Manitowoc Company, Inc. (The)

Good morning, everyone, and welcome to the Manitowoc Conference Call to review the company's second 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 Antonek, 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 would 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 and 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 businesses. 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 move to slide three. To begin, I would like to congratulate our team on a great second quarter. We delivered a strong financial performance in spite of several big challenges, which included supply chain disruptions, a cybersecurity incident, and the continuing impact of the COVID-19 pandemic. I am extremely proud of how the team has performed. In addition to the better than expected financial results, we announced our first acquisition in over a decade. As we pivot to a growth-oriented company, I'm excited to see how Manitowoc's culture for excellence continues to mature. As COVID restrictions in the United States and Europe eased during the quarter, I was able to visit our production facilities in Shady Grove, France, and Portugal. It was great to finally meet with our team members in person and observe all of the improvements that they've been able to accomplish over the past 18 months as our implementation of the Manitowoc way continues to accelerate. In Shady Grove, I was impressed by the dramatic operational changes in our manufactured shared services value stream. Led by Tom McMurdy, this is our in-house fabrication supplier. Typically, internal suppliers with multiple processes, such as laser cutting, vending, welding, and machining, struggle to manage our inventory levels and to meet delivery schedules. Using one-piece flow, SMED, TPM, and standard work, the team continues to drive improvements in safety, productivity, inventory turns, and on-time delivery. Five years ago, this was a struggling supplier for the Shady Grove campus. Today, they're one of our best. Moving to France, the team in Charu has implemented automated welding to fabricate pivots, which has resulted in an 85% reduction in our cycle times. They've also set the standard for how an internal warehouse should be organized for kidding, and the cleanliness of the maintenance shop rivals the kitchens of most five-star restaurants. Jean-Luc Thibodeau took over this location four years ago, and his team has led an impressive turnaround, making Chariou one of our leading lean facilities. In Moulin, France, the team is implementing a system called Easy Planning. I'm old school and love my paper, but the team is digitalizing everything on the shop floor from production planning to quality to TPM. During my visit, I pressed the quality button on an iPad in one of the cells, and the quality manager was literally standing behind me ready to help before I realized what I had done. In addition, the team is fully automating our process for cutting tubes that are used in welding up tubes. The most significant benefit of this project is the creation of complete kits to reduce material handling costs, inventory, and to save time on jib fabrication. Bertrand Deleuze, who runs the facility, has done a phenomenal job of setting the standard on how to effectively communicate the Manitowoc Way culture on a daily basis. Lastly, and most recently, I visited our facility in Baltar, Portugal, where we've invested over $5 million throughout the last few years to expand the manufacturing footprint. All of our operations in Portugal have been consolidated into Baltar. In addition, we recently transitioned the manufacturing of a few smaller tower crane models from the Moulin facility. This transition has reduced our cost, but equally important, it has created capacity in our Mulan factory to manufacture the larger top-slowing cranes that we've recently launched, like the MDT-489, 565, and 809. Through this process, the team, led by Vasco Rocha, has completely revamped Baltar's safety culture while focusing on the implementation of the Manitowoc Way. Before COVID hit, I challenged the team to create a one-piece flow assembly line for the slewing mechanism. This is the top part of a tower crane with the cab and the electronic cabinets. Through Kaizen, the team replaced overhead cranes with a trolley system. This large assembly is now pulled from one station to the next in a one-piece flow fashion, reducing cycle time by 13% and the number of operators in the cell by 20%. Overall, I was taken aback by how impressive this facility looked. A big congratulations to the team for a job well done. It's been very rewarding to see how our organization has made the most of a bad situation with the COVID lockdowns, with the acceleration of the Manitowoc Way. And frankly, the timing couldn't be better as our end markets rebound. Please move to slide four. With orders of $537 million in the second quarter, it's fair to say that the market strength that we experienced the last few quarters has continued. We saw strength in all major regions, although I remain intrigued by the dynamics of the European market. Our power crane business in the region is as strong as it's been in the last five or six years. However, the recovery of the European mobile crane market is still lagging. In Asia, we continue to see strong demand, although I must say that China has slowed during the summer months. Finally, in the Americas, the business continues to post improving results, and any infrastructure bill that the government may pass will provide good tailwinds for the coming years. We ended the first quarter with a backlog of $736 million, and we remain positive about the overall demand for cranes globally. Before handing the call over to Dave, I would like to make you aware of our latest corporate sustainability report, which is available on our investor relations homepage. Over the last year, we've made significant strides with our ESG strategy and integrating it into our operating system, the Manitowoc Way. With that, I'll pass it to Dave to provide further details on our financial results. Dave? Thanks, Aaron, and good morning, everyone. Let's move to slide five. Our second quarter orders totaled $537 million, an increase of $299 million, or 126% compared to the same period last year. On a currency-neutral basis, Q2 orders were up $278 million. Orders improved in all of our segments, driven by higher customer demand within each region, and was exacerbated by the prior year's order decline due to the significant impact from COVID. Sequentially, orders improved by $64 million due to improving market conditions in the Americas and steady markets in your app and the app. Seasonally, second quarter orders typically come in lower than the first quarter, which indicates strong momentum in all of our regions. Our June 30th backlog of $736 million increased 71% over the prior year and up 66% on a currency-neutral basis. Backlog increased across all of our segments, and over 85% is scheduled to shift within the year. Compared to year-end, backlog was up 36% and on a currency-neutral basis, up 37%. Notwithstanding the challenges in the quarter mentioned by Aaron, we achieved net sales in the second quarter of $464 million, an increase of $135 million or 41% from a year ago. The year-over-year increase resulted from a combination of entering the quarter with a higher shippable backlog, coupled with abnormally low sales in the prior year as a result of the COVID impact. Net sales were favorably impacted by 5% from changes in foreign currency exchange rates. All of our reportable segments reported increases in sales. Second quarter ES&A expenses increased by $14 million year-over-year. This amount included $4 million of costs related to the write-off of the note receivable from the 2014 divestiture of our Chinese joint venture and other acquisition-related costs. Excluding these items, the adjusted $10 million increase in ES&A expenses were primarily driven by higher short-term incentive compensation expense, coupled with unfavorable foreign currency exchange rates. Our adjusted EBITDA for the second quarter of $41 million increased $33 million year over year. Higher volumes and a favorable product mix were the main drivers of the year over year increase. In addition, we achieved a 24% flow through on our incremental sales. As a percentage of sales, adjusted EBITDA margin improved to 8.8%, an increase of 638 basis points over the prior year. This was mainly due to favorable product mix, improved manufacturing performance, and the leveraging of our fixed costs over a higher sales volume. These gains were partly offset by higher input costs, which will have a profound impact on our second half results. Second 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. Our provision for income taxes in the second quarter was $4 million and was driven by income in certain non-U.S. jurisdictions. As a reminder, Manitowoc has tax valuation allowances established for certain countries, and therefore, pre-tax losses in those countries are not available to offset pre-tax income and the related tax expense in profitable jurisdictions. Our GAAP diluted earnings per share in the quarter was 50 cents. On an adjusted basis, diluted earnings per share of 60 cents improved by $1.07 from the prior year. Moving to liquidity, we generated $9 million of cash from operating activities in the quarter compared to a use of $20 million in the prior year. Capital spending in the quarter amounted to $7 million, resulting in free cash flow of $2 million. Year-to-date, we have generated $34 million of free cash flow and ended the quarter with a cash balance of $159 million, flat with our March 31 cash balance and up $30 million from year-end. Our total liquidity as of June 30th was $454 million, with no outstanding borrowings on our ABL. As we discussed during the H&E Crane business acquisition call on July 20th, our plan is to fund the acquisition with a combination of cash on hand and debt, utilizing the availability of our ABL facility. Without considering the incremental benefit of the H&E EBITDA contribution, our net leverage as of June 30th would be 2.3 times at the $130 million purchase price. Moving to slide six. We have reinstated 2021 full-year guidance. Please note that the guidance excludes any impact associated with the pending acquisition of H&E Equipment Services Crane's business and is as follows. Revenue, approximately $1.775 to $1.825 billion. Adjusted EBITDA, approximately $105 to $115 million. Depreciation, approximately $38 to $42 million. Interest expense, approximately $28 to $30 million. Income tax expense, approximately $12 to $16 million, excluding discrete items. And capital expenditures, approximately $40 million. With regard to the second half of the year, we will be further impacted by continuation of rising input costs and other inflationary pressures. We have implemented price increases, but we do not anticipate that these actions will fully offset the unprecedented levels of rising input costs for the remainder of 2021. In addition, travel is normalizing in the second half. We provided salary increases to our U.S.-based employees in May, and we continue to accelerate our investment in new product development programs. To summarize, ES&A expenses are normalizing to pre-COVID activity levels. With that, I will now turn the call back to Aaron. Thank you, Dave. Please move to slide seven. In past calls, I said 2021 would be a year of transition. This remains our short-term business case as we return to a new normal from COVID-19, work through supply chain challenges, and deal with ongoing inflationary pressure and skilled labor shortages. Nevertheless, we remain committed to our four strategic growth initiatives. Number one, grow our tower crane rental and aftermarket business in Europe. Number two, build out our China and Belt and Road tower crane business. Number three, accelerate our new product development in all terrains. And number four, expand our aftermarket activities in North America. Moving to slide eight, last month's announcement regarding the acquisition of H&E's crane business is a perfect example of how we are executing our growth strategy. Through this acquisition, we will obtain a strong service network, which has 11 branches and approximately 225 team members, including the largest group of Grove Manitowoc service technicians in the world. The acquisition provides us a platform to grow our service, parts, used sales, and of course, our new product sales through a variety of financing options, such as long-term rent-to-purchase arrangements, which are often referred to as RPOs in the crane business. An RPO is when a customer rents a crane for one to two years before purchasing the outstanding balance. This is similar to how an individual will lease a car for five years and then execute the buyout option. On our last call, a few folks had questions about Manitowoc competing with our customers as a result of its acquisition. This is absolutely not the case. Our goal is to help customers more effectively manage their fleet and assist with greater financing options to ultimately sell more machines and move more iron. While our long-term strategy is growth-focused, the management way remains the fuel for our culture. I've already talked about the significant improvements being made in our manufacturing locations. We have additionally begun to expand the use of lean techniques outside of manufacturing. During our acquisition due diligence and integration processes, we utilize a lean project management tool that we call Eight Keys. In our back office, our legal team and HR teams are using process flow diagrams to improve how we draft our annual proxy statement, and we will further utilize the Manitowoc way to optimize the administrative aspects of our tower crane assets in Europe. We have an unwavering commitment to continuous improvement. Switching gears to our short-term financial performance, I am optimistic about crane demand. That being said, supply chain disruptions and inflation will put us on our margins, particularly in the second half of the year. As a reminder, last quarter, we communicated year-over-year cost headwind of approximately $15 million in discretionary spending and $30 million for steel, logistics, and transportation, primarily impacting the second half. Commodity steel prices are now trading over $1,800 per metric ton, which is well ahead of our 10-year average of approximately $670 per metric ton. As for transportation costs, ocean and land freight continues to rise. For example, the cost to ship Ukraine from China to Russia has increased four times. These cost increases will be unavoidable in the second half of 2021. While our long-term strategy is growth-focused, the Manitowoc Way remains a fuel for our culture. Sorry about that. The team is taking significant actions to adjust pricing, which has and will serve to offset the increased input costs. However, we will experience a delay between when we fully realize these price increases versus when we experience cost increases. The crane market is active, and it's difficult to predict the extent of inflationary pressure, effectively peg pricing, and remain competitive on deals. It's a tough balancing act. As you can deduce from our earnings guidance, our normal annual adjusted EBITDA flow-through of 20% to 25% on a four-year basis is not expected to be achieved due to the dynamics we have discussed. This is my way of saying that our revenue will be stronger in the second half than we had expected, but our margins will be tighter, as Dave outlined. In closing, it's an exciting time at Manifwalk. Although we will face serious supply chain challenges in the next couple quarters, crane demand is on the upswing, and we are in full execution mode on our growth strategy, which will drive the long-term value of our enterprise. With that, operator, please open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on the telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star 1 to ask a question. We take the first question from Stephen Walkman at Jefferies.