Manitowoc Company, Inc. (The)

Good day, everyone, and welcome to the Manitowoc Fourth Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ayan Warner, Vice President, Marketing and Investor Relations. Please go ahead.

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's fourth 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 Antonin, 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 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 over the call to you, Aaron. Thank you, Ion, and good morning, everyone. Please turn to slide three. A year ago on this call, I shared my concerns regarding the unintended consequences of the aggressive fiscal policies being used by governments around the world to accelerate the COVID recovery, which we expected to create inflation and lead to a choppy recovery. Clearly, in retrospect, the economic dislocations created by our return to normal were far greater than anyone anticipated. That being said, 2021 was a year of transition for Manitowoc on multiple fronts. While we bounced back operationally from the COVID shutdowns, we also made significant changes in our strategic orientation. As we laid out a year ago, we continued to build out our tower crane business and the Belt and Road regions, launching two locally designed cranes. We accelerated our all-terrain new product development, which will bear fruit at the upcoming Bama trade show this October. We invested $15 million in our tower crane rental fleet in Europe, which helped us increase our market share in Germany and win some strategic orders with key accounts. And finally, we completed two acquisitions in North America, which lays the groundwork for us to grow our aftermarket presence in the local mobile cranes market. Concurrently, we continued to make progress on our ESG journey. In more traditional safety terms, the team doubled our hazard observations that we call slams, and our recordable injury rate, excluding acquisitions, was 1.39 for the year. While our RIR was up slightly year over year, it is still well below the industry benchmark, and I am very pleased with our performance in the face of a precious year. On the sustainability front, we implemented a CUVIO, a tracking system to help us account for our environmental footprint, and we are utilizing the Manitowoc Way to drive continuous improvement. For example, we assembled a global team to collaborate on paint booth emission reductions and have already begun to realize benefits. As for diversity, we've been leaning in hard on this initiative to help offset our labor shortages. Namely, in Shady Grove, we implemented our first ESL program to help attract Spanish-speaking members of our community, and we have begun to offer relocation incentives in nearby cities, such as Philadelphia, to attract employees to our internal welding and machining schools. With respect to our balance sheet, we continue to position the company for long-term growth. After investing $40 million in CapEx and $186 million on two acquisitions, we closed the year with $75 million of cash on hand and $250 million of liquidity. Considering the difficulties of managing working capital in the current environment, I'm comfortable with where we ended 2021. For sure, the economic dislocations created by the return to normal were far greater than we anticipated a year ago, but I am extremely appreciative of all hard work by our team to minimize inflation as best as we could, implement price increases, and manage part shortages while executing our long-term strategy. A big thank you to the team. Specifically, I would like to recognize Jim Glenwright and Sebastian Millay, who recently won the CEO Award for the Manitowoc Way. In the midst of all the economic chaos of 2021, Manitowoc encountered a cyber attack in June. Jim led our effort to restore our IT system while at the same time continuing to implement a new ERP system for MGX equipment services. Meanwhile, across the pond, Sebastian earned his award for his contributions to the continuous improvement of our manufacturing processes in our tower factories. He led projects to implement an automated tube cutting machine in Moulin, while kicking off another significant machining project in our Char-U factory. I'm very proud of the commitment and passion of our employees at Manitowoc, and these two leaders truly represent the spirit of the Manitowoc way. Finally, I am pleased to announce that our Zhang Zhejiang factory won our annual Manitowoc Way Lessons Learned Competition for 2021. The welding value stream and services support teams developed a homemade robot for welding mass rod bars. Through ingenuity, the team built a robotic welder for less than $10,000. To buy the same machine would have cost 10 times as much, and it would not have been specifically designed for the job at hand. Thank you to everyone that participated in the competition, and I look forward to more innovative solutions in 2022. Turning to the financials, I would like to add a little color on our recent performance. Generally, the story on demand remains consistent with the last couple quarters. Every region and every product category is doing well, except for the China market. Orders for the quarter totaled $615 million, And our backlog ended the year just over $1 billion, our highest level in over 10 years. This was driven by continued solid activity in our end markets, rebounding customer sentiment, and improved dealer stocking levels. Looking at the P&L, I have to admit I was very surprised by how we ended the year. Inflation, part shortages, and logistical problems have been a serious issue for us for over six months. And unfortunately, they are creating a real volatile situation when it comes to predicting short-term results. On the back of a soft third quarter, shipments during October and November periods were $75 million lower than our internal forecasts. And as we entered December, vessels continued to be postponed while at the same time Omicron was spreading around the world. Much to our surprise, we were fortunate in the last couple weeks of the year and received several key part shipments which enabled us to complete several cranes. In fact, we clawed back over $25 million of shipments during December, which was nothing short of a heroic effort by our operations team. This, combined with tighter cost management and favorable mix, helped us deliver a healthy EBITDA of $34 million in the fourth quarter. Finally, as I indicated in our press release last night, we have announced a formal CFO succession plan as Dave prepares to retire. Dave will officially step down as the CFO on May 2nd, at which time Brian Regan will assume the CFO role. Dave will, however, remain with ManusWalks in an advisory role until January 2nd, 2023. Dave has played an integral role in ManusWalks' evolution since 2016. He led us through the difficult times after the food service business spinoff. He renegotiated our debt in 2019. And finally, he shepherded our recent acquisitions. Dave? It's been my pleasure working alongside of you for the last six years. On behalf of the Manitowoc family, thank you for your contributions and dedication to the success of Manitowoc. We wish you the absolute best in the next phase of your life. With that, Dave, the team wanted you to end on a high note. Please provide color on the fourth quarter financial results.

Thanks, Aaron. It's been an honor and a privilege to work we would not be where we are today. Lastly, I would like to thank the investment community and analysts with whom I have interacted with over the years. The many thought-provoking questions and comments surely challenged my thinking for the betterment of Manitowoc. A big thank you to everyone. Now, moving to our results for the quarter, which ended the year on a considerable high note. Please move to slide four. Our fourth quarter orders totaled $615 million a book-to-bill of 1.24 and an increase of 21% compared to $509 million of orders last year. The increase in orders were primarily due to higher global demand. Orders were unfavorably impacted by approximately $13 million from changes in foreign currency exchange rates. Our 2021 ending backlog of $1 billion was up 86% over the prior year and is at its highest level in over 10 years. The increase in backlog was across all segments and primarily due to higher global demand and lower than expected shipments in the fourth quarter due to supply chain challenges and logistic constraints. Backlog was unfavorably impacted by approximately $40 million from changes in foreign currency exchange rates. Net sales in the fourth quarter of $498 million increased $68 million or 16% from a year ago. The incremental net sales from acquisitions in the quarter was $24 million, slightly below the $30 million we communicated in the prior quarter. Net sales were unfavorably impacted by approximately $9 million from changes in foreign currency exchange rates. SG&A costs are up $24 million. As outlined in our press release on Friday, February 18, we recorded approximately $14 million for a legal matter with the U.S. Environmental Protection Agency. Due to confidential negotiations with the EPA, we are unable to provide any further updates at this time. Our acquisitions increased SG&A costs by $8 million in the quarter, and the remainder of the increase is primarily inflation-related. Our adjusted EBITDA for the fourth quarter was $34 million, flat year over year. The acquisitions accounted for approximately $3 million during the quarter, which was in line with our expectations. As I discussed last quarter, the Q4 adjusted EBITDA from the acquisitions was impacted by the elimination of intercompany profit and ending inventory. We expect the impact of the elimination of intercompany profits to be nominal going forward and target approximately $30 million on an annual basis from the acquisitions. As a percentage of sales, adjusted EBITDA margin decreased to 6.9%, a reduction of 100 basis points over the prior year. The decrease in margin in the quarter. Income tax expense in the quarter were 1.2 million. This was primarily driven by the jurisdictional mix of earnings partially offset by one-time tax benefits. Our GAAP diluted loss per share in the quarter was 10 cents, a decline of 15 cents over the prior year. On an adjusted basis, diluted earnings per share increased 8 cents from the prior year to 27 cents per diluted share, primarily driven by lower income tax expense in the quarter. Now I will recap the full year financial results. Orders totaled roughly $2.2 billion, up $655 million or 43% from the prior year. Foreign currency exchange rates impacted 2021 orders favorably by approximately $32 million. Net sales for the year totaled approximately $1.7 billion. and were positively impacted by $31 million due to favorable changes in foreign currency exchange rates. The year-over-year increase was primarily due to higher global demand, as 2020 was significantly impacted by the COVID-19 pandemic. Our adjusted EBITDA improved $33 million, or 40% from the prior year. Moreover, our adjusted EBITDA margins improved by 90 basis points to 6.7%. Our full year of 2021 adjusted net income was $31 million compared to a net loss of $12 million in 2020. We generated $76 million of cash flows from operating activities in the year, an increase of $111 million year over year. We spent $40 million in capital expenditures, which resulted in $36 million of free cash flows, an improvement of $97 million year over year and ahead of our expectations. We ended the year with a cash balance of $75 million, a decline of approximately $54 million year over year. As a reminder, we paid $186 million for the acquisitions using available cash along with borrowing $100 million from our ABL credit facility. Our total liquidity at December 31, 2021 remains strong at $254 million. As most of you know, our current notes are callable on or after April 1, 2021. As I mentioned at our investor day on December 13th, we continue to opportunistically look at the debt markets for new sources of capital or to reduce our total cost of capital. Our 2022 guidance assumes that our current capital structure will remain in place for the full year. Please turn to slide five. As we look ahead to 2022, we expect continuing global supply chain and logistic challenges. moderation in inflationary pressure, and an unstable labor market throughout the first half of the year. In the second half of the year, we anticipate an improved price-cost dynamic and a stabilizing supply chain, logistics, and labor market. Based on this outlook, our 2022 guidance is as follows. Net sales, approximately $2 billion to $2.2 billion. With regard to SG&A, It is important to note that our adjusted SG&A expenses for the year are expected to increase approximately 21%, of which approximately $32 million is from acquisitions. Our adjusted EBITDA guidance is approximately $130 million to $160 million. Depreciation and amortization, approximately $65 million. Interest expense, approximately $28 to $30 million. Provision for income tax expense, approximately $13 to $17 million. Adjusted diluted earnings per share, approximately $0.65 to $1.35. And capital expenditures, approximately $85 million. With our recent acquisitions and growing rental fleets, I think it's worth taking a moment to discuss how these initiatives will impact our capital expenditure investments. As we have discussed before, oftentimes a crane is rented for two years and then sold after the acquisition value has decreased. As such, there is always a certain level of churn in a rental fleet. As we sell used machines, we will replenish the rental fleet with the proceeds. We expect this to be approximately $35 million in 2022. In addition, we are still growing our rental fleets strategically to support RPOs and market share growth in target markets, such as the German tower crane market. This CapEx investment will approximate $25 million in 2022. The remaining $25 million of CapEx will be for a normal factory CapEx. Please keep in mind that the management of our rental fleet and the related CapEx is far more dynamic than the traditional manufacturing CapEx. It is heavily dependent upon opportunistic sales transactions, In certain instances, CapEx could be generated by an unexpected sale of a crane that is on rent, which will likely need to be replaced. In other instances, CapEx could be generated by an RPO opportunity, which can be multi-crane deals. With that, I will now turn the call back to Aaron.

Thank you, Dave. Let's move to slide six. As we begin 2022, our strategy remains unchanged and underpinned by our four strategic initiatives. We will continue to look for attractive acquisitions to help accelerate these initiatives, and we will opportunistically evaluate our capital and debt structure to help ensure that we have the necessary flexibility as the U.S. economy faces increasing interest rates. Adding a little more clarity and focus to our strategy, I am pleased to announce our vision for aftermarket, which we call Cranes Plus 50. Our goal is to increase our aftermarket or non-new machine sales by 50% over the next five years. Historically, our business model has been highly product-focused. Our objective is to grow beyond machines and products and to sell more aftermarket parts, field service, lifting solutions, RPOs, rentals for fleet management, used sales, remanufactured cranes, and digital solutions that provide greater customer connectivity. As a jumping-off point, we ended 2021 with $449 million in non-new machine sales, which will be outlined in our 10K filing. In closing, Manitowoc continues to strive to get closer to our customers and to grow our less cyclical and higher margin revenue streams. We continue to reposition the company for long-term growth while we weather the near-term economic storm. We are confident that our investment in our four growth initiatives will allow us to deliver on our Cranes Plus 50 strategy and increase our non-new machine sales by 50% over the next five years which we believe will fuel greater long-term returns for our shareholders.

With that, operator, please open the lines for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we'll take our first question from... Tammy Zakaria with JP Morgan.

Hi, good morning. Thank you so much for taking my questions. Good morning, Tammy. Good morning. How are you? So my first question is, I think you mentioned about $75 million of shortfall and orders in October and November. Did you recover all of that in December or do you expect all of it to come back in the first quarter? I'm trying to understand, like, when does this shortfall sort of get delivered, Bolton delivered, and whether you're going to recoup the entirety of it, or there's some lost demand there?

Okay, so, yeah, there were $75 million that we missed in October and November when we were making our shipments, but we were able to claw back $25 million of that during December, so there's $50 million missed. I think that's off the high point of our range that we gave back in December. I think the better way of looking at it is we'll recover those shipments in January and maybe some in February if they went out that far. But the reality is everything continues to shift right as we continue to fight through all these shortages. So I wouldn't say it's loss in demand. We've not had any demand cancellations or oral cancellations or anything like that. It's just the business right now remains very fluid in terms of shipments because of part shortages.

Understood. That's helpful. And then one quick follow-up. On the backlog, can you remind us whether the backlog represents everything you expect to ship within the next 12 months? And are these backlogs price protected?

So the backlog will, you know, the majority of the backlog is scheduled to ship in 2022, and all the pricing is fixed in the backlog.

Understood. All right. Thank you so much.

And we'll take our next question from Stanley Elliott with Stifel.

Good morning, Stanley. Good morning, everyone. Nice way to finish up the quarter in a tough environment. And, Dave, best of luck to you. We will certainly miss having you on the calls.

Thanks, Stanley.

Can you talk a little bit more about the plus 50, you know, increasing that, you know, by 50%? Is this all organic? What level of M&A or acquisitions will be needed for you to hit those targets?

Yeah, so it'll come through a combination of the acquisitions as well as some organic. And I'd remind you that whenever we closed the books on H&E, we had to eliminate the intercompany transactions. So that sort of sometimes outweighs what you see in terms of the organic, just in terms of the mathematics of it. But we definitely will rely on acquisitions to get there. But, you know, even from our recent acquisitions, we've got good synergies and there's more opportunities. You know, one of the things I'd like to just talk about on this subject is used. So if you look at the business typically, there's a lot of used business that's generated through trade-ins in Europe with all-terrain cranes. Historically, we haven't really done that proactively or I'd say strategically. We did it reactively in terms of what a customer wants and an order we'd like to get. So now that the acquisitions and owning H&E and their crane business in Aspen, it creates a real strategic opportunity where we can go chase business that we wouldn't have otherwise chased back in Europe. So we'd do a trade in Europe, bring the crane to the United States, and sell it into the U.S. market. So that's just one example of the sort of organic opportunities we have.

Interesting. And could you comment a little bit about your outlook from a regional perspective and You mentioned all the markets doing fairly well with the exception of China. Just see kind of what the puts and takes might be as we're thinking about the 22 guide.

Yeah, I mean, across the board, it's pretty strong almost in all regions. I'm just thinking even in Russia with all of the uncertainty there, the business continues to remain robust. So I don't really see a change. I mean, Europe has been in good shape for us. It continues strong, whether it be towers or all terrains, U.S., It still is robust. Asia-Pac, I mean, there's – throughout Asia-Pac, as certain markets reopen again, things look good. But, yeah, I generally say, you know, just take China out of it. All regions look pretty solid.

Great, guys. Thank you very much, and best of luck.

And we'll go to our next question from Jamie Cook with Credit Suisse.

Morning, Jamie.

Hi, this is Chigusa, Kotoku on for Jamie. Thanks for taking my question. So we were wondering, so for your, you guided sales up 22% at the midpoint for 2022. And I was wondering if you could help us understand how much is M&A versus price versus volume?

Yeah, so I would say that, you know, when we look at the incremental impact, we said between 100, 120 million will be M&A related on a net basis, on a year-over-year basis. And then, you know, generally speaking, there is going to be price included in there because we've raised our prices to more or less cover our increase in cost. But we haven't spoken about a dollar impact on that at this time yet.

Okay, thanks. And then your 2022 incrementals are implied below your typical 25% range, but we were wondering what you're assuming for price costs for first half versus second half.

Yeah, so I mean, if you look at the full year, it's a combination of where the volumes sit. But the biggest issue really comes back to this dislocation between our pricing and our costs. And as things shift right, so for instance, the $50 million that moved out of the fourth quarter and into the first quarter, in the first half, we've got some headwinds in terms of where our pricing sits relative to where our costing is. So that's the majority of the issue with contribution margins.

It'll start to sort out as we get towards the end of the year.

Okay, thanks.

Thank you.

And we'll go to our next question from Cliff Ransom with Ransom Research.

Good morning. Good morning, guys, all of you. Good morning, Cliff. Because I'm a big fan of Stanley's, I will just say that, Dave, we won't miss you on the calls, but we'll miss you in the office.

Thank you very much, Cliff.

As a quick comment before two very quick questions, Aaron, the real test of a CEO is ensuring orderly successions, and thank you for handling your first big test so well. This is obviously very well organized. Thank you. Do you believe that the recouping of shipment effectiveness in the fourth quarter was effective? an individual event, or was it, do you believe, the harbinger of something to come?

Yeah, I have to admit, now that we're through January, I'd definitely say it was a one-time event in December. In December, we had some pullback and things went our way in terms of, I think, everybody trying to get their shipments out at the end of the year. But in January, we sort of went back to where we were in October and November in terms of shortages and the logistical issues.

Got it. um and then the last question is in my mind this lean transformation that you have undertaken at manitowoc is the most important thing that manitowoc has done since it was founded can you give us one or two or three examples of stuff that you're really proud of and then maybe one or two examples of stuff that didn't work out as well as you had hoped and what you're going to do about it um

yeah i mean i think one of the coolest examples we have this year is the heat exchangers we've got in willemshaven so as part of our esg program our maintenance team there started to implement heat exchangers around our paint booth and in fact now all the men's and gals showers in the facility are heated by the the water that comes off the paint booth so i thought that was a great opportunity and it started to move be moved around the company so Yeah, I think there's plenty of those sort of I call small, but they're big at a local level of ideas that keep going. But, I mean, in terms of our mistakes, I hope we make mistakes every single day because we're not making mistakes and we're not making progress. So we still have a lot of progress to go on SMED. I think we've made some good gains on TPM in the last 18 months. We've started to really push hard on standard work, which is a never-ending journey. So, yeah, I think there's still lots of opportunity for us.

Thank you very much for that comment on mistakes. I appreciate it. Good day.

Thanks, Liz.

And we'll take our next question from Jerry Revich with Goldman Sachs.

Good morning, Jerry.

Hi. Good morning, everyone. Hi. Good morning. And Dave, congratulations.

Thank you very much, Jerry.

I'm wondering if we could just talk about the margin bridge in the fourth quarter, really impressive margin performance, you know, sequentially and year over year in the challenging environment. Can you just quantify for us, Dave, you know, what was price cost in the quarter and maybe just to quantify some of the qualitative factors that you spoke about, Aaron, in terms of getting parts, et cetera, what impact did that have sequentially on improving performance? absorption because the results really stood out versus what we're seeing from other manufacturers. Thanks.

Yeah, so, Jerry, I would, you know, I'd have to say that the biggest item in there is pure product mix, right? I mean, we obviously focused on products, you know, that delivered what I'll say is the best returns for us, and we were able to get those out the door. So that was, without a doubt, you know, the number one driver in that. In addition to that, I have to give credit to all the manufacturing facilities around the world. I mean, we really did well in execution in Q4, and it came out much better than what we anticipated. And those were probably the two main drivers that generated the biggest gains for us in Q4.

Got it. And, you know, obviously a strong bookings year for you folks in 21. You know, as you look at the prospect list, maybe through the first six months of 22 or however far, visibility you have. Can you talk about which regions do you expect to drive growth in backlog for you folks over the course of this year based on visibility we have now?

Yeah, I think regionally it probably remains pretty even across the businesses relative to their size. When I look out at 2022, I mean, the first thing I'd say is 1Q still looks good. Not as strong as fourth quarter, but fourth quarter typically is pretty strong for us. And we had a great fourth quarter this year. The other thing I'd add is we've been working really, really hard at getting the pricing that we need to offset the inflation. And so we've definitely lost some orders here in the first quarter, just being super disciplined relative to pricing. But I think that general outlook looks good. The other thing I'd add too is, you know, because of the pricing situation, we're pretty conservative about taking orders into 2023. I mean, we want to manage our backlog as closely as we can so we don't get too far ahead of ourselves.

Appreciate the discussion. Thanks.

Thank you. Thank you, Jerry.

Again, if you would like to ask a question, please press star 1 at this time. Again, that is star 1 for questions. We'll take a follow-up from Cliff Ransom.

Thanks again, gentlemen. One last question. Very important in this equation is new product development and satisfying end users. Can you talk a little bit about how you've used lean thinking to enhance that process?

Yeah, I mean, we've used it on multiple fronts. One is just around the tollgate process we use for product development and how we move cranes. I mean, I'll tell you outright, we've got a 6400-1 that we've been looking to launch now. It's been delayed six months in total. So, I mean, we go through all the tollgates and everyone stands in a room and says, not ready to go, and we say, okay, keep working on it. So, I mean, I think that shows the level of discipline that we have. And then the other side of this is just the voice of the customer and the field followers that we do to really make sure that the way we design in the cranes is what the customers want. We have a lot of dialogue with folks around what are the real needs and true specifications of the cranes we need to develop.

Thank you again. Good day. Thanks, Cliff.

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

Thank you. Before we conclude today's call, please note that a replay of our fourth 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. Good day.

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