Manitowoc Company Inc (MTW) 2005 Q2 法說會逐字稿

Welcome to the Manitowoc Co. Inc. second quarter's earnings conference call. Today's call is being recorded. There will be a question and answer session following the presentation. Instructions for asking a question will be given at that time.

For opening remarks and introductions I would like to turn the call over to Mr. Kyle. You may begin, Sir.

Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. 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 Tim Kraus, President of Manitowoc Foodservice Group. Glen Tellock, President of Manitowoc Crane Group and Bob Herre, President of Manitowoc Marine Group are also on the line to participate in our question-and-answer session.

Carl will open the call with an overview of our financial results for the quarter, including a brief report on each operating segment. Tim will follow with an update of our with Foodservice operation and Terry will conclude with a 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 for the entire conference call, you can hear a replay beginning at 1 PM Eastern time today until 1 AM Eastern time August 4. The number to dial for the replay is area code 719 457-0820. Please use confirmation code 5487091. You can also access an archived version of this call by visiting the Investor Relations section of our corporate website at www.Manitowoc.com.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 would like to review our Safe Harbor statement. This call is taking place on July 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 market and other factors that affect our business.

Actual results could differ materially from any implied projections due to one or more factors explained in Manitowoc 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. Good morning everyone. Yesterday we reported second quarter revenues of $617 million -- a 17% increase over the second quarter of 2004. We reported net earnings of $24.1 million or $0.78 per diluted share for the quarter compared with net earnings of $15.3 million or $0.50 per diluted share for the same period last year.

Our reported net earnings for both periods included special charges.

For the 2005 period, our reported earnings include a charge of $118,000 net of tax (ph) related to the early extinguishment of debt. Excluding this charge, earnings for the 2005 second quarter would be $0.80 per share which is above the Wall Street average estimate.

For the first 6 months net sales increased 23% to $1.15 billion from $938 million in 2004. Net earnings were $30.5 million or $1.00 per diluted share compared with $21 million or $0.77 per diluted share.

Excluding special items earnings per diluted share for the first half of 2005 were $1.19 up 53% from the first half of 2004. Our tax rate for the quarter was 21% down from 30% in the first quarter of 2005. The reduction in the effective tax rate for the quarter was due to clarity we received concerning the realization of certain tax benefits that were previously reserved against due to their uncertainty. We anticipate having an effective tax rate for the full fiscal year of 27%.

Now I will review our segment financial results. Crane segment sales for the second quarter were $427 million, an increase of 29% compared to the same quarter last year. Operating earnings were $35.5 million, up 97% and operating margin improved to 8.3% from 5.4% a year ago. This improved (indiscernible) performances illustrates this significant operating leverage of our Crane business.

Crane Boot (ph) backlog of $530 million is up sharply from the year ago quarter and we are seeing continued strong demand for our Tower Crane, mobile telescopic crane and crawler cranes in all markets except for crawler cranes in North America.

Crane backlog has been increasing steadily since (indiscernible) in 2003 and has continued to be strong through the positive outlook in many of our end-user markets. Our Crane backlog is not dependent on any one geography or product line.

Foodservice sales of $126.5 million declined 3.4% from the 2004 quarter as a result of cooler than normal weather that dampened demand for refrigeration and icemaking equipment in April and May. Lower sales volumes at Manitowoc Ice coupled with continued margin pressures at diversified refrigeration -- DRI -- our contract manufacturing unit combined to reduce Foodservice earnings and margins for the quarter.

Tim Kraus will provide more detail on our Foodservice results later in the call.

In our Marine segment, revenue for the quarter was essentially flat from 2004 at $63.4 million. Operating results were a loss of $2.7 million during the quarter compared with Operating earnings of $2.7 million in the 2004 quarter. As we indicated during our first quarter conference call we anticipated that Marine was both disappointing results for the second quarter and the loss is directly related to 3 specific projects.

One of the projects has now been delivered to the customer, one is currently on route for delivery and the third project will leave our yard next week.

Among the issues creating the extreme inefficiencies on these projects were considerable revision and were previously inspected and certified by a third party. Overruns in delivery costs and additional hours devoted to bringing the vessel into weight-compliance requirements. These projects are now complete and we anticipate that the Marine segment will return to modest profitability in the second half of 2005.

Cash from operations in the quarter was positive $13.1 million compared with the use of cash of $1.5 million in the same quarter last year.

We remain confident that we will achieve our objective of generating net debt reduction of $50 million for the full year. Manitowoc's normal seasonal pattern is to use cash in the first half of the year followed by strong cash generation in the second half. We expect this pattern to continue to hold true this year.

Manitowoc improved its EVA performance in the first half of 2005 by more than fivefold over the same period last year. We expect this positive trend to continue for the full year, which continues the year-over-year improvement we've achieved since 2003. This improvement in EVA performance validates the strategy and execution of our acquisition.

My final comments are in earnings guidance which we are tightening to $2.15 to $2.30 per share. This is roughly a 50% increase over last year despite worse than expected year-to-date results in our Foodservice and Marine segments.

Though market drivers in the North American Lattice-boom Crawler Crane industry continued to improve this is one market sector -- truly the only one in Crane -- that has not experienced an appreciable upturn from (indiscernible) levels. A meaningful recovery in the North American crawler crane revenues is not anticipated until 2006.

Clearly, the Crane business is driving our improved results. And our visibility is for continued strong market condition in cranes for the foreseeable future. We are seeing good indicators in most of the construction and infrastructure market and we believe we are still several quarters away from achieving historic peak cycle earnings.

With that I will turn the call over to Tim Kraus to talk about our Foodservice business. Tim.

Thanks, Carl, and good morning. Foodservice had a solid quarter with sales of $126.5 million and operating income of 18.2 but the comparable results are down from last year. The shortfall in sales occurred entirely in our ice machine segment where an unusually cool spring delayed the high season, which is more dependent on the replacement side of the business. Industry shipments in April/May were nearly 11% below last year.

In adjacent space, the Heating, Air-conditioning and Refrigeration Distributors Trade Association reported factory shipments down 11% in April and 18% in May. This group represents 300 manufacturers and 450 wholesale distributors of refrigeration and related products. We did see a marked improvement in the second half of June and that trend has continued in July as the recent heat wave has extended across the U.S. but particularly along the Eastern Seaboard.

Industry shipments in June were up slightly over last year. This trend is unique to the domestic market as our European and China operations both reported very strong year-over-year performance for the quarter.

Year-to-date, our market share in the ice machine industry is up over 2004 as the S (ph) series continues to gain momentum.

In our beverage division which is less dependent on weather and replacement market we posted solid double-digit growth for the quarter. Our refrigeration which is our lock in refrigerator segment was essentially flat. The shortfall in earnings resulted from the uncharacteristic volume reduction at Ice and continuing challenges at DRI -- our contract manufacturing operation.

As we've discussed in the past, DRI operates under a fixed-price contract and as yet we have not been able to recover from the commodity cost increases we incurred over the past 18 months.

Manitowoc Ice was the first operation to go live on the new Oracle ERP system in May. While any conversion of this type is a challenge the system did operate as designed. In conjunction with ERP Design we are developing a shared service center to manage marketing services, our customer and vendor masters, credit, accounts receivable, accounts payable and global procurement.

In August we began the conversion of our beverage division with a schedule to go live in the first quarter of 2006 followed by refrigeration. We will conclude the project in late 2006 or early 2007. When it is complete, we will have a single instance single database ERP system driving the Foodservice group on a global basis. There are tremendous synergies in the design through customer and vendor management and shared services across the group.

In China our operations is a key component of our global strategy. We will complete construction of the new 188,000 square foot manufacturing and design facility this month -- July -- and begin manufacturing some products in August. This modern single port facility replaces our 10-year-old five-story facility in Honchou (ph), China.

All of our senior management and most of our production workforce have made the commitment to transfer to the new facility, which is located just 10 miles from the existing plant.

As you recall in 2004 we transferred production of our European Ice Machine line to China and then introduced the new EC Series. These products have been highly successful and we are posting very strong double-digit growth in Europe this year. We have additional lines of new products and existing products in both ice and beverage that are scheduled for production in China over the next 18 months.

I will conclude with a brief comment on commodity costs. Through a combination of the price actions in 2004 and ongoing cost reduction activities, we have been able to counter the increases in our key commodities, particularly steel, copper, and foam in all of our businesses with the exception of DRI.

Looking forward to prices below commodity appear to be more stable and commodity-related margin pressures should abate or be lessened during the second half of 2005.

In summary, all the fundamentals are there and if the summer trend continues, at even typical seasonal levels, we would expect to deliver much better results in the third quarter. With that I will turn the call over to Terry.

Thank you, Tim. Manitowoc continues to generate impressive financial results for its shareholders. The tremendous operating leverage for the Crane group was evident this quarter as operating margin increased to 8.3% from 5.4% in the first quarter. We intend to maximize that leverage by optimizing cross selling opportunities within our global family of brands. Of course, our rebound from the North American (indiscernible) market will accelerate the leverage of the Crane group.

Tim described the weather issues that Foodservice faced during the quarter. And the recent heat wave should certainly be a pleasant and unexpected benefit in the third quarter. We are focusing Foodservice on maintaining its leadership position on the cold side of the industry and expanding into new markets and geographies through product innovation and a global manufacturing strategy. We believe the issues affecting our Marine segment are now behind us.

Our Marine business has performed well in the past and will perform well in the future. When you look at our opportunities you can understand the reasons for my optimism. With the Navy's LCS program we have the potential to supply a series of fast midsize affordable ships. And that's a mission where commercial ship builders such as Manitowoc can excel.

We are told the LCS program could require the construction of approximately 60 vessels over a decade and, today, our Marinette Marine subsidiary is building the first prototype in this class of vessels. We laid the keel for the LCS Freedom in June and it is scheduled to launch next spring.

We also have tremendous opportunities as OPA 90 requirements phase in for product carriers and tank barges. According to the U.S. Maritime Administration nearly half of the deadweight tonnage of U.S. flag product carriers and tank barges are not in compliance with OPA 90 regulations and must be replaced or converted by 2015. With only 10% of the nation's shipyards capable of building ocean class tank barges, our Marine group's future is encouraging.

We have set 4 strategic priorities to guide Manitowoc for the future. Our first strategic priority is increasing crane sales and market penetration on a global scale. We are delivering on this objective through a broad product line that we can cross-sell into new geographies. Domestically, we -- depending (ph) federal approval of highway and energy bills will serve as fundamental drivers of construction activity that would require a full complement of frame types.

In Europe, we are increasing both the manufacturing and marketing of the various crane platforms we offer. And in China we will begin production at our new manufacturing facility early next year to better participate in the fast-growing Asian construction market.

Our second priority is to strengthen Foodservice's business and market share. Foodservice has a commanding presence on the cold side of the food preparation industry. And we continue to introduce new products to maintain our leadership position. Our ongoing investments in the infrastructure of the segment including the European system and the China facilities positions Foodservice to grow rapidly and capture more business as opportunities arise.

Leveraging the strengths of our multiple shipyards is our third priority. We have taken firm steps to correct the recent operational issues and we are bidding only those new projects that complement our capabilities and capacities and that meet our targets for profitability. I discussed the significant opportunities for this group and I'm confident that we will see improved financial performance during the second half of 2005 and beyond.

Finally we are focused on improving cash flow and reducing our debt leverage. We are on track to reduce net debt by $50 million this year while maintaining a healthy capital spending program.

I will conclude my comments by saying that I am pleased with where we are today and where we are headed. Manitowoc designs, manufactures and markets world-class products through a diverse range of end-users and does so on a global scale. We have expanded our market presence through strategic acquisitions and an intense R&D initiative which have resulted in technology breakthroughs and dozens of innovative products.

We focus on EVA to ensure that we stay true to our goal of building long-term shareholder value. As you can see, these strategies are working. And I look forward to sharing our growth and progress with you in the quarters to come.

With that, I will now turn the call over to the operator for our question and answer session.

(OPERATOR INSTRUCTIONS) Gary McManus of J.P. Morgan.

Just looking at your earnings guidance. It's basically unchanged you took up the low-end by a nickel but basically unchanged. I believe you lowered the tax rate assumption; I believe you were previously at 30 now at 27. So if we ignore the benefit of taxes it seems like you're implying a lower -- slightly lower earnings guidance than before. Is that what you're really trying to say? Or is there something we should be worried about?

No, I certainly don't think there's anything that you should be worried about. The guidance obviously did have an expectation for a 30% tax rate as we indicated at the beginning of the year. Obviously, we have taken some initiatives and have gotten some benefits. In this quarter that -- we're going to change the blended rate for the year to $0.27 as you mentioned. Obviously we've also gotten some negative surprises in some of the operational side of the business. Notably the Marine portion of the business but also to a certain extent, Foodservice thus far, year-to-date, and obviously that's been buttressed pretty considerably by the tremendous results that we have had in Crane. So net net, we are still reading the guidance unchanged with those negative and positive into the mix.

Can you talk of improved results in Marine in the second half? Can you quantify them? I think you were expecting a better number than the small (indiscernible) you indicated in the second quarter. So what kind of profit expectations should we expect for Marine in the second half?

I would certainly characterize it as modest. The surprises that we pointed out were driven by some statistic specific projects that have obviously 2 or 3 have set down the last of the 3 goes out next week. And that part of it is -- of the results is certainly behind us. But as we look at the outlook and the array of projects that we were left with, we are not expecting a significant turnaround that's going to generate large profitability. So I would characterize it as a fairly modest profit outlook for the balance of the year.

Chris Martin of CSFB.

If we could just stay on Marine for just one second because I think the expectation was that Q2 would be similar to Q1 and, obviously, these are issues that you have been aware of for a couple of months now. What actually got weaker in Q2? What was it that was the reason for the negative surprise?

I would characterize that as basically the additional costs were due to deeper (ph) problems with some of the various inefficiencies in the project completion. But I again will point out as Carl has stated those 3 projects that brought this about half basically been concluded. One is out in turnover. The second project is in process of delivery now and in transit. And the third will exit the yard next week. And so with a combination of all those getting behind us, we have taken the costs that we saw on that. And so I think if there's anything else on there maybe Bob Herre might have a few comments to make as far as his confidence level on where we are in Marine at this point getting our arms around this issue.

The problem projects are essentially behind us at this stage. We did incur some additional costs that were unexpected in terms of rework and delivery cost overruns; but those are now essentially behind us. The types of projects we have on a go forward basis are more known and repetitive commercial projects that we are -- have a track record of performing well on.

I think Carl's laid out the raw material impact over the last couple of quarters. Q1 it was about $0.17. Can you give us that and by segment if possible?

Sure. It's really pretty much according to what we expected at the beginning of the year. We obviously did see a pretty sizable hit in the first quarter because of the comparables and when the run-up really occurred in 2004. In Cranes, we still see some pressure in certain categories but, overall, given the initiatives that were put in place throughout the year last year and year-to-date this year, we are coming out when we look at all commodities across the board, relative to those actions about breakeven. And that's our outlook and it's a similar story in Foodservice.

So essentially overall a net net neutral impact? In the second half, do we actually turn favorable? In the balance there, is it net positive?

That's fair.

Finally just on the DRI contract manufacturing business, you said it's continued to weigh our margins. Are we still EVA positive on that business?

Slightly.

If I could, I would tell you that we are not setting back on that either. We have continued to explore many alternatives with our customer on that to resolve this compression issue and we will continue to do that as we move forward.

Edmund Griffin of Blackrock.

Can you refresh my memory? When you look at the Crane segment how big is the U.S. Crawler Crane business? What was the revenue at the previous peak and when you talk about being a couple of quarters away from peak margins how should we think about peak margins in this next cycle, considering it's a different mix than -- I guess -- the last time around?

Unfortunately I can't give you specific business unit level information but I can give you some metric back from the last peak of the cycle. We were certainly largely a crawler crane product line company, Crane segment exclusively back at that time. That would be the 1998, 1999 time frame. And what we had stated publicly relative to our expectations without putting a specific time frame on it is that we can get to a 12% operating margin level in the Crane segment overall.

And that would imply what for U.S. Crawler Crane margins?

Once again we don't really guide on the product line level.

How much in revenue is the U.S. Crawler Crane?

I can't -- all I can give you is the (indiscernible) metric that is already out there.

Moving to the Marine segment, when you talk about the 3 contracts that you have had issues with and I guess the final one wraps up next week. What sort of operating margin would you expect to take this to know that we have these contracts? These underperforming contracts finished with and the new business coming online is business that you are more familiar with and have a better track record with?

Overall, unfortunately, we don't expect to get back to a much more than, essentially, a breakeven type of result for the segment. But obviously that includes a significant hit we have taken thus far this year.

(MULTIPLE SPEAKERS)

I'm sorry if you want to think about it in terms of more of a normalized product mix and having these issues behind us (MULTIPLE SPEAKERS) putting a specific timing on it we have indicated -- and certainly have seen it historically when we have a favorable mix project work the ability to generate double-digit margin in the Marine business.

(OPERATOR INSTRUCTIONS) Charlie Rentschler of Forsyth Research.

DRI. When is that contract expire?

December of 2007.

So we've got quite a ways to go?

But as I said Charlie, we continue to -- with our customer on this -- to explore numerous alternatives on how to progress this compression issue and we will continue to drive to that, not waiting until the contract expires.

Let me clarify. I said it expires 2007 -- that would be the first sunset. It's an evergreen type of agreement and requires 24 months' notice. But to Terry's point, we have very active conversations going on and we can come to an agreement that would give us the improvement we need in that business.

Skipping over to Crane's, I have read that the 1000 ton crawler model in your portfolio is getting some orders. If that is true, could you explain why that particular model is maybe attractive? And also does that augur something of an upturn coming up here?

I think I would like to defer that question to Glen but I would like to reemphasize those that, overall, I think everything we are seeing in the Crane cycle is that that trend is following the light construction cycle which we have said all along. So I don't think it's just down to a specific model. Describing it would be the cycle but Glen, can you share anything on that?

With respect to, Charlie, the high-end, some of the things maybe that you read or heard about some of the higher end ones are going into Asia and into Europe. And that's what we have been talking about the past few quarters where the markets have been sustaining some of the crawler manufacturing.

The thing is is the 16,000 we introduced this year and 18,000 last year when you look at what is happening in North America market, in addition to around the world, these are big projects that are going up whether it be new construction or some of it is even in the repair side, maintenance side of the business. And that is where in the petrochem business or the power industry, it can be obviously not in the power in North America but certainly in the petrochem maintenance. That is where these cranes are very helpful.

One final question then I'll get back in the line here. But on the Littoral Combat Ship program, Terry, how confident are you that this project will escape any kind of Pentagon budget cutting? I mean we read about that but -- what are your thoughts about that?

I guess the best way I could characterize that is that at the (indiscernible) that we had in June it was quite evident that the Navy regards this as a very very important piece of their fleet modernization; and there are two of these vessels being built and I can't speak for what would happen long-term in the Pentagon but we believe that the vessel meets the criteria that has been laid out that the Navy would wants to have as far as a high-speed vessel that can operate in shallow waters and so we are willing to build them the very best vessel we can and build it on time for them and I think we will go from there.

Joel Liss of Lehman Brothers.

It's Henry Kernan (ph) for Joel. Question for you on this Foodservice market. In order of magnitude was the drop in margins more from the DRI or was it more from the drop in the ice machine demand for the quarter? I'm just trying to figure out where I can go, going forward?

It would be more skewed toward the issue that we had with the unseasonably cool wet whether. If I were going to try to split it up between the 2, I would say probably 2/3 that issue, 1/3 contract manufacturing business.

My second unrelated follow up question is in the Crane market. How are you seeing the pricing environment? Is it continuing to get better or flattening off?

Overall in the Crane market itself I'm going to let Glen see if there's any other characterization he can make but utilization rates are very high today in the market. I hear in North America on both the mobile telescopic (indiscernible) at closing in on very high levels and basically the very large crawlers are extremely high and the utilization rates and the rental rates are improving. So I think that would give you an indication as to how that market itself is developing. Glen, I'm (indiscernible) on the pricing.

With respect to pricing since January of 2004 we have continued to raise prices on all of our products on a global basis. I will say, with respect to some of the competitive pricing that you asked about, I think there have been some -- in various markets there have been prices that have been raised through -- in different areas throughout the world. So I think there are pockets of resistance where people want to or competitors want to call it a strategic market or whatnot and I think you still see some of the what we consider competitive pricing in unusual given the commodity increases and things that have happened over the past 18 to 24 months.

But I think in general, prices have tended to go up a little bit.

Scott Mackey of Robert W. Baird.

First question, with respect to the guidance then, have you been taken down an element of your second half guidance? Or do, what, relative to everything we've discussed thus far the flat guidance vis a vis the change in the tax rate. Does that all reflect things that occurred in the second quarter?

The guidance level that we laid out at the beginning of the year? Obviously included an expectation that the Crane business was on the rise. We have been saying that throughout 2004. As I mentioned with Mr. McManus from J.P. Morgan, the benefit that we had in our -- from tax in the second quarter certainly blends the overall year to a lower tax level than we expected. At the beginning of the year. And guided through at the 30% level dropping down to 27% that benefit and obviously we've seen some departures from our expectations that we laid out at the beginning of the year for the full year in both Foodservice thus far because of the two key issues that we talked about relative to the poor weather conditions in much of the first second quarter April and May. And the contract manufacturing issue that's continued to be a challenge.

Obviously the big one that was worse than we expected was the Marine business and some of the challenges that we had and some of these specific projects that are now either set sail or setting sail. So all in we are pleased that we were able to keep the guidance level where it is tighten up the reins a little bit, bring up the bottom end.

The other thing I'd like to mention about our expectations is that the -- from a seasonal perspectively tend to generate more of the operating earnings level in the first half of the year than the second half. The operating earnings -- as an example last year, in the fourth quarter we were about 27% and for the full second half in the mid 40s. So obviously we are not giving quarterly guidance but 20% in the fourth quarter for the operating earnings. 20% for the total year and like I say, mid 40s of the second half of the year. To give some idea (indiscernible) since we don't give quarterly guidance. Hopefully that is helpful.

Given your comments about the departure since the second quarter to the original forecast, are you willing to share with us the revenue growth assumptions by segments to go into this midteens year-over-year sales increase?

No we really haven't done that. Certainly we were -- we did give an expectation of the midteens level and we've obviously gotten very positive results above and beyond that in the business. I guess I will leave it at that.

Seth Weber of UBS.

The Crane backlog was flat sequentially. Was that a function of Con Expo being in the March quarter? Did March backlog perhaps was artificially high? Was there something going on there? This is perhaps a question to Glen. Do you feel like this cycle is any different from the previous cycle? Is it possible that Crane users are running machines longer or harder and that they may be pushing them beyond the 85 or 90% utilization rate before they buy new cranes? Have you heard anything to that effect?

I will comment on the backlog question and Glen can embellish it obviously when he chimes in. I think we indicated that there was some benefit certainly from the timing of Con Expo in the first quarter backlog. Typically you intend to have a little bit of channel filling that you would get some benefit in that first quarter backlog and by virtue of that we are very pleased that the backlog in the second quarter has maintained the same level that it was in in the first quarter. That was good results from my perspective. I don't know, Glen, do you have anything to add to that plus answering the rest of Seth's question?

No I've nothing to add on to the back log. I think you hit it on the head. With respect to the cycle, Seth, I think one of the biggest changes of any other cycle that we have had before is the emergence of China into the fold and some of the other emerging markets that you see coming online. In every cycle if we go back 30 years every peak of the next ten-year cycle has been lower than what the previous ten years has been and I think that trend -- what we look at will probably hold true again. But regardless of the fact that maybe it is fewer units, what you're going to say is I think a trend toward larger units. When that happens -- when you look into China and you look into possibly Russia some of the Koreas, South America you are seeing a trend toward the bigger cranes as they build infrastructure and that kind of thing.

So where the cycle for (indiscernible) they are not built for use longer or anything like that. I think the cycle is a little bit different with some other countries that typically weren't a big part of those cycles in the past and really gives us a much broader geographic diversity than just depending on one market.

Is it fair to assume that the larger pieces of equipment have higher margins?

Typically that is true.

Quick follow-up. Are you having any issues with the supply chain tires, build, anything like that?

Yes we are -- I think the challenges supporting the growth that we've had through the supply chain and there are issues no doubt. To date I will say that availability is not -- is not a problem. There are some -- most of the things we have been able to get it's just how do you secure them, where are you buying them and what is the cost? But it is a challenge and an ongoing one that we have on a regular basis and that's why the supply chain and procurement initiatives that we've undertaken over the past 12 and 18 months are very important to our business not only now but as we look out at how to take advantage of the up cycle in 2006 and 2007.

Our goal has supply chain efforts that we initiated last year in a much stronger effort have given us the ability to search out around the world both availability, as well as the very best quality and pricing actions that we can achieve. Through that that leverage that we have with tying in all three segments, we've been successful at, at being able to continue to maintain our manufacturing schedule and also address the overall commodity pricing issue I think quite actively.

Robert McCarthy of Robert W. Baird.

Forgive me if this has been asked and answered but at this point -- given what you've been working on on pricing in the Crane business and changing the material costs -- are you at a point now where you can say that you have caught up with cost increases in the Crane business?

Overall I would say the answer to that question is yes. There's certain specific materials that we have not (indiscernible) using that others have. But blended altogether we're on the right side of the curb.

In terms of the Foodservice outlook for the full year and the -- I guess I'm beginning to learn that every year there's some discontinuity created in the business by weather -- some months great, some months not so great. Is it possible that you could make up the second quarter weather-related shortfall in the third quarter on the back of this nasty heat that we've had across most of the country?

I think it's possible. There is -- the machines that were not replaced in the second quarter didn't get any newer and the heat certainly accelerated that and from July activity -- July has been very positive so first quarter we saw industry growth the second quarter we saw -- it went away. The economics are the same. I would think that as the year goes out we expect to see some growth in the industry.

Gary McManus of J.P. Morgan.

I may have heard this wrong -- did you say you'd expect Marine to break even for the year? In profits? Did I get that wrong?

Yes. Yes, yes, break even.

Getting back to the seasonality, if I look at the last 3 years -- just look at the Crane segment. Looks like second half profits were similar to first half profits in the last 3 years. So can you just educate me? How much seasonality is there in Crane profits and do you expect it to occur this year with good conditions out there?

I think one of the issues that obviously can affect the seasonality to as an extent is the slope of the curve as you're coming off of a trough (ph) business but I would expect the general seasonality to continue. And that would be Crane business, would most robust in the second quarter.

So even though again in the last 3 years second half has been comparable to the first half? I mean the second half of '04 was 30 million versus 28. The second half of '03 was 15 versus 16. I mean it doesn't seem like there is a lot a seasonality in the Crane business historically.

I think if I could Carl -- Gary this is Glen. Everything being equal you have a month in the third quarter in Europe that basically doesn't contribute a heck of a lot with the vacation schedule and the holiday schedule in Europe. So all things being equal you would see the second half being down from the first half.

As Carl mentioned, the seasonality coming out of the trough is very different and it can be -- it's a matter of I know you don't want to hear it but the mix is a big issue as to what's going out towards the end of the year and when it goes out. Again, you see some of the geographic diversity doesn't play as much as it has in the past but the fact of the matter is we do have a very strong backlog at $500 million. But at the same time, again, everything being equal you have the one month in August where shipments are way down because of that. So there's always a tendency to have that.

Are you trying to suggest the mix in your backlog is less favorable than what we have been seeing even the last two quarters?

I was compelled to just saying it as a general comment over the past 3 years because I think your comments went back to like 2003, 4, and 5.

But I mean can you comment on the mix in the backlog?

I think the best comment there is Carl's comment I think, in his remarks was, it's really -- it's spread pretty geographically and it's really not dependent on any one product line and I think that's the best way to say it.

Scott Mackey of Robert Baird.

Scott? Helen? Okay. Are you there, Scott?

Your line is open.

I think we've lost him.

You may continue with your closing comments at this time, Mr. Kyle.

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