Manitowoc Company Inc (MTW) 2006 Q2 法說會逐字稿

Good day everyone and welcome to this Manitowoc Company Inc. Second Quarter 2006 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 to Mr. Steve Khail. Please go ahead, sir.

Good morning everyone, and thank you for joining us for our second quarter earnings conference call. Participating in today's call from here at our corporate offices will be Terry Growcock, our Chairman and Chief Executive Officer; Carl Laurino, Senior Vice President and Chief Financial Officer; and Bob Herre, President of Manitowoc Marine Group. Joining us from remote locations will be Tim Kraus, President of Manitowoc Food Service Group and Glen Tellock, President of Manitowoc Crane Group. Carl will open today's call with an overview of our financial results for the quarter, including a brief report on each operating segment. Tim will discuss market trends and activities with the Food Service Group, and Terry will conclude with a commentary on the Company's strategic imperatives. 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 today's entire call, you can hear a replay beginning at 1 PM Eastern time today until 1 AM Eastern time on August 3. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 4289588. You may also access an archived version of this call by visiting the Investor Relations section of our corporate website at www.manitowoc.com.

Before Carl begins his financial commentary, I would like to review our Safe Harbor statement. This call is taking place on July 27, 2006. 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 the speakers' 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 projections due to one or more of the factors explained in Manitowoc's filings with the Securities and Exchange Commission, included but not limited to the Company's annual report on Form 10-K for the year ended December 31, 2005 and its quarterly report on Form 10-Q for the period ended March 31, 2006.

With that, I'll now turn the call over to Carl.

Thanks, Steve, and good morning everyone. Yesterday we reported second quarter 2006 net sales of $746.2 million, a 27% increase over the second quarter of 2005. We also reported net earnings for the quarter of $42.2 million or $0.67 per diluted share compared with net earnings of $24.1 million or $0.39 per diluted share for the same period last year. Both revenue and earnings set new company records in our seasonally strongest quarter. Our reported net earnings for both periods include special items, which include the effects of early debt extinguishment and discontinued operations. Excluding these items, diluted earnings per share for the quarter were $0.82, an increase of 100% from our adjusted EPS last year. Please refer to our press release for a reconciliation between reported GAAP earnings and earnings from continuing operations before special items.

As you have seen in the past several quarters, our Crane segment generated the majority of this dramatic improvement. Crane segment sales for the second quarter were $570 million, an increase of 33% compared to last year. Operating earnings were $75.6 million, up 113% and operating margin improved to 13.3% from 8.3% a year ago. Margins for the quarter reflect the high capacity manufacturing utilization that is typical for the second quarter. Backlog at June 30, totaled $1.1 billion, up 13% from the prior quarter, and up more than double from a year ago. Backlog growth was strong across all of our geographic markets and in all product categories. We view the continued increase in backlog as confidence in both Manitowoc and in the underlying strength of the global construction cycle.

Foodservice sales of $113.3 million increased 9% from the 2005 quarter and operating income of $17.8 million was a 9% gain over the prior year period. These solid improvements in revenue and operating profit are the result of the benefits from three years of new product introduction. In addition, our market share in the ice division continued to improve. Operating margins in the current quarter were essentially flat from a year ago, primarily as a result of product mix, lower demand in our beverage division and some commodity pressure. Year-over-year comparisons for Foodservice was a result of more normal weather patterns throughout the US this year, compared to a cool wet spring last year, which reduced demand for ice equipment. Tim will discuss Foodservice in greater detail later in the call.

Marine sales for the quarter increased 7% to $62.9 million and operating profit totaled $1.9 million compared to a loss of $600,000 in the second quarter last year. This improved financial performance reflects better execution of projects with more favorable terms. We are also benefiting from process improvement initiatives and contract protection on commodities. Our Marinette shipyard is building the initial prototype for the Navy's Littoral Combat Ship program and has other government projects with options for the Navy's improved naval Lighterage System modules and the Coast Guard's recently awarded Response Boat-Medium program. Our base shipbuilding yard has a strong backlog of several OPA-90 compliant tank barges and the repetitive nature of these vessels lets us capture multiple production and engineering synergies.

During the quarter, we retired our Euro bond debt using a combination of cash and lower interest rate bank borrowings. This action is expected to reduce 2006 interest expense by approximately $10 million from 2005 level. Also of note, all three of our business segments contributed to our EVA of $52.6 million for the first half of the year compared to $10.5 million in EVA generated during the first half of 2005. Once again the crane segment was the largest reason for this strong performance as higher sales and improved product mix increased profitability.

Net cash provided by continuing operations for the quarter totaled $47.2 million, a $35.1 million improvement from last year and through six months of 2006 we have generated cash from ongoing operations of $29.7 million. This is noteworthy because Manitowoc has historically used cash in the first half of the year and generated cash in the last six months. We expect full-year free cash flow from operations to be greater than $125 million in 2006. I'll conclude my comments by confirming our recently revised 2006 earnings guidance $2.50 to $2.60 per share, excluding special items. This current range represents an increase of between 38 and 45% from our guidance at the beginning of the year, maintaining guidance at this time is appropriate given our continued strong outlook and confidence in all three segments’ performance. I conclude my prepared comments and I'll answer specific questions in the Q&A. Terry?

Thanks Carl. We typically feature one of our segment presidents as a guest speaker during our conference calls. This quarter, Tim Kraus of Manitowoc Foodservice Group will discuss his segment's market conditions, operations and strategic outlook. During the course of his comments, Tim will touch on our proposed Foodservice acquisition. However we are restricted from discussing any specific aspects or synergies related to the proposal. Tim?

While the Crane Group grabs the headlines and deservedly so, we continue our role as a consistent generator of profitable growth. Our first strategic priority is growth and we are on target with the 9% year-over-year increase in the second quarter. As expected, the favorable weather conditions did contribute to industry expansion but our new products and growing preference for our -- growing customer preference for our brands were even larger contributors. Our market share grew as ice machine shipments increased at twice the industry growth rate.

As Carl mentioned in his commentary, our overall growth was somewhat dampened by a softness in the beverage dispense sector. In the first half of 2005, we were the beneficiary of several large customer conversions in beverage which have not recurred this year. We anticipate the softness will continue at least through the third quarter but expect the dispense market to recover in the fourth quarter and on in 2007. Innovation is our second strategic priority and that drives new product development. In the past three years, we have introduced more than 75 new products. We have listened to our customers to create exciting new products for convenience stores, like the Ice Pick combination, Ice dispenser crusher, Flavor Magic, the flavor injection system plus our new line of ice makers and dispensers for the healthcare segment.

We are also leveraging our core technology to enter new markets. Perhaps the most exciting new market opportunity is our line of commercial grade ice machines for the home, office and small business. We are marketing these products through national big box retailers, private label customers, and traditional channels. Through the first six months of this year, all of our new product introductions are selling well ahead of plan and are contributing to our overall growth performance. We continue to focus on our customers and right now the number one customer need is for more energy efficient product. For the past several years, we have combined advanced engineering with more efficient sub-components to create energy efficient cold side equipment. Several states and [all] utilities including California provide rebates to customers who purchase equipment that meets the efficiency target. Today we have more products that qualify for these programs than any competitor. That is another major contributor to our gains in market share.

Our fourth priority is operational excellence. Here in the US, we focused on scaling our business to leverage overhead. The consolidation of our Tennessee and Wisconsin walk-in refrigeration facilities announced in the fourth quarter last year is complete and we are seeing the benefits of that move. In conjunction with our ERP conversion, our new shared services center affords us the opportunity to consolidate certain backroom support functions across the entire group and across all our operations we use Six Sigma and lean manufacturing tools to identify opportunities for additional improvements. The results are quite evident. By the end of this month, we will complete the transfer of all undercounter ice machine manufacturing to our new facility in Hangzhou, China. We also began limited production of certain beverage equipment models in China in the second half of the year to take full advantage of this modern facility. This will further reduce our costs and enable us to compete more effectively. With these moves and the continuing growth of demand in our domestic China market, utilization of the new facility is well ahead of plan.

Regarding the recent run-up in commodity costs, our strategy has been and continues to be to combat such increases with cost takeouts, improved operating efficiencies, and pricing actions as necessary. We employed all three strategies in the first quarter and we were able to mitigate some of the significant increase in commodities. Further pricing actions in the third quarter and an acceleration of our cost reduction efforts should minimize the impact for the remainder of the year.

I will conclude my comments today with a discussion of our overall acquisition philosophy. Our view regarding hostile acquisitions and comments regarding an acquisition that we completed during the second quarter. In the past, we've maintained that our preference was to focus [technical difficulty] industry. Our rationale is that by remaining cold, we could leverage our core competencies and technologies across the businesses and thereby maximize the synergy in engineering, in procurement, and in the market channels.

On the cold side, we estimate that 80-85% of our sales replace existing equipment with the balance supporting new store construction or to a much smaller degree, menu expansion. As the Food Service industry matures, operators shift their focus from new store construction to increasing same-store sales, often to refresh programs, menu development, and expansion. You see this today in the quick service segment, where operators are expanding their menu beyond the traditional hamburger or pizza venue to include salads, ethnic foods, soups, and specialty sandwiches. As they expand their offering, their food preparation equipment requirements change, but typically their refrigeration, beverage, and ice requirements do not.

Menu development and change are the primary drivers on the hot side. Hot side players tend to be smaller niche players serving narrow applications based on their own core technology. As an example, the technology for a range is different from a fryer or a convection oven or a microwave or a steam kettle. With limited product lines, it is difficult to achieve critical mass or provide synergy with other business units, while a larger hot side company with market-leading positions in multiple technologies could provide considerable potential in terms of synergy and technology. So, as we consider our acquisition opportunities, a hot side acquisition would make sense if it meets our acquisition criteria, if it includes a full complement of technology, and if it serves a broad customer base. If that acquisition also brings the cold side component, that could be even more attractive. Our preference is still on the cold side, but the right hot side acquisition can and will work.

Before I turn the call back to Terry, I would like to comment briefly on the acquisition of McCann's Engineering that we completed during the second quarter. Based in Los Angeles, McCann's is a vertically integrated beverage component supplier that includes some manufacturing in Tijuana, Mexico and a sourcing office in China. McCann's has been a key supplier to Manitowoc. So, through this acquisition we have secured this vital supply line. In addition, McCann's brings us a strong management team, customer relationships and core technologies to our organization that will enable us to accelerate our growth in this division and keep us at the forefront of the industry. This acquisition is consistent with our strategy to expand our technology portfolio through niche acquisitions, joint ventures and alliances. With that, I will turn the call back to Terry. Terry.

Thanks, let me update on Food Service Tim. We realize that many investors were surprised by our recent acquisition activities, but we are pursuing the same strategy that we used to build our Crane group to the level of success and global leadership it enjoys now. Tim mentioned several of the strategic priorities that support Vision 2010 to describe his business segment and we continue to pursue the following imperatives in all of our businesses. Our number one strategic imperative will always be profitable growth. Our global leadership position in the lifting industry is expanding by cross selling our full range of products into new markets and to new customers. This strategy is already working with our European tower cranes gaining share in the North American and China market, while our mobile hydraulic cranes are gaining share in the Europe, Middle East, and Africa region.

Our Food Service growth plans include a number of exciting new products and initiatives and the Marine segment is forging a solid reputation as one of America's premier mid-size ship [melders]. Innovation will continue to be a strategic imperative. The lead Littoral Combat Ship prototype that is scheduled for launch in September is one of the most innovative programs in Naval ship building today, and our team at Manitowoc Marine is earning high marks from the Navy and our program partners. The Crane segment is also dedicated to innovation as evidenced by the 14 new crane models that it will introduce this year. In addition, Food Service is on track to launch another dozen new products in 2006.

Our third strategic imperative is customer focus. Crane customers in the fast-growing Asian markets need timely deliveries and our new Zhangjiagang facility has reached the monthly build reach that were forecasted. In addition, crane care call centers are being established in Europe and Asia to complement our full North America service team. In Food Service, the ERP system that will be fully operational in early 2007, will give the sales force the ability to cross sell our three major product lines; ice, refrigeration and beverage. This creates efficiencies for the customer and simplifies their supplier management efforts.

The next imperative is excellence in operations. Sharp increases in commodity cost and tight availability are affecting manufacturers worldwide. We are using our scale to source materials on a global basis, and have been successful in leveraging volume for best-in-class pricing and gaining improved delivery and product quality from our supply chain partners. We also continue to use the principles of Six-Sigma, Lean Manufacturing and design for Six-Sigma to streamline operations in all of our manufacturing sites. The best strategies won't work without people. We have implemented organizational processors to identify high potential performers and swap them for management succession. We're also developing our next generation of leaders through specialized classes on three continents and through advanced leadership training where we bring together the best and brightest from around the world through our Manitowoc style MBA. In total, we have trained more than 200 employees in multiple disciplines including LDP and ALDP. In the end, it's all about value and our final strategic imperative is to increase shareholder value. EVA totaled more than $52 million through the first half of the year, a figure that's more than 2.5 times greater than the level of EVA we generated in all of 2005. In addition, our strong cash generation has enabled the company to retire a substantial amount of debt this year. We have strategic flexibility, because we meet the most basic measurement of business success, consistently solid cash generation. I am proud of the fine job that our folks are doing around the world to grow shareholder value and I believe we have the momentum and the opportunity to continue this performance.

With that, I will now turn the call over to the operator for questions and answers. Operator?

Thank you. [OPERATOR INSTRUCTIONS]. Seth Weber, Banc of America.

Thanks. Good morning. Either Carl or Terry, maybe can you drill down a little bit on the crane business margin of 13.3% in the quarter. I mean does that put the 12% target in the rear view at this point? And can you give us some sense for where we are in manufacturing capacity and what your expectations might be for topline growth for this year in the crane business as far as units and pricing go? And then as a follow-up, can you give us an idea of what China did for the quarter and what the new facility over there did for your margin? Thank you.

Seth, I'm going to let Carl handle the question on the margin, but let me first off tell you that we are extremely pleased with the Crane group. Everything that we had positioned that group to do back in 2001 and 2002, when we brought together this global leadership in lift solutions is working as we had planned around the world. But I would also caution you, when you're looking at the second quarter, that is seasonally our strongest quarter every year in the Crane group. So, our strong quarters are always the second and third quarters as far as seasonally adjusted in both our food service and our Crane group. So, with that, Carl.

As you know, the second quarter certainly would be the seasonal strong quarter for us. Obviously, we were experiencing some pretty nice expansion in the Crane business starting in the '04 timeframe. Obviously has been continuing and as you look at last year, the margin characteristics, you certainly see a drop off in the third and fourth quarters. So, full-year expectation, obviously we have given an expectation that we would be able to achieve or maintain the level that we posted in the first quarter above 10%. Obviously, this extremely strong performance that we have had in the second quarter gives us a lot of confidence in that regard, but certainly not to the level that you are talking about when you are talking about rear view mirror for the full year.

As far as China goes, I think our -- I can't give you specific financial information on -- at that level for our normal disclosure policy. We can tell you that obviously we have got capacity that we have brought on line there, with an expectation for very robust demand coming out of that region. The expectations that went in -- on the front end before we made the decision to expand are certainly being realized. We are very happy with the pace that we are on and how we have brought product into that facility, and as it relates to what that means for our overall margins is it’s in accordance with what our expectations were before we embarked on it.

Topline expectations at the beginning of the year, we indicated from a unit perspective, we expected to be up over 20% from a unit standpoint and we didn't get real granular about what it might mean relative to our overall revenues and obviously given the fairly limited number of competitors that will represent global competition. We try not to get real specific on how that breaks down, how our overall revenue breaks down. But certainly the expectations from a unit perspective and everything that we are looking at in the marketplace continues to be very strong. And we would certainly verify the expectations that we had when we announced in the first quarter.

Okay. Maybe, Glen, can you give us any kind of color on verticals that are particularly strong, whether it is energy or any kind of large infrastructure, anything to that effect?

Before Glen answers that, let me just say that we are seeing really strong growth in all of the regions and basically all of the categories. There are some that are obviously growing stronger than others, but we are seeing good, strong growth in the lift solutions, in all of the product categories, all of the regions, and almost all of the market drivers. But, Glen, if you could give a little bit more there?

I think, certainly a couple that are really driving some of the growth on a worldwide basis are certainly the energy markets and North America, you have a lot of the highway bill. So, not only the highway bill, but you also have the Clean Air Act, which hits the -- anybody that has built coal fire plants or the petrochem industry. Those are some big markets right now. I think you have the non-residential construction. You are seeing the building industry back and again, I think I want to stay away from -- I think people want to focus on the residential and put a lot of our business into that, and I think that's not where the majority of our growth has been, it's in the non-residential construction, which those markets are as good as they've ever been in the last, say five or six years. So, those are really the industries that are driving some of it. When you get into the Middle East, you have China, obviously India, and in South America, again the mining, the oil industries, the energy, and the highway.

Joel Tiss, Lehman Brothers.

Hi guys, this is [Henry Cronin] for Joel. In the food service segment, you talk about the benefit from some of the governmental initiatives. Is it possible to quantify that for the quarter and sort of talk about how that might play out over the next couple of years and the impact to the food service business?

Could you repeat that? I’m sorry I missed that.

Sure. Some of the governmental incentives such as in California on the food service business, how can -- what's the impact of the quarter, and longer-term how could that play out over the next four years?

I am going to let Tim give you some color on that, but let me first tell you that that's just -- that's one of the drivers that is in the food service side. There are several states that have rebate programs based on energy consumption in food service equipment, whether it's the refrigeration equipment or the ice machines, and the ice machines are historically significant consumers of energy. So, what we have is through our product development that we've had in the last number of years, the last three or four years, coming out with the S-Series. The product today is as strong as we have ever had. And we do need, as Tim said in his comments, more of the directed energy rebate programs than any of our competitors at this point in time, as a result of this expanded development that we have in that product. But that's not the only driver and I am going to let Tim, maybe, go through a little bit of that, plus some of the other drivers. Tim?

Yes. I think the rebates that are offered certainly favor the company who has the more energy efficient equipment, because it reduces the customer's acquisition price. In our position of having a large percentage of our products that meet the requirements than a competitor is certainly contributer to our overall market share. Equally, I think in terms of the expansion we had this quarter, equal to the market share gain was the gain from new products. And again, in our healthcare product line, our consumer residential ice machine line and some of our beverage dispense products are growing very rapidly. So, the overall growth was really a combination of those three factors; industry expansion, somewhat weather related, market share growth, and then the new product strategy.

Is there any way to talk about how those trends could impact the business over the next couple of years if the initiatives become bigger in '07 and '08 than they are today?

I think every one of our competitors and even we are focused on the products that do not meet the energy threshold, the energy standard thresholds, getting those up to par so that we can sell into the markets that have those types of programs. So, I don't think we'll have a competitive advantage on energy for any extended period of time. I think our competitors will certainly catch up. Our new products on the other hand, we have got another dozen new products in development for this year, and that has been a driver for us over the past five or ten years in terms of market share. So, we are more focused on the new product with an eye to obviously exceeding our compliance or working towards the next level of compliance regulations that will be out there in years to come.

I guess my follow-up on the residential product line opportunity. Is there any way that you can sort of scope out how big that opportunity is and sort of the time frame over which you'd expect to get to the type of margins that you have gone to historically in food service, if that is possible?

The residential line specifically, we do not expect it to have the type of margins that we have on our commercial food service equipment. It is a highly competitive category, as the residential appliance market is. In terms of size, probably, I don’t know, 20, 30% the size of the commercial ice machine market, but it is a growing segment by virtue of this trend toward high-end kitchens in the home. So, it is a growing segment, and we see this as a really nice opportunity in adjacent space.

Obviously, Henry, there is a certain amount of uncertainty with any kind of new product launch and this one for us is not only new product, but really a new market space which would increase the uncertainty. So, it is difficult for us to really frame in a specific, even size category but couple that with size and time frame, it is a difficult question to answer at this stage of the game. We are certainly excited about the product itself and the features that it has. And we think it is a good demographic to be in.

Okay, thanks a lot.

Nigel Coe, Deutsche Bank.

Good morning, just wanted to try and tackle this crane margin question from a slightly different angle. Your [inaudible] margins have improved quite a bit from 2005 levels. I think now it is 28% in 2Q. Can you just make some very general comments on what impact mix is having on that margin growth, and how much moving volume, and where do you think that can go over the next two or three quarters?

Before Carl answers that or if Glen has anything as well on that, we did say at the end of last year that we saw the return of the North American crawler crane market coming. And it was starting to take place at that point in time, and that obviously has given us a more favorable mix as far as our total overall volume going through in the crane business, but again I would want to re-emphasize that this is not a regional increase and it is not by products. All of our products, all of our categories, and all of our regions are doing extremely well at this point in time, and the outlook for them into the foreseeable future is bright. And with that Carl, if maybe you could shed a little bit more on that.

I would say Nigel that certainly much more would be on the manufacturing efficiency and absorption side, than on the mix side. Certainly we are seeing some favorable things from a mix perspective because of what Terry just talked about, but much more significant on the manufacturing absorption.

Okay, and do you think we go to maybe 30% plus type property margins in the back half of the year?

We think that, that is achievable before we are done with this current expansion, that we are in, which as we've said, quite a few times, we think has got some pretty good legs in front it.

Secondly, just talking about the backlog, can you actually give us the dollar amount of the backlog? I think it says $1.1b. Can you be a bit more specific on that? And talking about the mix issue, clearly they are coming through the -- as you convert the backlog, there is a better mix of crane coming through, but in the actual orders, the physical orders for 2Q versus 1Q, have you seen a shift in -- towards heavier cranes in that order flow?

The actual number is $1.116 billion.

Okay, thanks.

As we said, as things go, certainly we are getting some benefit on the mix side, on the crawler crane side which would represent the heaviest lift product capability that we have. I don't know if Glen has got anything to add to that would help.

I just would add Carl, that the shift in the mix, I don't think it is any different than the first quarter, with the orders that have come in, but it is certainly different than last year and that is the additional crawler crane, the ramp up that Terry alluded to, that we said at the end of last year, that we did see the pick up in the crawler crane market primarily in North America and that is in fact happening.

Okay, thanks a lot guys.

[OPERATOR INSTRUCTIONS] Robert McCarthy Robert W. Baird.

Good morning gentleman.

Good morning Rob.

I wondered if I could ask you to go back and revisit like whatever would be the best topic for us to talk to either a Grove or the combination of Potain Grove. I wondered if you could go back and remind us that when you did those deals, what your synergy targets were over what kind of period of time, how well you did in achieving those and how well you did in achieving your goals for earnings accretion from those deals?

What I would tell you is 2001 was the time frame for the Potain acquisition and Potain gave us the footprint around the world that has allowed us to become a global leader in lift solutions. Then we followed that in the summer of 2002 with the Grove acquisition that basically rounded us out with now having the largest single category in lift solutions that being the mobile telescopics along with the leading position in crawler cranes and the leading position worldwide in tower cranes that Potain had brought the year before. But we were able to then take that and go to what we have now set up as a truly global company in cranes where we operate under three separate regions, Europe, Middle East, Africa, the Americas and the Asia Pacific marketplace, and what we are doing with all of that is obviously to build the product closer to the customer and sell the product within the region rather than by the product category. So, some of the products by that very nature -- we will lose a little bit of the [side-out], but I think Carl can give you some pretty good information on that. Before I turn it to Carl, let me also put one other thing. We go to those three regions, but we surround it all with the strongest after-market support of anyone in the world because we are as global as we are in the crane side with our Crane Care focus. So, Carl.

Robert, as you probably know, obviously we've got some fairly disciplined criteria that we use when we look at the financial metrics that need to be met and the acquisitions need to be EPS accretive within two years and EDA positive within three, and obviously that's with an eye towards utilizing as few synergies as possible. As we look at things on the front end, obviously synergies are important to us as it relates to what we expect to do in terms of value driving for the business and we seek to retain as much of that as possible. When we look at the combined organization of Manitowoc growth, Potain when we had those into the fold -- as a combined organization and we are integrating based upon having a kind of a three-company integration process. We were looking at synergies in the, call it high single-digit percentage of the purchase price in total. And obviously we kind of gave that to the investor public in parts as we went to one, we went to the other, certainly achieved well beyond what we had publicly expressed that we were looking for and after that point in time, it becomes much less a matter of talking about it in terms of integration, it just becomes a matter of performance of the business.

Sure. Ok, thanks that was very helpful. I was wondering if I could prevail on Tim to talk about -- I don't know historical or going forward or maybe both, differences in estimated growth rates for -- as you are labeling it cold side versus hot side food equipment. In other words, I mean just how much faster does the hot side of the industry tend to grow?

The industry growth in terms of store expansion, food service sales growth has sustained both hot and cold and that’s industry; it’s industry. The driver on the cold side is replacement, and the average life of a refrigerator product is priced seven to ten years depending on the product. This really plays on the hot side as well but menu development makes it more dynamic. As an example, a large chain recently rolled out a sandwich program, and it required a small footprint of the equipment that could toast bread, hold the sandwich food items and prepare it in a small footprint. So, it is more dynamic and more project related or menu development related. So, industry growth is the same either way, hot or cold. Industry is industry but -- as operators focus on increasing same-store sales, one of the ways of doing that is expanding or altering the menu and that doesn't normally affect refrigerator storage as much as it does the type of technologies to prepare the food.

And you don't think that that would drive faster demand growth in those categories, in other words, shorter replacement cycles?

Yes. It would. If it replaces existing technology, it depends upon -- if they are adding as an example fried chicken to a menu, then it certainly drives new product. If they are moving from a menu item that traditionally used traditional or oven technology and they are moving to conduction or steam then it would replacement, yes.

If I could prevail on you to also address, the first half of the year you have shown about 3.5% topline growth, I assume with pricing probably volume has been flat or slightly negative, can you give us an idea of what kind of a drag this non-comparability in beverage conversions has been on volume so far this year?

Carl could you maybe -- you got a little bit of information on that I think that might be of some help on that.

Well obviously when you get to the 3% Rob, it is those kind of tail of two halves when you look quarter-over-quarter and the decrease we had in the first quarter really is coming off of a very difficult comparable in 2005, when we look at the beverage because we had what I would characterize as unusually strong first quarter in beverage, Q1 '05 with a pretty significant sized couple of roll-outs and really nothing of any kind of order of magnitude in the first quarter of '06. Really on the beverage side and the difficulty there I think that trend actually continued i.e. lackluster rollouts in the second quarter and obviously the ability to increase in excess of 9% on the topline was driven by the rest of the businesses, these things that we are talking about as it relates to weather and just across the board good demand in other areas.

And I gather from what you saying that that non-comparability in last year's comparison got easier in the second. In other words it wasn't as big of a problem to overcome.

I would agree with that comment.

And then I guess from what Tim said, we will still have a little bit of an issue of this in the third quarter and we think we are done with it.

What Tim was alluding to is that we do not have at this point any view of any major rollout programs that are out there in the third quarter. We do see some opportunity coming towards the end of the year for some potential rollouts and -- but really the toughest comparison I think was that first quarter.

If you are talking about the ability to grow the business in the second half of the year, not so much something has to do with comparisons. You think you will have incremental opportunity to gain business?

Yes, I guess -- let me just go back to the indications that we gave for outlook at the beginning of the year indicating a high single digit year-over-year growth expectation for the segment despite this 3% that you are talking about from a year-to-date standpoint, we are still and obviously you can see where we are in the quarters looking at it alone, we are still very comfortable with that high single digit expectation that we gave for the full-year today.

Okay terrific. Thanks guys.

Gary McManus, JPMorgan.

This is actually Phil [Grachen] for Gary McManus today. Quick question for you on the EGNA line item for the quarter, I apologize if I missed any prepared comments on this, but I was surprised to see that you didn't show any improvement relative to the second quarter of last year, after showing an 80 basis point improvement in the first quarter. I was wondering if you could talk a little bit about what drove that and whether you expect to show an improvement in the second half of the year, thanks?

One of the real big ones that we would have is from the expensing of options standpoint Phil, would be the biggest difference there.

So, was that bigger in second quarter than the first quarter then?

Yes, it was.

Okay, anything else?

There really isn't anything taken alone that would be of significance obviously with the performance in the crane segment from an employee compensation standpoint. There is an affect in that area as well.

We are still implementing the Foodservice ERP, we will have that through by the end of or by early part of 2007, where we will start seeing some of the advantages and the cost reductions coming from that implementation, but at this time, we still have some additional cost going into that process and some duplication.

Okay, so in the second half of the year would you expect to see an improvement relative to last year or...?

In the second half of the year you asked?

Yes, I mean, first quarter again was 80 basis points lower, the second quarter is flat. Just trying to get an idea of what you think for the second half of the year?

I would say flat is probably a fair expectation.

Okay, thanks.

Charlie Rentschler, Wall Street Access.

I am going to try to stay as far as I can away from the United Kingdom, but as I think back on my relationship with you guys over the last three or four years, I guess, I have heard you say about the same, how important it is to keep a balanced portfolio as it is to stick to the cold side of the Foodservice equipment business. And is my sense correct that basically we have got a collision between these two. I suspect that the growth of the crane segment has been so strong and it is over 70% of your revenues year-to-date that you are really trying to strive to create, rebalance the portfolio as Terry likes to say. And so not seeing the acquisition possibilities on the cold side you have made a strategic shift in your thinking? Is that a fair way to summarize what has happened here?

Well, I could answer that very easily and that would be no, but let me give you a little bit on that. Each of our businesses, we are very disciplined in our strategy approach. And each of our businesses have, their strategies that they have laid out as to how they are going to grow their business profitability, and where they see that they will be in the year 2010 and into the future. We do not look at this as a total package from the corporation. It’s what is food service going to be, what is cranes going to be, and what would marine be. And we look at it from that basis and that basis only. We are again very disciplined in our approach in all of our growth strategies, whether it's with innovation or through acquisitions, alliances, joint ventures, whatever it is, and it all starts with our product [wage] metrics. When we look at what we do not have or what we need to further increase our position within the marketplace in which we operate in, in all three of those segments, and we do it on an individual basis and that's what really is the driver on this. And we go back to again what Carl has said. We are not only disciplined in our focus, in our approach at the strategies, but we are very disciplined then in the fact that it has to meet certain financial guidelines as we put it in place and that it is once again, it has to be EPS accretive within two years and EBA-positive within the third year, and we are, we are very diligent to that as we go forward.

[OPERATOR INSTRUCTIONS]. I'll turn the conference over to Mr. Khail for any additional closing remarks.

Before we conclude today's call, I'd like to make three brief announcements. The first announcement is that Manitowoc will issue its third quarter earnings after the market closes on October 23, and will host its usual conference call with the investment community at 10 A.M. Eastern Time on October 24. Second announcement is that Manitowoc will host an Analyst Day in New York on November 26. Invitations and more information pertaining to that event will be forthcoming. And lastly I'd like to remind everyone that a replay of today's conference call will be available, beginning at 1 P.M. Eastern Time today until 1 A.M. Eastern Time on August 3rd. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 4289588. You may also access an archived version of today's call on our website at www.manitowoc.com. Thanks again for joining us. Have a good day.

That does conclude today's conference call. We thank you for your participation and have a nice day.