Manitowoc Company Inc (MTW) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Manitowoc Company, Inc. First Quarter Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over the Mr. Khail. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. Participating in today's call will be Terry Growcock, our Chairman and Chief Executive Officer, Carl Laurino, Senior Vice President and Chief Financial Officer, and Glen Tellock, President of Manitowoc Crane Group. Tim Kraus, President of Manitowoc Foodservice Group and Bob Herre, President of Manitowoc Marine Group are also on the line to participate in our Question and Answer session.

However, we will open today's call with an overview of our financial results for the quarter, including a brief report on each operating segment. Then, we'll follow with an update of our Crane operations, and Terry will conclude with the strategic commentary. Following these remarks, we will open the call for your questions. For any of you who are not able to stay on the line of the entire conference call, you can hear a replay beginning at 1:00 p.m. Eastern Time today until 1:00 a.m. Eastern Time on May 5. The number to dial for the replay is 719-457-0820. Please use confirmation code 1404685. You can also access an archived version of this call by visiting the Investor Relations section of our corporate website at www.Manitowoc.com.

Before I turn the call over to Carl, I'd like to review our Safe Harbor statement. This call is taking place on April 28, 2005. During the course of today's call, forward-looking statements, as defined in the Private Securities litigation Reform Act of 1995, may be made during each speaker's remarks and during our Question and Answer session. Such comments are based on the Company's current assessment of its markets and other factors that affect our business. Actual results could differ materially from any implied projection due to one or more of the factors explained in Manitowoc's filings with the Securities and Exchange Commission, including, but not limited to, the Company's Annual Report on Form 10-K for the year-ended December 31, 2004.

With that, I will now turn the call over to Carl Laurino.

Thanks, Steve, and good morning, everyone. Yesterday, we reported first quarter revenues of $537 million, a 30.4 percent increase over the first quarter of 2004. The increase reflects double-digit sales growth in all three segments. We reported net income of $6.5 million, or 21 cents per diluted share for the quarter compared with net earnings of $5.8 million, or 21 cents per diluted share, for the same period last year. Our reported net earnings for both periods include special charges. For the 2005 period, our reported earnings include a charge of $8.3 million related to the early extinguishment of debt. Excluding these charges, earnings for the 2005 first quarter would be 39 cents per share, which is well above the average of Wall Street estimates.

Now, I'll go through the segment financial results. Crane segment sales for the first quarter were $358 million, an increase of 42 percent compared to the same quarter last year. Operating earnings were $24 million, up near 96 percent, and operating margin improved from 4.1 percent to 5.7 percent, reflecting improved operating leverage in North America and Europe, as well as higher sales in Asia. As you can see, we are gaining profit leverage on the increased volume in the Crane segment. We expect to continue to increase this leverage in profitability as our end markets move towards the next peak of their current cycle.

This performance is the direct result of actions we took to restructure our business following the Potain and Grove acquisitions, which included multiple plant consolidations in Europe, the relocation of our U.S. boom truck business, and a shift to a three-region business model. A dedicated focus on working capital reductions also contributed to our financial improvement throughout the segment. Same group backlog is up sharply from both the year ago quarter and year-end 2004 as we are seeing continued strong worldwide demand for our power crane, mobile telescopic crane, boom trucks, and crawler cranes. Demand is also increasing for mobile telescopic cranes and boom trucks in the United States. Our outlook for crawler cranes in this region is essentially unchanged, however, we believe the North American crawler crane market could gain momentum later in 2005 or early in 2006. Glen will go into more detail on Crane segment operations later in the call.

Food Service sales of $119 million represented an increase of 10 percent, while operating earnings of $14 million were essentially flat from last year's first quarter results. Excluding the results of our contract manufacturing operations, sales and operating profits increased 14 percent and 17 percent, respectively. Our ice and beverage lines are experiencing solid demand across a wide range of end markets.

We continue to introduce new products and are on target to rollout 25 new products this year. We intend to extend our competitive advantage in the food service refrigeration industry when we complete the move into our new Chinese manufacturing facility during the third quarter. Manitowoc has been in China for the past decade and this new plant will not only enable us to leverage our opportunities in the fast-growing Chinese market, but will also allow us to better serve our customers in Europe and the Middle East.

Food Service is in the final stages of launching its ERP system, which will go live at the ice division next week and will be rolled out across the remainder of our Food Service Group through 2006. The ERP system enhances cross-selling as well as offering additional operating efficiencies that come from having one of the broadest and deepest product lines in the food service industry.

In our Marine segment, sales rose 18 percent to $60.2 million driven by increased activity at Marinette Marine and Great Lakes yard building and [indiscernible -line noise] and that was in line with our expectations. Operating earnings declined from $4.1 million to $782,000 as a result of fixed price commercial contracts that were bid and awarded before the unexpected rise in steel and other commodity costs last year, coupled with operational inefficiencies on certain projects. Our new Marine Group President, Bob Herre, joined the Company in February and has already launched a number of corrective measures to improve the Group's efficiency and profitability.

Looking ahead, we expect Marine's second quarter will be similar to the first quarter. We will anticipate improving results throughout the second half of 2005. All in all, we are confident that the Marine Group will resolve its operational challenges before the end of the year.

In other items, we reported negative cash from operations, which is typical for the first quarter given our key mill [ph] ramp up to working capital in both Food Service and Cranes. We remain confident that we will achieve our goal of generating an asset reduction of $50 million for the first--for the full year. Historically, Manitowoc achieved positive cash flow in the second half of its calendar year, and we expect that pattern to continue this year.

I'd like to close with a few comments on our EBA performance. We adopted EBA methodology in 1993, and have found it to be a very effective tool in managing our business. The Company was EBA positive in the first quarter and we expect to be solidly EBA positive for the year for the first time since 2002. In 2003 and 2004, our performance was naturally affected by heavy investment in our Crane segment and difficult market conditions for that business. Our EBA improvement in 2004 over 2003 was more than $18 million. Achieving positive EBA in the first quarter this year, and our outlook for additional EBA growth in the full year, is a testament for a successful integration of the Crane business and our overall focus on maximizing return on invested capital.

With that, I'll turn the call over to Glen Tellock to talk about our Crane business. Glen?

Thank you, Carl, and good morning, everyone. Manitowoc Crane Group had a very good quarter. Our performance gives us a solid foundation for a successful 2005. Our revenues, earnings, and cash flow were above expectations in the quarter. As reported, we are on track to achieve our primary objective of being EBA positive for the full year for the first time since our acquisitions of Potain and Grove. Our backlog has greatly increased since December. ConExpo, the large construction equipment trade show held in Las Vegas every three years, was a great success, with strong sales and significantly improved optimism from past trade shows. Our backlog, which includes most of the orders taken during ConExpo, stood at $532 million at the end of the quarter compared to around $340 million at the end of 2004.

Looking at our markets, we see solid recovery in North America from mobile hydraulic products, including boom trucks. We also see what we believe is the early stage of a long-term growth trends towards power cranes in North America, as the industry becomes more familiar with and accepting of these products. We have yet to see an increase in orders for North American crawler crane, although crawler crane utilization for our customers is improving. During ConExpo, our North American customers have told us that their crawler equipment utilization rates continue to improve and for the first time in quite a while, rental rates have improved. However, current rental rates are still 20 to 30 percent below prior peak levels.

In Europe, as expected, business is relatively stable. Asia continues to recover, led by strong growth in China. As mentioned last quarter, we are also increasing our focus and resources in Eastern Europe and the Middle East to take advantage of market growth. The Middle East market has been soft many years, but has been picking up for the last year or so due to aging equipment and an increase in the petro chemical industry. Eastern Europe continues to grow and very timely evolves combined with the need for basic infrastructure.

Our market shares in all products and regions are strong and we are growing in most categories. The strength of our brands, success of our new products, and our regional approach to the marketplace continues to pay dividends for us. Material costs and availability remain an issue for our industry, although the situation appears to have stabilized compared to the last half of 2004. Material shortages are taking more management time than before, but have results in no production disruptions to date. We have been leveraging our purchase power from a global basis to ensure material availability. Considering the impact of higher sales volumes, the efficiencies of our current business model, our focus on cost reduction, and the pricing actions that we undertook last year, we expect operating margins should continue to improve and that we will generate increasingly positive cash flow. However, if commodities continue to rise, we will rely on these same strategies to manage our operating performance.

Turning internally for a moment, our strategy of global growth and commercializing a continuous stream of innovative new products remains in place for 2005. This year, we will introduce 11 new products to the market across all of our product lines. This long-term focus on providing our customers with new value-added products is at the core of our strategy to improve both our customers return on their investment and increase shareholder value for Manitowoc. Several of these new products, including the 16,000 crawler crane and the GMK5130 all-terrain crane, were introduced during ConExpo with very positive results.

In February, we broke ground on our new manufacturing plant in China, which we expect to be operational in early 2006. [Indiscernible - line noise] very positively positions us in the fastest growing lift market in the world.

In summary, we certainly have risks that need to be watched and managed for 2005, given continued issues with materials, a stable but flat European market, and an unimproved North American crawler market. However, we definitely have more positives than negatives with improving markets, great market position, strong backlog, and solid operating performance trends. We are confident that 2005 will be another excellent year for our Crane business.

With that, I'll turn the call over to Terry Growcock for some strategic comments and final thoughts. Terry?

Thank you, Glen. As Carl and Glen have said, we're off to a great start this year. It's very gratifying to see that our plans and strategies are generating such solid financial results. The Crane group's global acquisition strategy has successfully lessened our dependence on the North American crawler crane market, but the success goes beyond addressing the cyclical nature of the lifting industry. With a broad yet focused product line, we can now leverage cross-selling opportunities and a family of world-class brands. We're seeing signs that the North American crawler market could rebound in the latter stages of 2005 or early 2006, and that would be a welcome addition to the positive trends that Glen discussed earlier. Keep in mind, however, that any recovery that might occur in the U.S. crawler market this year is not modeled into any of our current projections.

Product innovation and customer responsiveness are driving solid performance in the Food Service segment. A great example is the continued expansion of our S-Series ice machine product line during the first quarter to include two new high capacity models. These models not only fill a key product void, but address the needs of high volume customers such as theme parks and cafeterias and allows Manitowoc to gain an even greater share of the total food service equipment spend in these important end markets. Our marine group is our smaller business segment, but that doesn't mean we're not focused on addressing and correcting the issues affecting this operation. The issues we saw this quarter are related to specific contracts. As those vessels are delivered later in 2005, they will be replaced by vessels whose contracts have more favorable terms. We are also being more selective in the contracts we did. We are including material and commodity escalators for our contracts and we're scheduling the work in the shipyard that's best suited for a given project. We will manage our entire backlog of work for optimum efficiency and profitability.

Carl mentioned earlier that we use EBA as a tool to help manage out business. We also employ a more basic management technique that is no less effective, setting goals and developing strategies to meet them. Our Annual Report and yesterday's press release detail four key strategies and I'd like to close with a few comments on our progress.

Our first strategic priority is increasing crane sales and market penetration on a global scale. The Potain, Grove, and national acquisitions gave Manitowoc leading global market positions in each of our key product categories. We'll meet our objectives for cranes by cross-selling the product line and keeping the new product pipeline flowing. Our new Chinese crane facility will enhance our manufacturing capabilities and allow us even greater access to one of the world's fastest growing construction markets.

Our second priority is to strengthen Food Service business and industry share. We listen to our customers and develop products that meet their needs. I mentioned the S-Series line earlier and we'll launch a total of 25 ice, beverage, and refrigeration products this year to keep the momentum going. Our current and potential customers serve about half of all of the meals eaten in this country. That's a huge market and the global opportunities are even larger. I believe Food Service will continue to offer better products and better value, positioning this segment for success in this priority.

Leveraging the strengths to our multiple shipyards is our third priority. Here, we seek to maximize the strengths and capabilities of our Great Lakes yards for both commercial and government customers. I expect to see a much improved operation by year end. This business has great potential and we are well positioned to capture the rights kinds of projects going forward.

Finally, we're focused on improving cash flow and reducing our debt leverage. We're on track to reduce net debt by $50 million this year and we will work toward the capital structure that give us strategic flexibility.

Before I close, I'd like to update our guidance for this year. Based on our first quarter results, we are raising our previous full year 2005 EPS guidance from $2.00 to $2.20 per diluted share to a new range of $2.10 to $2.30 per diluted share. This updated range represents a 42 percent to 55 percent increase over comparable 2004 results and is an aggressive, yet achievable, target. In addition, we are raising our full year revenue guidance from a mid-single-digit percentage increase to a mid-teen level.

With that, I will now turn the call over to the operator for our Question and Answer session. Tricia?

Thank you. (Caller Instructions.) And for our first question, we'll go to Charlie Rentschler with Langenberg and Company. Please go ahead.

Yes, good morning, everybody. Crawler cranes. Is there something different about this cycle? We've now been in a recession what five or six years? For example, did you guys in the 90s build such robust stout machines that these things just don't wear out like they once did? What can you tell us about that?

Charlie, I'm going to let Glen answer that. But first let me tell you that there is one difference in this and that is the fact that we are now a global player in this market. And we have increased probably our crawler crane substantially with sales into the rest of the world. It is the North American market that has not rebounded, but we are seeing opportunities around the rest of the world. So with that, Glen?

Good morning, Charlie. There is no difference in the market that we have now versus what it was at any other down cycle. And the cranes, they're built as well today as they were 20 years ago. We have a lot of cranes that are out in the field that are, in fact, 25 and 30 years old. The difference we have I think right now is that in the late 90s there were a lot of people that were buying equipment gearing up for a lot of the power work. And when you had the problems with the power industry in 2001 and it went down, there were a lot of cranes out there in the industry. And what's got to happen is the utilization of those has to--had to come back where those are being employed into jobs and different--it's not necessarily power, but the other markets.

So we're looking at the utilization, as I said, and we're watching the rental rates. The difference we have now is there's different applications that some of the cranes are in. For instance, you're always going to have the petro chem, you're going to have the power industry. But now, all of a sudden, you have the wind power. That's where our 16,000--we didn't have that several years ago and now we have that product. So I think what you have to look at is what's the utilization, where are the cranes going to go, and I think, what does the market do? And you're seeing a lot of trends towards higher lifting capacities and that's what bodes well for the industry as we go forward. It's not going to be on the less than 100 or 150 ton. We believe that's going to be upwards of that 400, 450 ton range. That's why we came out with the 16,000.

Which is where your sweet spot is. Can I ask a follow-up question of Tim, please? In view of the many new products the Food Service segment is rolling out, what things have been depressing margins there?

Well, the biggest depression on margins has been commodities [indiscernible - too far from microphone]. In regards to our new products, they're right in the range of our expectations.

That's right on point, Tim. The margin hit in food service from commodities is certainly significant. And you may have seen--our issue--obviously, as a food service margin as an industry and for us in particular are very strong. We did have one element on the Food Service business that was kind of substandard to Manitowoc's levels that effected the year-over-year comparison. So those are really the two significant issues.

Thank you. For our next question, we'll go to John McGinty with Credit Suisse First Boston.

Good morning. Can you guys hear me?

Yes, John. Good morning.

Good. Just one question and it's, Carl, down in other income of all things you have an income of $1.7 million. I think if you take out the nonrecurring it was kind of an expense last year, that's actually a fairly big number. What--and it's not something you traditionally have. What was that?

It was gains on foreign exchange.

Oh. And how big were the gains on foreign exchange? Is it the 1.7 or was it bigger than that offsetting like normally what would have been like an expense or something?

That was almost all of it, John.

And would that have been taxed at the 30 whatever it was--32 percent rate that you were taxed at or would that have been--was that both a pre-tax and a net number?

That would have been tax.

Okay. That would be tax. And then, on my follow-up question, on the guidance, kind of a two-parter. One, could you just delineate which of the three businesses that were going from mid-single-digit to mid-teens, is it all in Cranes and everything else is about where it was or where does that come from? And then, the second part is since you essentially beat the first quarter kind of consensus or thoughts by a dime or 9 cents or something, and you're only raising the full year by mid-point to mid-point by a dime, are you just being really conservative or is there--are there problems that speak to--continued problems somewhere? So I was wondering if you could talk to the two guidance issues.

The--as far as our guidance goes, one point that I would like to make is to help out with the seasonality of the business, which is skewed, as you know, in the second and third quarter. And when you look at it historically, it's difficult to gauge because of our acquisition activity. We actually spent probably about--of the remaining guidance, we probably have about 75 percent of it that would land in that second and third quarter and about 25 percent in the fourth.

Okay, that's helpful.

The question about raising a dime, as we talked about, we did have obviously an expectation relative to where our material thoughts would be. We talked about our strategies to combat that and we've done a pretty good job with it. There is a lingering effect that does continue to effect us net of our pricing actions and other initiatives in the second quarter. And then, we get on a positive side of the equation in the fourth quarter--third and fourth quarter, excuse me.

And the revenue difference?

It is certainly cranes.

In other words, everything else is the same. The difference is cranes.

That's right.

Thank you very much.

And for our next question, we'll go to Robert McCarthy with Robert W. Baird.

Morning guys. Just to follow-up on John's question, my sense is that Marine turns out to be a greater drag on performance this year than you expected a quarter ago. So is that sort of the missing link here? Your much improved outlook for the Crane business, but in terms of your forecast for the full year, you have to get some of that back for a disappointing second quarter at Marine?

Rob, I would--I'm going to ask Carl to give you a little more on that, but I would say that is definitely the case. What we have is obviously as we move these older contracts out where we can get to the newer contracts that had some of the clauses, plus a little more flexibility in how we schedule our yards, I think the combination of those will begin to show the improvement that we are expecting as the year unfolds. But we're looking at the second quarter as being a very similar quarter to the first quarter in the Marine side and then moving beyond that. Carl, do you have anything to add?

I guess the only thing I'd add to that is, obviously, the diversified model has a smoothing effect for us and in this instance, obviously, we are experiencing some challenges in the Marine segment. But the long-term drivers that Terry talked about in that business continue to be good and we're getting through except for the two key issues that have hit us in Marine on the efficiency side and on the commodities side.

Okay. And in terms of the--reconciling the big increase in sales outlook, increase on earnings outlook, is tax rate an element in this, Carl, or is the little bit higher than expected tax rate in the first quarter strictly a function of the debt retirement charge?

More an issue with the debt retirement charge is the--the other things that were mentioned about the revenue is that obviously the year-over-year comparison is coming off of--sequentially, we are seeing better and better results throughout 2004 that would be minimized a little bit as the year looks forward versus using a Q1-to-Q1 comparison.

Yes. Okay. All right. And, if I may, lastly, at this point looking at first quarter and the net drag on your material costs are from raw material costs. Compared to fourth quarter, has there some kind of shift here in effect in mix where most of the drag is accounted for by the Marine business?

No, I wouldn't characterize it as [indiscernible]. Obviously, Cranes is approximately 5 times the size or more. And they would have carried the heaviest burden, even in the first quarter in our expectations. But Marine certainly had more than their lion's share given the order activity that needed to take place in the first quarter and the cost issues on the contracts.

Okay. All right. Thanks. I'll get back in line.

Thank you. And our next question comes from Joel Tish with Lehman Brothers.

Hi, guys. How are you doing? I wonder if you could talk a little bit about crane pricing and the cost structure and all that? And maybe if you could give us a little bit of sense of how the mix of the backlog looks?

Joel, if you could just give me a little more flavor. You say the crane pricing and the cost structure. What do you mean by that?

I just mean if the pricing has gone up enough at this point to offset the cost? It seems like this is the hardest quarter in terms of field comparisons. And should we get a little bit of head wind going forward? And then, the other piece to that would be what's in the backlog? If the backlog would contribute to that margin improvement during the course of the year or that would take away from it a little bit?

As far as the outlook on commodities, Joel, we expect to have a --continue to get some drainage against the prior year comparison still in the second quarter in crane. And then, as I said before, talking about the full company definitely being on the right side of that equation in the second half of the year for the Crane segment. And I'll let Glen talk about the characteristics, cost and backlog.

The backlog, I don't think there's any unusual mix in there. I think what you're seeing is pretty consistent with where we said the sales trends were going to go for the year in the different areas, so I don't think that has a big impact on it. I think it's merely the things that Carl talked about with the costing issue and the commodities. Now on the pricing issue, on us raising prices, as you know, we talked about at this same time last year, going out as market leaders and raising prices. We did that. And then, we managed our pricing increases as we could last year to kind of offset some of the material cost increases with efficiencies, our global purchasing initiatives, cross takeouts, the new products. And where that wasn't enough, we did have to raise prices again during the year. And we're going to continue to do that same thing as we see fit to add to 2005.

And there are a few spotty areas, Joel, where we will continue to raise prices this year. We've had a couple in Europe on some power cranes. But again, in my comments I said we've seen things stabilize since the fourth quarter or the second half of 2004. And stabilizing is a heck of a lot better than what we were seeing in the second and third quarters last year when they were spiking up dramatically and you couldn't get ahead of the curve. So we feel better about it at this point in time. Especially what's within our backlog as we employ that the rest of the year.

Okay. And lastly, can you just talk quickly about what steps that you guys are taking to fix that contract manufacturing business in Food Service?

Well, first off, what I would like to explain on that, Joel, is that the contract manufacturing business, while it does change the overall impact of the margins in the Food Service side, it is still EBA positive. And it is a good contributor overall to the Company. And with that, I'll ask Tim to give you some of the steps that we are taking in that business.

[Indiscernible - too far from microphone] cost reduction, but I think the important thing to remember here is that--and we said this last year in the call. In our old contract we had a mandatory 3 percent price reduction each year. And last year was the last year of that. And that occurred at the end of the first quarter. [Indiscernible - too far from microphone] there is more margin question in the first quarter. Going forward, we'll see that moderate on a year-over-year comparative basis. There is no opportunity to raise prices at this point, but we certainly have quite a few cost reductions in the queue.

Okay, thank you.

And for our next question, we'll go to Seth Webber with UBS.

Thank you. Good morning. Following up on Joel's question, do the crane contracts that you guys are signing today and the contracts that are in backlog, do they have price escalators in them or variable pricing for commodity costs?

This is Glen. The majority of them do not because when the contract is signed, we have the delivery--specify in the delivery, and we're taking into account what we believe is happening from a pricing standpoint at that point in time. If they are large contracts, for instance, maybe it's a dam project and it is a 9 or a 10-month contract, we are addressing that with individual customers on an item-by-item basis. But anything else, really, it's the way the--especially in North America. For instance, when you put it through distribution, some of the people are putting down their--they're putting out their orders throughout the year. And at the same time, we look at the faster we can bring the product to our facilities with material and everything else because we can compress that cycle. That's the advantage we have on the manufacturing side to get it in and out and deliver at the shortest lead time possible. So I don't think that's as big of an issue that you would see for instance in the Marine side.

Okay. Thanks, Glen. On the backlog, can you give us--is there any additional color you can give us on the geographic mix? Are you seeing anything, particularly with China? Is that stronger or weaker than it has been?

Asia as a general category has certainly had robust growth and we'll continue to see that. Obviously it's off a much smaller base than Europe and America, which still comprises the vast majority of the backlog.

We are seeing improved strength in basically all of the regions. As we said, the impact of this quarter was really across the board in all of the areas with the obvious exception of the North American crawler market.

Thank you. And our next question will go to Phillip Volpetelli with CIBC.

Hi. I just had a couple of housekeeping questions. Could you give us a deprecation amortization for the first quarter?

It's a little over $15 million.

$15 million. Great. And then the cash interest expense and cash taxes paid during the quarter?

Interest expense is about $13 million.

And was there any cash taxes during the quarter?

Not significant.

In terms of going forward and looking at your different businesses, are there any opportunities to grow through acquisitions or do you think it's more of the blocking and passing that you've laid out in your 10-K and on the call today?

I would like to say that we have really a three-pronged growth strategy that we're driving to. Obviously, one is organic with all of our efforts internally with new product development and cross-selling. The second one would be our globalization and taking our products and regionalizing our products and strengthening our position around the world in both Cranes and in Food Service. But then, the third is we have been an inquisitive company. We've made a number of acquisitions since 1995. And, as I said earlier, we think that we are strategically positioned and we will look and continue to grow the company in all of those areas.

Okay. Just one last clarification. The amount of net debt reduction is 50, fifty, correct?

50. Correct.

Great, thank you.

And we'll take a follow-up question from John McGinty with Credit Suisse First Boston.

Yes. Just a couple of--I guess, one, why was the Marine issue a surprise? I mean, you knew you had the fixed price contract and the steel shouldn't have been a surprise to you. And you had obviously given the change in guidance and everything else. That was a pretty major surprise. Why?

Obviously, we did--the material component of it was not necessarily a surprise to us in and of itself. It certainly was an issue as it relates to the year-over-year comparison, however. And the efficiencies--we--I think that's the biggest function we talked about on the last call was just the extreme amount of project work that we had in a compressed period of time that did create some inefficiencies and in some cases, some of those inefficiencies were unanticipated.

So are you saying that the reason that the earnings went from--instead of running 4-plus million were running under 1 million, that that was all the inefficiencies?

No.

Because everything else--I mean, you would've known about. Because when we look at the guidance and the change in the guidance, even though the guidance is higher, it's a lot higher in Cranes and a lot lower in Marine. So I just don't understand why this was a surprise.

Well, I mean, the commodities did continue to increase even throughout the--late last year and early in this year.

But you would--I mean, you know now what's going to go on in the second quarter because you know what steel you've bought. So why didn't--I mean, is this--I'm just confused. How comfortable are you with the guidance for Marine now? In other words, do we have another? You're saying that the second quarter is going to be something under a million like the first quarter. And then, the second half better. But if you have the surprise you had now, should we be worried about this one also--those numbers being a surprise?

John, as I said, we are still completing these older projects. And as we complete these older projects, that pressure will be off with regard to those older vessels that will continue to impact us. But basically, then, as we go through the--into the third and the fourth quarter, we're into newer vessel contracts that allow us the opportunity for--and the flexibility for both improved margin from the impact of the CO-plus [ph] and other commodities. Plus, as I said, we will then be much more efficient in our yards in that we will not have so many vessels at one time coming through at one time that have been in production along with the issue with the commodities.

Okay. And then, if I could to kind of shift for a second. The jump in the backlog was the largest I think I've--I've only got data going back to 2000, but it's the largest jump ever from 300-plus million to 500-plus million, a $200 million increase. Was that effectively proportional? In other words, whatever your backlog was throughout '04, by geography, by type, does--was the increment--was the $200 million-plus increment split proportionately or was any of it more skewed one way or the other?

John, you're saying from a mix standpoint, right?

Well, yes. In other words, what I'm saying is you added 200 million to the backlog in round numbers. And whatever the backlog was--the mix, the geography, mix of type of crane, did that new $200 million come in at that same mix or is it more heavily weighted toward the domestic, more heavily weighted toward hydraulics, more heavily weighted toward power? What I am trying to understand is where the strength came from unless it was across--or was it across the board?

I would--again, kind of what I said previously, I don't think the mix is any different. I think from a geographical standpoint, I think it's in the areas that we believed we were going to see growth this year, which we talked about previously, which is Asia and then power cranes in North America. And I think you saw some of the announcements we had on that coming out of ConExpo. So I don't think there's a--with the whole amount--don't think that the whole $200 million though is in fact ConExpo. That's not the fact. But there is--the mix is probably within reason consistent with what we've seen. But I would say that you are seeing just pockets of the increase that certainly Asia is on a percentage-wise probably the biggest increase. And then you have some different product lines, which are good in North America and then there are some pockets of opportunities in Europe. So I don't think it's all that significant that would sway your percentages that greatly.

Was Grove a major--I mean, was Grove as much a participant as everybody else? I mean, I know it's the North American hydraulics.

Oh, absolutely. That and including the national crane line.

Okay. And then, if we look at margins and we look at '06 when we're looking--given the backlog, looking at probably a double-digit sales gain in '06, are we looking at an incremental margin that's going to run up--you know, the incrementals were kind of lousy in the first quarter still, but are we looking at incremental margins that should be back at the operating margin to a 15 to 20 percent incremental margin for you on the increased volume in '06 given the fact, hopefully, that the steel--the material cost issues will be behind you?

No, I certainly agree with that comment and we have said that there certainly could and probably should be some firming up of the crawler crane market. And you know that that does provide us with additional--I also--.

--But even without crawler. Shouldn't you get that even without crawlers given what you've done and the Potain, the Grove, the overseas? Shouldn't that give you 15 plus--?

--I guess I would also--I guess I'd contradict a little bit the characterization about the margin being lousy from a perspective of the margin improvement and--.

--But the incrementals were only 9 percent.

I'm looking at over a percent and a half increase in the margin in the face of a pretty significant cost issue on the commodities side, which as you said, could certainly go away as we look forward into an '06 timeframe.

Okay. And then, the final question, Terry, I understand the contract manufacturing may be EBA positive, but you went from price decreases to no price decreases, but material costs, who knows what that's going to happen. Is that really the best use of those assets? Are you unable to terminate that contract?

The contract itself does have a final period on that. It's not out into infinity. And there is a term on that. But as I said, we are an EBA company and we believe that the business is good for the shareholders. It does provide economic value and it is a business that we do not take lightly. We evaluate it constantly, and evaluate our alternatives and our options. And I can assure you that there are a lot of efforts underway to actually improve the margins in that operation with cost reductions in other areas.

Okay. Thanks very much.

And for our next question, we'll go to Martin Levinsky with Bank Austria.

Yes. Hi. Hello. I have one question. Could you elaborate a little bit more on your working capital outflow in the first quarter? Was it just crane demand or does it have to do with Marine as well?

It's actually a typical seasonal characteristic of the Company. And perhaps--.

--It looks a bit odd. That's all--.

--With the significant increase in the Crane business, that year-over-year increase in the top line and in the backlog, that certainly is more--makes it more of an issue for us in the first quarter than probably historical periods. But it is not unlike the normal seasonal characteristic of the Company to see a significant build in working capital over the first quarter, in particular, but the first half of the year generally, we tend to be a user of cap.

Okay. Thank you.

Thank you. And for a follow-up question, we'll go back to Robert McCarthy with Robert W. Baird.

Glen mentioned something that I wanted to ask about. A couple of times he has made mention of the positive impact of ConExpo on order flow in the crane business. I just want to make sure that I come away with the right impression. Your outlook for the balance of the year then would not envision sustaining the--well, north of a half a billion dollar quarter booking rate from the first quarter for the balance of the year. Is that a fair statement? Was it clear?

No, I think it's clear. I would say that that's probably true, Rob. And the reason is because maybe some of the bigger orders--the ones we announced that were, let's say, with the large power crane orders or something that's a multiple order for new product that's coming out, that's not the same. But the rest of it I think is typical trend order bookings and that kind of thing. So I do agree with you in certain respects on some of those orders we've announced. But the rest of it I think is a matter of maybe some of the things you see around the corner in the different industries and the different regions that are in fact picking up.

Okay. Fair enough. And Terry, your remarks when you were talking about the Marine business originally and the issues that you face there on specific contracts. You specifically identified commercial business. Does that mean that you've had success being able to pass through effectively some of your material cost issues on the non-commercial business that you have?

Well, obviously there is a difference in the contracts that you have between the commercial and those that are related with the [indiscernible] with the government side, whether it's the Department of Defense or the Homeland Security. And in those cases, there were different clauses and ability to recover the material side as we go forward. There is obviously a difference in the way we operate all of those businesses totally.

So you are getting some relief?

Yes. And you know, like I said, it's the difference in the way the contracts are structured.

I understand. And lastly, can anyone give us an update on the timeline on the RBM program?

Yes. I think our new President of the Marine Group, Bob Herre can do that for us.

That sounds like a good idea.

Yes, Robert. Bob Herre, here. The RFP for that project just hit the street the day before yesterday, as a matter of fact. And it's a 90-day turnaround to have the [indiscernible] submitted to the Coast Guard. And we're actively working on that and we'll have a good proposal to put in by the deadline.

That's the end of July. And then, what kind of a turnaround is typical for a decision?

I think we're probably looking at late Q3, early Q4 right now.

So like 90 to 120-day kind of timeframe?

Yes, sir.

Okay, great. Thank you.

Thank you. And due to client time constraints, we'll take our last follow-up question from Charlie Rentschler with Langenberg & Company. Please go ahead.

Yes, a quick one for Carl. Can you give us an estimate of free cash flow for the full year?

That would be roughly at that $50 million that we're indicating as a net debt reduction expectation.

Okay. Thank you very much.

And there are no further questions as this time. I would like to turn the call over to Mr. Khail for any closing or additional remarks.

Before we conclude today's call, I'd like to remind everyone that a replay of our call will be available beginning at 1:00 p.m. Eastern Time today until 1:00 a.m. Eastern Time on May 5. The number to dial for the replay is 719-457-0820. If you are calling in the replay, please use confirmation code 1404685. You may also access the archived version of today's call on our website at www.Manitowoc.com. Thanks again for joining us. Have a good day.

Thank you. That does conclude today's conference. You may now disconnect at this time.