market picking up, We're going to have to make some decisions regarding our build schedule because we don't want to miss out on potential sales in the first quarter, which would typically happen if we draw down our inventory as low as we can in the fourth quarter. Dave, you have anything to add? Yeah, and I would say that if I recall the last time we spoke about free cash flow, we talked about being positive in CFLA cash flow from operating activities and that would be offset by capital spending. At this time, our line of sight indicates that we'll have positive free cash flow after the capital spending. And that's always contingent upon, you know, how the order book takes us to the end of the year and with inventory, you know, being the wild card in that one for the most part.

Okay. You had also said that working capital will be a headwind in first half, reversing in half, too. So I was just curious why that had changed. Thank you for the color. Ben, can you talk a little bit, you gave us the $30 million on material cost inflation, that's helpful. Can you talk about the other costs that you had discussed in Q4? You talked about $15 million headwind from the return of discretionary costs, just update us on that. And then you'd also talked about negative mix on stronger crawler sales. Is that different now just because towers are picking up so much. If you could just update us on those, I'd appreciate it. Thank you.

Yeah, you hit the nail on the head with respect to the mix because the tower business is stronger than we anticipated. The crawler business is held steady, and that helps us out. I think that's a good way of looking at it. With respect to the costs we talked about in the fourth quarter, I would say those maintain. There's no significant change to that $15 million. Right. And I'd say the big benefit came in in the first quarter when we did the year-over-year comparison is that, you know, last year in 2020, we had about $3 million of costs associated with the ConExpo show, which didn't repeat. And that was a big driver for the decrease against 2021 results. That's going away, and so, you know, then those headwinds will continue for the rest of the year.

Okay. I think I just missed how much you said ConExpo cost you. Could you just repeat that? Sorry.

Yeah. The ConExpo trade show cost in 2020 were about $3 million. That provided a benefit on a year-over-year comparison.

Okay. That's a good proxy for trade shows going forward then, or at least ConExpo's and Bama's. Thank you. Appreciate it.

We want to take our next question from Meg Debray from Baird. Please go ahead.

Good morning, Meg. Yes, good morning, everyone. So, you know, you clarified that steel logistics and all these inflationary pressures are a net $30 million headwind. So I guess I'm wondering if we're sort of normalizing for that, say that you didn't have this $30 million headwind, You know, what would incremental margins have looked like, you know, based on your operating plan, your guidance for 2021?

Mike, I think you're really asking a 2022 question, but I think it's difficult to answer that question, especially when we start to look at mix and where we thought we were in the fourth quarter. Mix is a little bit better. But, yeah, there's a lot of headwinds as we look forward to the next couple quarters. Dave, you don't need to ask. No, I just say that. I'm sorry, Nick.

Go ahead. Well, I think we all understand that. What we're trying to understand really is what you view at this point, given what you've done with capacity, given all the investments that you've made, what you view as a sort of a normal incremental margin run rate for the business X some of these inflationary or cost variations.

right so maybe we've always we've always looked at you know the upside at 20 percent you know as as uh as a flow through on the incremental sales um in under normal conditions um you know and depending on the product mix it could go up a little bit higher than that but we've always said right around that 20 range i see and um

I'm kind of curious on your prior point on pricing and on, you know, certain dealers ordering forward and so on. How exactly are you going about implementing these price increases? I mean, do you sort of have like list prices at the beginning of the year and then you adjust it as the year progresses? Is this a matter of surcharges or are there other things? Is there another mechanism at work here? And I'm kind of curious if these are sort of temporary moves in price or if there is a permanent aspect to what you're doing with pricing that carries into 22.

Yeah, so it's a combination of things. First, it says we don't do surcharges. We actually change the prices. That being said, when we get into negotiated deals, it's a question of how much you discount. And, of course, we're putting more pressure on our team not to discount as much as we were to offset that. So I'd say it's a couple of things. I think the real struggle for us is that when we were in the first quarter, three months ago when we talked, we really anticipated that the steel price increase would look like it did a couple years ago. It'd go up for a quarter, then it'd start to drift back down. And, you know, at the time, you don't want to put too much of a price increase in place because that could cause you to lose orders or be less competitive future. I think where we stand now is it's pretty obvious that – the steel prices are going to hold tight and maybe even increase in the second half. So in some instances, we'll go for a second round of price increases this year.

Okay. And then final question for me, when we're looking at this $30 million figure that you shared with us, I'm curious as to what's all baked into this figure. Are you assuming that your steel cost is sort of converge onto where we're currently seeing spot rates? Or is there another assumption that's made here? Thank you.

No, I mean, so the three components, really, when we look at it are steel, transportation, and obviously components within the crane. And we're just looking at, you know, where the steel is today relative to the futures that are out there that are listed on the marketplace right now.

I don't think I follow your comment there.

Well, I just add that, look, it's all steel, but a lot of the components and sub-assemblies we're buying, those folks are seeing the same inflation across the board. So it's not just that our steel suppliers are increasing prices on us. It's basically everyone. And I would say there's broad-based inflation right now for everyone, not just the crane business.

Okay, I'll take this offline. Thank you. All right.

As a reminder, to ask a telephone question, please signal by pressing star 1. We will now take our next question from Jamie Cook from Credit Suisse. Please go ahead.

Morning, Jamie.

Hi, this is Tagusa Kotoku on for Jamie. So our first question is on, we hear from companies in particular on highway saying that they expect the supply chain conditions to improve or they could at least manage better in the back half of the year. But I was just wondering what you're seeing differently. And then the second question is, can you talk to the variables around the top line for this year? And how do you think of the timeline to return to normalized revenues of 1.9 to 2.2 billion that you have talked about previously? Thank you.

So on the first question, I would say that that's wishful thinking. I mean, every day we see different shortages. In fact, in the United States alone, we've received 40 force majeure letters year to date, which is something I've never seen in my career. And I would just add that when I see this chip shortage, it goes into basically every sensor that's in every part. So it's very difficult for us to predict who will be short next. It's something we literally battle day to day. With respect to the top line, I don't think we're ready to comment on when we think we get back to the 1.9. Okay, thank you.

We will now take our next question from Stephen Fisher for UBS Investment Bank. Please go ahead.

Thanks. Good morning, guys. Just wanted to ask you a little bit about – morning. Ask you a little bit about the energy side of the business because, Aaron, in your comments, you kind of tempered expectations around the North American business. I guess to what extent do you have capacity reserved in North America just waiting for oil and gas cycle to come back? And if it were to remain muted, would you need to do anything differently with your capacity or would a potential – highway building cycle absorb that capacity instead?

Yeah, I mean, I think when I look at it, the main effect is on large RTs. If you go to the oil patch today and drive around, you'll see a lot of those sitting in the rental houses. So business is extremely slow, very, very low utilization. We don't expect a significant change next couple quarters. But I think that we're well positioned at our factories that on both sides of it obviously we'd love to see a pickup in the business but we don't need to do any additional restructuring anything like that to get our capacity back in line okay and then wind has been somewhat of a helpful driver in the past what are you seeing there at this point yeah i mean i really think that we saw uh the jump on orders three or four months ago that we had talked about in the last call. But I'd say over the last, since that, so we saw the jump in crawler orders, but since that, I think it's just been good dialogue. I think that's, you know, I think three months ago people were putting in orders and speculation that the wind business would take off. Over the last three months, though, I'd say that those folks have the machines on order that they want, and we haven't seen much more move than that. Okay. Thanks very much. Thanks, Steve.

It appears there are no further questions at this time. Mr. Warner, I'd like to turn the conference back to you for any additional or closing remarks.

Before we conclude today's call, please note that a replay of our first quarter 2021 conference call will be available later this morning by accessing the investor relations section of our website at www.manitowoc.com. Thank you everyone for joining us today and for your continuing interest in the Manitowoc Company. We look forward to speaking with you again next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.