This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good day, everyone, and welcome to the Manitowoc Second Quarter 2022 Earnings Call. For your information, today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Ian Warner, Vice President, Marketing and Investor Relations. Please go ahead, sir.
spk03: Good morning, everyone, and welcome to the ManusWalk conference call to review the company's third quarter 2022 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 Brian Regan, 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 the call over to Aaron.
spk06: Thank you, Ion, and good morning, everyone. Please turn to slide three. Our third quarter operating environment was similar to that of the last few quarters. Significant part shortages, labor constraints, logistics disruptions, and inflation. I greatly appreciate the persistence and determination of the Manitowoc team for managing through these difficult times while executing our four breakthrough initiatives to grow our aftermarket business. Growing our aftermarket reduces our cyclicality, provides recurring revenue streams, and improves our margins over the long term. During the third quarter, our sales were $455 million, and our adjusted EBITDA was 24 million. As I inferred on our last earnings call, we ended the second quarter with a fair number of machines that were nearly complete. I had high hopes that our naturally lower production demands in the third quarter, combined with those nearly finished goods, would prevent us to ship more. In spite of this, we fell short of our internal revenue forecast by $45 million, adjusted for FX. On the demand front, third quarter orders were 472 million. Our orders have tracked to roughly $150 million each month for the last eight months. That level of consistency is unusual in our business. Our backlog ended the quarter at a robust $943 million. During the third quarter, demand trends remain unchanged from the previous quarter. Across North America, customers are busy with a steady backlog of projects, dealer inventories remain healthy, and planned government investment in infrastructure and chip manufacturing provide good reasons to be optimistic. Not to mention, Oil prices are well above $65 per barrel, which was historically been a good barometer for crane demand in the oil patch. Of course, these tailwinds are juxtaposed against inflation, rising interest rates, ongoing parts and labor shortages, and longer lead times for cranes, which has stymied growth. In Europe, Russia's transgressions have given rise to dark clouds over the region. Inflation has risen to record highs, yet the European Central Bank has been slow to adjust interest rates. The tower crane business has begun to slow, And the mobile crane business, which was very subdued during the immediate fallout of the COVID pandemic, has experienced a sluggish recovery in spite of healthy crane utilization in the region. Among all of our markets, the Middle East offers the greatest opportunity for growth. Saudi Arabia's Vision 2030 initiative is coming to fruition. The government has committed more than a trillion dollars to a diverse slate of ambitious projects and the momentum is building. In addition, Qatar and Kuwait are showing promising signs of growth, After years of muted activity, it appears the Middle East is coming alive again. As in recent quarters, Asia-Pacific remains mixed. Although China is a relatively small market for Manitowoc, it continues to deteriorate. Our Chinese competitors are once again offering pricing and payment terms that defy logic. These Chinese players added enormous capacity over the last five years. As the domestic Chinese market continues to slow, we expect these competitors to aggressively pursue more export business in the Belt and Road regions. In South Korea, the local market remains robust, but the strong U.S. dollar has become a significant obstacle for us in the short term. Likewise, in Australia, crane activity is holding up, but supply chain issues have led to a cash crunch causing anxiety through the construction industry. Finally, in Singapore, we are starting to see some green shoots in the tower crane market. Please turn to slide four. Changing gears, we continue to make progress on our Cranes Plus 50 strategy to grow our aftermarket. For the quarter, our non-new machine sales increased 27% year-over-year, and we are on track to achieve our full-year 2022 goal. This growth is primarily driven by acquisitions, but the team continues to increase our field service population and expand our territory. Last month, we purchased certain assets from Haunted Equipment Company, adding Colorado, Wyoming, and Nebraska to our footprint. Although this investment was relatively small, I'm excited about the expansion of our direct-to customer territory. It's a great addition to our portfolio with a promising mix of non-new machine sales and synergies for our MGX and Aspen businesses. With the integration of the recent acquisitions completed, we have begun to accelerate our implementation of the Manitowoc way at these new businesses. To that end, last month, we completed two Kaizens at our Aspen equipment location in Bloomington, Minnesota. One of the Kaizens was focused on 5S, while the second Kaizen was aimed at increasing productivity in one of the location's truck body upfitting cells. The team created an action plan that is expected to eliminate approximately 80% of the waste in this upfitting cell and improve its capacity by 30%. Although we are in the initial stages of implementing LEED in Aspen, I'm proud of the team's receptiveness to the Manitowoc Way and I look forward to further success. Please turn to slide five. Before I hand the call over to Brian, I would like to comment on last month's BAMA show in Germany. As most of you know, BAMA is the largest constriction equipment trade show in the world. It's a phenomenal opportunity to showcase our new products and solutions, to celebrate milestones with our customers, and to drive the commercial side of our business. And it takes a tremendous amount of work to pull it off. I want to extend a heartfelt thank you to the many Manitowoc team members who made the show a big success. Customers at the show were very impressed with the 12 new cranes we introduced, including a four-axle, 100-ton all-terrain hybrid concept crane, and our first luffing tower crane model equipped with CCS, our crane control system. We also received good feedback on our recent dealer acquisitions in the U.S. These acquisitions will allow us to get closer to several of the large European-based multinational crane operators. And importantly, our customers noted that our product quality has improved significantly, which is a far cry from my first Bama six and a half years ago. Overall, feedback from our customers and global partners reinforce that we are on the right track with our strategy. With that, I will turn the call over to Brian to take us through the financials.
spk01: Thanks, Aaron, and good morning, everyone. Please move to slide six. Our third quarter orders totaled $472 million, a decrease of 13% from a year ago. The year-over-year decline was driven by lower demand in our URAF segment, primarily due to softening macroeconomic conditions in the region, as mentioned by Aaron. This was partially offset by higher orders in our Americas segment. Additionally, foreign currency impacted orders unfavorably by approximately $24 million. Our September 30th backlog was relatively flat sequentially at $943 million and unfavorably impacted by approximately $25 million from changes in foreign currency exchange rates. Backlog remained elevated, with supply chain constraints continuing to impact our ability to complete and ship cranes. Net sales in the third quarter of $455 million increased 12% from a year ago. The year-over-year increase was driven by the stronger shippable backlog entering the quarter, primarily in the Americas and Europe regions, and incremental sales from acquisitions, which drove higher non-new machine sales. However, sales continue to be negatively impacted by supply chain constraints, resulting in shipments shifting to the right. We estimate this impact to be approximately $45 million adjusted for foreign currency. Net sales were also considerably impacted by $32 million from changes in foreign currency exchange rates. SG&A expenses increased by approximately $6 million year over year, primarily related to our acquisitions and partially offset by favorable foreign currency exchange rates. Our adjusted EBITDA for the third quarter was $24 million, an increase of 20% year over year. As a percentage of sales, the adjusted EBITDA margin was 5.3%, an increase of approximately 40 basis points over the prior year, primarily due to the higher sales volume. Foreign currency did not have a material impact on adjusted EBITDA during the quarter. Third quarter depreciation and amortization of $15 million increased $5 million compared to the prior year, which was driven by the acquisitions. Moving to income taxes, we had a benefit in the quarter of $300,000. This was driven by the jurisdictional mix of the income. As a reminder, we have 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 gap diluted income per share in the quarter with $0.07. On an adjusted basis, diluted income per share was 10 cents, an increase of 4 cents from the prior year. Our net operating working capital year-over-year increased $112 million, $156 million on a currency-neutral basis, primarily due to the acquisitions, increased volume, supply chain disruptions, and inflation. Year-over-year, approximately $75 million of the increase was attributable to the acquisitions. On a sequential basis, net operating working capital was up $18 million, primarily due to higher inventory as a result of mis-shipments in the quarter and lower accounts payable as a result of adjustments to our billed schedules. Sequentially, foreign currency exchange rates favorably impacted net working capital $18 million. Moving to cash flow, we had a use of $6 million of cash from operating activities in the quarter, primarily due to the continued working capital challenges previously discussed. Capital spending was $15 million of which $8 million was for the rental fleet. As a result, our free cash flow in the quarter was a use of $21 million. We ended the quarter with a cash balance of $43 million which was flat sequentially. Total outstanding borrowings under our ABL increased during the quarter by $24 million to $104 million and total liquidity remained strong at $245 million. Our net leverage ratio remained under three times as of September 30, 2022. As we enter the fourth quarter, our elevated shippable backlog and inventory levels support achieving the low end of our revenue and adjusted EBITDA guidance for the full year. As it relates to free cash flow, we have line of sight to achieving breakeven. However, we remain vulnerable to part shortages and vessel availability. With that, I'll now turn the call back to Aaron.
spk06: Thank you, Brian. When I assess the current environment, it's a tale of contradictions. On one hand, high oil prices, significant infrastructure spending, good crane utilization, and a large backlog are usually signs of a strong crane cycle. On the other hand, we face an unprecedented supply chain and logistics crisis. The highest inflation in 40 years. an exceptionally strong dollar, rising interest rates, and an unpredictable geopolitical situation on the back door of the EU. While this plays out, the Manitowoc team remains focused on generating cash and executing our four breakthrough initiatives. As I learned 20 years ago from Fred Pozes, the former CEO of American Standard, when it's light, it's hard to see the dark, and when it's dark, it's hard to see the light. At the moment, there is no shortage of darkness. That being said, crane fleets continue to age, and at the moment are clocking plenty of hours. Every major crane house that I speak with recognizes the need to refresh their fleets. The longer the pending crane replacement cycle is delayed, the stronger the next cycle will be. While we wait for better times, we will drive internal continuous improvement with the mammoth walkway while executing our Cranes Plus 50 strategy. As part of this journey, we will continue to strengthen our product offerings and build out our aftermarket footprint, fueling our long-term growth and driving shareholder value.
spk09: With that, operator, please open the lines for questions.
spk07: Your first question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.
spk09: Morning, Jamie. Hi, Jamie.
spk00: Hi, this is Chigusa. Kotoku on for Jamie. Thanks for taking my question. So my first question is on the fourth quarter. I think the sales and the margins are implied up sequentially, and I was just curious if you could comment a little bit about what gives you confidence that you could clear the red tags. If you could comment on supply chain and price cost, it would be great.
spk06: Yeah, so, I mean, looking at it sequentially, the third quarter is always our weakest quarter because of all the shutdowns. That being said, of course, we do have fewer days because of the holidays, but No, I think there's a couple things that we look at. First off, internally, we reduced our forecasts, similarly to the misses we've had the last couple quarters. So we have pulled that back in terms of our internal forecasts. The other thing I'd add is to remember that when you look at the historicals, we've added $120 million in annual revenue from the acquisition. So that will help get us to the big number that's out there. And then the last piece is just around what we've been fighting with for the majority of the year. I was just in Willemshaven. For example, we had 45 finished cranes sitting in the yard where we're trying to get them on vessels and get customers to come take their machines. So that's a combination of battling the part shortages as well as getting units on the vessels that are going to make the difference. But we've got the backlog. We've got the inventory. At this stage, most of those machines are nearly complete. I mean, typically for us, there's about a month lag. I mean, we finish the machines and then there's a lot of work that has to be done in terms of final configurations and load testing and those sorts of things. But the manufacturing is pretty well closed by the time we end November. So I think all those things considered, if we can get a little luck in terms of the supply chain, and we normally do in the fourth quarter more so than some of the previous quarters, we feel that it's doable. I agree, it's going to be a tough stretch. But as I say, we've got everything in place to do it.
spk00: Okay, that's helpful. Thanks. My second question is on 2023, the top line. So I was just wondering if it's fair to assume that 2023 is most likely going to be down given the demand trends. But like as to your point, like given the fleet age and the oil prices and the government stimulus has yet to manifest, there's a lot of tailwinds in 2023 as well. So I just wanted to get your thoughts on how to think about how you think about 2023 top line.
spk06: Yeah, I mean, we haven't given any guidance in terms of 23. All I would say is that we really have good backlog, and we've been tracking at about 150 a month in terms of orders, and a little bit stronger than that in October. So I don't think that it will necessarily be down, but, again, we haven't rolled out any guidance at this stage formally. But, again, I think there's some positives out there, too, assuming we don't have some deep-down recession that comes.
spk07: Okay, thank you. Your next question comes from the line of Seth Weber with Wells Fargo Securities. Your line is now open.
spk06: Morning, Seth.
spk05: Hey, guys. Good morning. I wanted to ask about the backlog and, you know, price cost. Do you feel like that you've largely worked through lower price backlog at this point, or do you think that's a fourth quarter event, you know, kind of with big pusher in the fourth quarter, and then just how you're handling that? pricing for orders that you're taking for 2023? Thanks.
spk06: Yeah, so we haven't worked through it yet. Then the third quarter is probably an impact of $10 to $12 million, which is better than what we sort of indicated on the last quarter. But realistically, it's probably not until the second half of 2023 before we really get through all of that and out of our backlog. And that being said, it's still Assuming that there's not more inflation, and right now I'd say our biggest concerns are around wage increases, medical increases. I mean, there's a lot of different downstream increases that are starting to come through, even though commodity prices have tempered. So I would say second half of 23.
spk05: Okay. And when you're taking orders for next year, though, do you have firm pricing or is it some sort of provisional pricing? Yeah.
spk06: How are you – We don't use surcharges, but we do have provisional pricing, and we've limited the lead time in terms of which would take an order, so we firm it up as we get within basically six months, I guess.
spk01: It's six months, Seth, and when you look at our pricing, like Aaron said, it is provisional pricing, so anything that's in our backlog is fixed price.
spk06: Yeah, so it doesn't move from provisional to backlog until it actually gets locked in. I mean, the biggest advantage there is just giving our dealers the visibility that they got units on the order board without nailing down the price just yet.
spk05: Got it. Okay, that's helpful. Thank you. And then just on the aftermarket business, is there any, you know, swag for how we should think about how you guys are thinking about that, you know, the growth in that business over time? Is that, in your mind, sort of a mid-single-digit grower thing? on the aftermarket side, just, you know, going forward. Yeah.
spk06: I mean, that's just it is we've got the acquisitions there that swing the numbers pretty heavily and they have so far this year. And so, I mean, it is heavily acquisition driven, but we've been slowly investing and getting more service techs. We've added a little bit more population. So I think that's probably a fair number that you're, you're looking at there. Um, But it's something that we're constantly talking about looking forward in terms of how do we keep the number growing to get to our end all beyond goal.
spk01: Yeah, because you can see that a lot of our investment has been in that area with the rental fleet. So, you know, the expectation is that that's going to drive revenue and incremental growth in that area.
spk09: Got it. Okay. Thank you very much, guys. I appreciate it. Thanks, Seth. Thanks, Seth.
spk07: Your next question comes from the line of Stanley Elliott with CIFL. Your line is now open.
spk04: Morning, Stanley. Morning, guys. Morning, everybody. Thank you guys for taking the question. I apologize. I got on a little bit late. But, you know, it sounded like October was better from an order standpoint. Curious to hear a little bit more about some of the success you guys had at BALMA with the 12th. cranes and maybe, you know, how do we think about orders coming out of the show from that? Yeah.
spk06: So first thing I'd say it's our first Bama in the fall, and then it lines up with our winter campaign and some of the other normal trends we have. So it's a bit different than normal. I mean, normally we project that we're going to be in that sort of 50 to 75 million range. It's always hard to say what comes out of Bama because all the other activities that are happening either before or after When we look at October, I mean, we've been tracking at 150 million of orders each month for the last eight or nine months. In October, we were just over 200 million. So I think that's a good sign that we've seen some of that come through. And I think that for the fourth quarter, our orders should be north of 500 million. So I think that's all a pretty good sign of it was a good mama. Dialogue was excellent. A lot of good activity, a lot of discussion. I mean, there's a lot of uncertainty, especially with the price increases and the higher interest rates. Some of the things are going on in Europe, but, I mean, if you look at really the conversations that we're being had, folks are optimistic. So we just need to get through some of these geopolitical issues or at least find some more certainty. I think it would be real positive for us.
spk04: And on the North American market, you talk about kind of stable private public investment. You've also done a lot to change the distribution, how you're going to market. How much of the improvement there do you think is – that strategy to be closer to the customer versus, you know, people trying to add fleet? Just curious kind of what some of the dynamics are here in North America.
spk06: Yeah, I mean, I wouldn't say that the dynamics have changed much, even with the acquisitions relative to sort of order trends. I mean, it's still the struggle of lead times, dealers getting on the build schedule, and then managing that relative to the price increases. So I wouldn't say that there's been too much of an effect in terms of just general order dynamics? Brian, what do you think?
spk01: Well, I think we do have about $90 million in network and capital on our balance sheet related to the acquisitions at the end of September. So there is a delay just based on the nature of the distribution business versus us selling to our dealers. So there's a little bit of that that plays into timing of sales, but I don't think it changes anything other than that.
spk04: Great, guys. Thanks for the color and best of luck. Thank you, Stanley.
spk07: Your next question comes from the line of Tammy Zakira with J.P. Morgan.
spk06: Morning, Tammy.
spk07: Hi.
spk08: Good morning. Thank you so much. I may have missed it. I apologize if I'm asking the same question again. But I think last quarter you said you expected about $60 million of manufacturing costs had been for the year. Has that view changed as we exited the third quarter? No, I mean, the view hasn't changed.
spk06: Yeah, no, the view of that hasn't changed. I mean, it was lower in the third quarter, but we also had lower shipments in the third quarter and lower seats. But I'd say that number is probably a reasonable number for the full year.
spk01: Yeah, I think the $60 million was the inflation impact, not just the manufacturing.
spk06: Yeah.
spk08: Got it. Okay. And then just going back to the third quarter top line, in the second quarter, I think you said shipments missed by about 40 million. And then in the first quarter, it was 35 million. Did you quantify how much of 3Q shipments shifted to fourth quarter? And what gives you the confidence that you can still achieve the low end of the EBITDA guide for the year? And then does that assume like you sort of catch up on all those missed shipments in the fourth quarter and we get some sort of normalization? How should we basically think about like achieving the low end of the EBITDA guide?
spk06: Yeah, so I mean we missed, we pushed, and that's against internal forecasts, 45 million from the third to the fourth. In terms of our forecasts, I mean we had an even bigger number expected in the fourth quarter. I mean, we face the same challenges that everybody else does and all your other calls. I mean, if we can get a couple parts to go our way and vessels go our way, we can hit it. We've got the inventory. When I say inventory, I don't mean empty chassis. I mean nearly completed machines that are waiting for vessels. So this is the ongoing challenge we've had. Now, I would say if you look back at our fourth quarter of last year, We had a similar situation where we were pretty conservative at the analyst meeting, and then we actually beat the numbers that we had projected down to. Things normally go our way as everyone's trying to get all their shipments out in the fourth quarter. So I think we're in a position as long as vessels keep going, weather's decent on the North Sea, and parts come in even, I would say, at the current level, which hasn't been great. So I think that's a long way of saying we got a lot of machines that are nearly completed, whether it be whip or finished goods.
spk01: And we have adjusted our internal forecast down, and that's reflected in the guide to the low end of the guidance.
spk08: Got it. Thank you so much. That's very helpful, Cutler.
spk09: Thanks, Tammy.
spk07: Your next question comes from Jerry Riewich with Goldman Sachs.
spk02: Morning, Jerry. Hi, Jerry. Hi, this is Clay. I'm for Jerry today. Our question was on pricing. From other machinery makers, we're seeing pricing accelerating to the low double-digit rate exiting the year. Is this similar to what you guys are seeing for your product lines?
spk06: Yeah, I mean, if you look back over the last 12, 18 months, our prices are up 20% to 25%. We have not announced all of the price increases for early next year, so we're still in the process of really trying to nail down how much more we think we've got to go As you can appreciate, where the dollar is, particularly in the United States, we want to be as accurate as possible to not overstate the number.
spk02: Thanks. And as a follow-up, can you give us more color on how utilization rates have trended in the quarter based on what you're hearing from your customers? Thanks.
spk06: Yeah. I mean, Bama, the discussion with all the customers are extremely positive, I'd say, on all the major continents. particularly on the mobile side of the business. I mean, a lot of this infrastructure that's out there is big projects, and folks are, you know, ready to tackle these big projects. But, I mean, all the major houses we talked to, particularly on the mobile side, activity was good. I would say on the tower side, we've seen a little more nervousness. And you can see that, you know, whether it be that the Grand Prix is projects that are starting to come off in France or just residential construction in France. So the tower, I'd say, is a little more nervous. But mobile crane-wise, activity and utilization is really, really positive.
spk09: Thanks. I'll pass it on. Thanks Clay.
spk07: There are no further questions at this time. Mr. Ian Werner, I will turn the call back over to you.
spk03: Thank you. Before we conclude today's call, please note that a replay of our third quarter 2022 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.
Disclaimer