Manitowoc Company Inc (MTW) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to this Manitowoc Company, Incorporated Third Quarter 2006 Earnings Conference Call. Today's call is recorded. At this time for opening remarks and introductions, I would 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 Third Quarter Earnings Conference Call. Participating in today's call will be Terry Growcock, our Chairman and Chief Executive Officer, and Carl Laurino, Senior Vice President and Chief Financial Officer. Joining Terry and Carl on today's call will be Bob Herre, President of Manitowoc Marine Group. Glen Tellock, President of Manitowoc Crane Group is also with us and will be available for our question-and-answer session.

Carl will open today's call with an overview of our financial results for the quarter including a brief report on operating segments. Bob will discuss recent activities involving the Marine 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 will not be able to stay on the line for today's entire call, you can hear a replay beginning at 1 p.m. Eastern Time today until 1 a.m. Eastern Time on November 1st. The number to dial for the replay is area code (719) 457-0820. Please use confirmation code [1041978]. You may also access an archive from this call by visiting the Investor Relations section of our corporate website, www.manitowoc.com.

Before Carl begins his financial commentary, I would like to review our Safe Harbor statement. The call is taking place on October 25, 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 each speaker's remarks and during our question-and-answer session. Such comments are based on the company's 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 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 Decrease 31, 2005, and its quarterly report on Form 10-Q for the period ended June 30, 2006.

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

Thanks Steve, and good morning everyone. Yesterday, we reported third quarter 2006 net sales of $779 million, a 38% increase over the third quarter of 2005. We also reported net earnings for the quarter of $50.4 million or $0.80 per diluted share compared with net earnings of $17.1 million or $0.28 per diluted share for the same period last year. Both revenue and earnings represent the third consecutive quarter of record results, which is impressive considering the fact that we normally experience sequential, seasonal softness in the third quarter.

Our reported net earnings for the 2006 and 2005 periods include special items, which include costs associated with our terminated bid for Enodis plc, restructuring activities and discontinued operations. Excluding these items, diluted earnings per share for the quarter was $0.82, an increase of 116% 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 we have seen for the past several quarters, our Crane segment generated the majority of this dramatic improvement. Crane segment sales of $583.3 million set another record and increased 44% from last year. Operating earnings were $76.1 million, up 157%. And, operating margin improved to 13% from 7.3% a year ago. This performance illustrates the strong operating leverage of our global crane manufacturing base.

Backlog at September 30th totaled $1.4 billion, which is 25% higher than the prior quarter and more than double the level of one 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 not only a sign of confidence in our products but a confidence in our ability to deliver these orders in a timely fashion to allow our customers to effectively participate in the growing, global construction industry.

Our global manufacturing footprint makes that possible, including our new plant in Zhangjiagang, China. This facility reduces lead times for cranes destined for projects in Asia, which is one of fastest-growing construction markets for several years and shows a solid long-term outlook. Equally important, we've double our production in the Americas region without adding brick and mortar.

Foodservice sales of $114.5 million increased 5% from the 2005 third quarter, and operating income of $18.6 million was essentially flat with the prior-year period. Operating margins declined due to softness in the beverage industry, absorption issues in refrigeration, cooler year-over-year weather and commodity cost pressures. Over earlier periods, we have successfully managed commodity costs through procurement efforts, material substitutions and pricing actions. And, we expect Foodservice to repeat performance in the intermediate term.

You'll recall that we previously expected a second half 2006 recovery in beverage, however, we now expect the beverage markets will remain soft until mid-2007. To bolster that outlook, we have focused on improving our refrigeration production efficiency. We expect those improvement will bear fruit this quarter as well as throughout 2007. In all, we expect operating earnings in Foodservice will be approximately flat this year despite roughly mid single-digit sales growth.

Although we had our challenges in Foodservice, we did have some bright spots. Our US market share in ice machines reached an all-time record in August as customers continued to choose our energy efficient and innovative products.

Marine sales for the quarter increased 59% to $81.2 million, and operating profit totaled $2.4 million compared to a loss of $100,000 in the third quarter last year. The higher revenue reflects the ramping of activity on the Littoral Combat Ship in preparation for its launch last month coupled with continued strong activity on our commercial backlog of OPA-90 double-haul vessels.

After several quarters of significant under-performance at Marine, we are beginning to see the results of new processes that we have put in place. Our commercial projects all have contract terms and delivery schedules that generate fair returns and allow us to use our people and assets effectively. Our commercial backlog should serve as a foundation for Marine's profitability through 2008 and into 2009.

I'd also like to point out that while the operating margins at Marine are lower than our other segments, its low capital requirements and the progress payment structure of its contracts make Marine a very good performer on a cash-generation and EVA basis. Bob will discuss Marine's operation and progress during this call.

Net cash provided by continuing operations for the quarter totaled $89.6 million, a $30 million improvement from last year. Through nine months of 2006, we've generated cash from ongoing operations of $159.2 million. That's more cash than we generated in all of 2005, and we expect that the fourth quarter will be another strong cash flow generating period. After funding our capital expenditures and dividends, we expect full year free cash flow from operations to be greater than $125 million in 2006 with cash generated from continuing operations expected to total $200 million.

Total 2006 debt retirement is expected to be in excess of $200 million as well, which will bring our gross debt to capitalization to less than 30%. I'll conclude my comments by raising our 2006 earnings guidance range to $2.70 to $2.75 per share, excluding special items or $2.03 to $2.58 per share on a GAAP basis. We anticipate discussing the outlook and factors driving 2007 earnings at our Investor Day on November 28th.

With that, I'll turn the call over to Terry Growcock. Terry?

Thanks, Carl. We typically feature one of our segment Presidents as a guest speaker during our conference calls. This quarter, Bob Herre of Manitowoc Marine Group, will discuss his segment's operations and strategic outlook. Bob?

Thanks, Terry. The launch of LCS FREEDOM on September 23rd was a landmark event for The Manitowoc Marine Group, and not just because of the spectacle of seeing a 377-foot combat ship slide off our dock and drop 12 feet into the Menominee River. It was a landmark event, because it was the perfect combination of our six strategic priorities coming together at a single point.

Let me explain what I mean. Our company's number one strategic priority is growth, and the growth opportunities represented by the LCS program are exceptional. The Navy expects to take delivery of as many as 55 of these ships over the next 10 to 15 years. As the builder of the lead ship, Manitowoc Marine would expect to be a major participant in that build strategy. I have been in and around the shipbuilding industry for more than 30 years, and the long-term growth opportunities that LCS provides to an operation of our size come along perhaps once in a generation.

Our ultimate customer is the United States Navy, but we also respond to the needs of our partners on the Lockheed Martin team. The priorities of innovation and customer focus were critical in meeting the intricate timelines that were complicated by the normal design and engineering challenges that arise during a first-in-class project. Our team worked well with our partners to develop new construction techniques and production managed processes that kept the project on track.

The next priority that FREEDOM highlights is excellence in operations. For decades, Manitowoc Marine has prided itself on its workmanship, and our reputation as the best shipbuilder on The Great Lakes is well deserved. However, if the hull is painted gray, it becomes a different story. The United States Navy avidly demands that its combat ships be built to the highest standards in the world, not to Great Lakes'. Reports from the Navy's pre and post-launch inspection teams validated that our shipbuilders are, indeed, among the best in the world.

We are able to perform at high levels because our people are well trained, and our processes are well managed. The Marine Group averages 15 years of experience for its production personnel compared to an industry average of seven for other primarily commercial shipyards. We nurture that competitive advantage through continuous training, strong safety programs and leadership development. I'll also mention processes, which are especially important in any Navy combat vessel program. LCS served as the catalyst for significant investments in documentation and work order tracking programs at Marinette that can be leveraged for future LCS work and other commercial projects.

Carl mentioned that our [project] FREEDOM is an investment in the LCS program and is one that I also believe will generate value for our shareholders. Not only will future contracts significant monetary value, but the repeat nature of this program creates opportunities to develop learning curves and centers of manufacture excellence within our organization. The most profitable shipyards are not the ones that deliver great ships, but those that deliver the same great ships over and over.

With all the discussion of LCS, we cannot forget the important contribution that our commercial and rework offers. We will deliver two of our OPA-90 double-hull tankers that are part of our Marine Group backlog this quarter, and we continue to discuss additional opportunities with current and perspective customers. In addition, our outlook for the repair winter season is quite favorable, and this work is a solid complement to the new construction activities of our work force.

And, now I'll turn the call back over to Terry for his strategic commentary. Terry?

Thanks for that update on Marine, Bob. The LCS launch was a great opportunity to showcase our Marine facilities to the Navy's top admirals, and their reaction was extremely favorable. Bob discussed how our strategic priorities are shaping the successes with LCS, so I have to share similar examples from our Crane and Foodservice segments.

There is absolutely no better illustration of our commitment to growth than the Crane Group's performance in 2006. Our vision of creating the world leader in lifting solutions has been a great success as we have been able to cross-sell new and legacy products to the global customer base. Our backlog continues to grow as the current global construction cycle evolves like never before.

Innovation has been the hallmark of the Foodservice Group with nearly 100 new products brought to market over the last three years. The latest offering is the Flex-Tower fountain beverage system, which leverages the trend to non-carbonated drinks such as juices, flavored waters and sports drinks. Flex-Tower was very well received at the National Association of Convenience Stores Trade Show earlier this month in Las Vegas, and we expect it to help drive growth in this important market segment. New and innovative products such as Flex-Tower also help lessen our dependence on restaurant refresh programs that primarily specify new models of our traditional, carbonated beverage systems.

Crane CARE is the benchmark for customer focus in the lift industry. This quarter, we continued our efforts in building new call centers to serve the Europe, Middle East, Africa and Asia-Pacific regions. Both of these facilities will be open by mid-2007. Our Crane CARE call centers are far more than order takers for parts. They are staffed by experienced technicians who can troubleshoot problems on a real-time basis with our customers. Often, the solution is a simple adjustment, for which the field mechanics have not been trained. Getting the equipment back on the job in hours instead of days is part total cost of ownership value proposition that makes Manitowoc Crane products the choice of the world's leading construction contractors.

The top line success we've achieved in the Crane segment brings its challenges. Delivering a $1.4 billion backlog requires excellence in operations in order to meet delivery schedules. We've accomplished a lot in manufacturing related to ramping our work force, implementing lean initiatives and expanding our global capacity through prudent capital investments.

In addition, our global sourcing teams study every step of the manufacturing process to identify potential compression bottlenecks that could be caused by supply chain shortages. I believe that these proactive investments in people and processes will keep it ahead of the curve as supply chain availability and commodity inflations are likely to remain key challenges for much of the current construction cycle.

Our commitment to people and processes is also reflected in our 2006 safety performance. Our record revenues were driven by a record number of hours worked. And, I'm proud to report that year-to-date, our total number of reported incidents is actually down from last year. That's not incidents per man hour but total reported accidents. That's an impressive record for a complex manufacturing operation and diverse geography such as ours. And, it's the result of industry-leading safety training and cultural commitment to working smart and safe.

Our focus on these priorities is what drives our outstanding record of shareholder value creation. We use EVA models to measure our progress in creating value, and the results so far this year are impressive. EVA through the first nine months of 2006, totaled $85 million, a fivefold increase from the same period last year. We have a Vision 2010 strategic plan that will enable us to maintain our growth and earnings momentum. And, I look forward to sharing details of our 2007 outlook at our upcoming Investor Day Meeting in New York City on November 28th.

I would be remiss if I did not comment on the recently announced retirement of Tim Kraus. Tim is out of the office until early November attending to several personal issues. He will then retire on January 1, 2007 as President of the Foodservice Group, a position he has held since 2000. During much of 2007, Tim will also be assisting us in the transition. During Tim's tenure, ice has grown its market share by over 1% each year. The beverage and refrigeration groups have strengthened their offerings with new products including a Manitowoc DNA look plus selective product and plant rationalizations. A new group-wide ERP was launched and will be fully in place in mid-2007. And, the new 200,000 square foot China facility was brought line as well as numerous other achievements in this important segment.

We will miss Tim, but rest assured, he is leaving us with the strongest model, aggressive strategic direction and a solid management team. We have initiated a search, both internally and externally, for his successor. Thank you, Tim, for all of the contributions you have made during your 17 years with Manitowoc.

Tim's dedication to Manitowoc's success is matched by our nearly 10,000 employees who are equally driven to create value for our customers and shareholders. Our industry-leading positions in the Crane and Foodservice markets and our revitalized performance in the Marine sector put us in a great position for continued success. And, our team members in the Americas, Europe and Asia are ready to take advantage of the outstanding market opportunities before us.

With that, I'll now turn the call over to Kim for questions and answers. Kim?

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Joel Tiss from Lehman Brothers.

Hi guys, it's actually [Henry Kirn] in for Joel today.

Hi, Henry.

Hello, Henry.

A question on the timing of the crane backlog, can you give a little more specifics as to when some of those revenues might fold out over time, or how much could be in the fourth quarter and then beyond?

Well, I'm going to ask Glen to back up any of this, but is all current backlog. That backlog is pretty much -- the fourth quarter and the first quarter of next year is by far the bulk of it. And, I'd also tell you that it's pretty well dispersed by our various products as well as the geography in which serve. I think we cover that pretty much. It's just about the way the sales have been unfolding, so -- but, I'm sure Glen has a little more color he might be able to give on that.

I don't have much to add to that, Terry. I think you touched all -- really, it is through obviously, the next three quarters as Terry mentioned. And, I think that's the encouraging sign for us is it's not going out long term, and we're not worried about people backing out of these orders. It's really going to the end users and not through the dealer inventory channel. So, that's all I would add.

Okay. Is there any way you can give a current breakdown of the Crane segment geographically?

I think when you look at the lift in the numbers.

Yes.

They've been fairly consistent, as we've said. In late 2005, we did indicate that we started to see the traditional markets and North American market for the crawler cranes pick up and we saw some change in mix from that perspective when that happened. But really since that time, it's been across-the-board contributions from both a geographic and a product standpoint.

Okay. Thanks a lot, good quarter.

And moving on, we'll hear Seth Weber from Banc of America.

Hi, thanks. Good morning, guys.

Good morning, Seth.

Terry, in the prepared remarks and then in your comments earlier, there's been a couple of comments about utilization and meeting customer demand. Can you maybe give us an idea where the Crane Group stands today at utilization levels? And, how hard do you think you can press this? How much do you think you can produce in a given quarter? And, maybe give us your view on how you think about adding brick and mortar here versus lead times? And perhaps, what lead times look today? Thank you.

Well, that's a lot of questions right there, Seth. But, let me tell you first off, we have said before and will repeat that we do not see a need for adding brick and mortar to -- with regard to this cycle. We did put up the new facility in Zhangjiagang, China that is now running and running very well for us. And, that's a 600,000-foot manufacturing facility, for a total of about 800,000 square foot. And, that was really the brick and mortar investment of any magnitude that we saw that we were going to need in this cycle.

We cover the rest of the growth through our global sourcing with some selective outsourcing, with improved efficiency and productivity in the factories and additional personnel, additional shifts, and all of those things that you would expect. And, we have been meeting the demands, I think, quite well. It has, of course, been a challenge with the supply side. But again as I said in my comments that with our team, both in Crane Group as well as the global sourcing team. We have been able to scour the world for availability of materials and have been, I think, very successful in that effort. And, I expect us to continue to be successful while I still see that those challenges will be out there.

We believe that we're meeting our customers' needs and expectations. We're having a very solid opportunity at growing our volume, which you saw in this last quarter in the sales uptick in the chain side -- in the Crane side. And, I think maybe Glen can give you a little bit more on what's happening in the utilization and the industry in its entirety. But, I would tell you that we're seeing strength, as I said before, in all regions, in the Americas. We're also seeing strength in the energy sector from all parts of the world and the emerging countries.

So at that, Glen, if I could get you to maybe talk a little bit about the utilization rates?

Yes. Would -- really Seth, the -- when you get the utilization rates of our customers moved through the dealer channel, certainly in North America primarily, it's at actually all-time high. And obviously, with that happening and everything going to the end user that means the dealer inventories are quite low, so a little different than some other factors that are going on in the North America market right now.

So -- and the last comment I would make with respect to what you asked on the -- how much more can you do? It's not so much with the brick and mortar. It's really, if we're going to make capital investments, as Terry said, we would -- it's in machinery and [equipment]. That gives us better productivity that can -- taking a look at what's going to happen long term, we're in a cyclical business, and what do we need to do now to make sure that we can meet the upside and minimize the risk of the downside. So, that's really where we're headed with some of the things we're doing on capital investments.

Now, we have a question from Robert McCarthy from Baird.

Good morning, guys.

Good morning, Rob.

Hi, Rob.

Let me first ask you about your revised out for the Foodservice segment. As I recall, part of your album had specifically to do with new customer wins. So, I'm wondering if your -- now your expectations, you're not really going to see recovery there until mid '07. Is that a reflection of that didn't come through? Or, are we seeing a broad-based fall-off in the market? And related to that, your outlook for down margins in the fourth quarter is that strictly a function of volume and this question on price versus material costs? Or, are you including some restructuring or severance costs or anything like that in those numbers?

Well Rob, I'm going to let Carl handle the question on the margins. But, let me take on your question first off on the Foodservice outlook as far as the revenue side. We're still seeing a very good outlook in the ice machine side, and that has not changed. And, we've been running very well in that and growing market share on a regular basis in the ice machine with our innovative strategies and our expansion of the markets.

However, we have seen in the beverage side, a slowdown. We saw this occur about a year ago at this point in time. We thought by now, it would be starting to come back. However, it's being driven by a lack of, really, platform business with our -- within the bottling industry. And, the replacement business that we had last year is certainly not taking place this year.

Secondarily, we have not enjoyed I think the level of the C-store business that we received last year, nor do we expect that same as the year unfolds. We have a lot of optimism for some of the programs that are in place on the entire beverage side that we have talked about, with both our new products as well as with some of the platform business that we've talked about. But it is not going to take place as early as we had thought. We're now looking at being closer to mid next year as that begins to really ramp up. We're confident in that business. It's just not as strong as we predicted it to be at this point. But, it is coming and we'll be there, and we'll be ready with the right products when it happens.

Okay.

Carl, do you want to --?

Yes. And Rob, you may remember from earlier call -- an earlier call that we indicated that we expected to be able to gain back the margin erosion that we experienced, really because of the erosion in beverage that we saw in the first quarter. We had a talk there with some rollouts that we had in 2005.

Yes.

And, we guided that we would in fact, for the full year, to be able to make up in the second half of the year that which we lost in the first half. And really because of what Terry talked about, from an industry perspective from beverage, certainly the commodity headwind being strongest in the quarter. Some more of that probably in the fourth quarter, but really the continued softness there. And, we also mentioned some issues that we had just from sufficiency standpoint in just our refrigeration business that would -- that we indicated we have addressed, which won't continue to hurt us in the fourth quarter. But as far as any restructuring or severance, there really isn't any of that.

Okay. And then the -- my other question relates to the Crane business. If you're in the process of trying on an ongoing basis -- improve your production rates, in part, press your lead times, which are going out? Is it possible that contrary to sort of typical historical experience, that despite the reduced number of days in the fourth quarter, is it possible that we'll see Crane segment revenue actually go up compared with the third quarter?

Well, we did see that last year Rob, and I -- the -- just the -- where we are from a cycle standpoint plays into it. I think what's probably more likely is to see the same type of comparative from a fourth quarter to first quarter standpoint, which would typically be seasonally weaker than the second and third quarter, as we did last year, and I think is a more reasonable expectation.

I'm sorry. I don't understand how that addressed the fourth quarter. I missed that Carl.

That -- the comparative to the first quarter 2006 that we saw in 2005 would be similar in 2006, given that we were into the recovery and the cycle spin in the 2003 trough year and that the cyclical dynamics should be fairly similar from a -- cyclical and seasonal dynamics should be fairly similar in 2005 and 2006.

Okay, very good. Thank you.

And, we'll take our next question from Phil Gresh with JPMorgan.

Hey. Good afternoon, guys. First question here or questions on incremental margins, the first question is, looking at pricing relative to raw material costs, I think companies have been talking about the difficult comparisons for raw material costs relative to last year's third quarter, particularly for steel. But, your incremental margins look pretty similar to the second quarter when cost comparisons weren't as difficult. Now obviously, you've had some better utilization, but I'm just wondering if, is that a function of also achieving incrementally price realization this quarter to make up for that?

Yes. I would say that's -- pricing it is part of the manner in which we combat any kind of commodity movements. We have consistent increases in the category of steel for several quarters running that we utilize in the Crane business. And, we combat that with not only pricing, but also what we do on the supply chain initiatives as well as things that we can do from a product-engineering standpoint. And, all three of them have helped us in any kind of intermediate term that you would look at to make sure I'm on the right side of the margin equation.

But, nothing specifically different in the third quarter?

No.

Versus the second quarter? And then, my follow-up on the incremental margin is regarding a question that was asked on the last quarter's call about whether you would potentially get incremental margins up to 30%, which you said is feasible this cycle. So as I look at this quarter, you had 26% incremental margin in what is, typically, the seasonally weakest quarter. [inaudible] costs were arguably their most difficult comp for the year. The fact that these levels -- is there any reason why you wouldn't be able to at least maintain this -- the high 20% incremental margin level through '07?

I think I'd like to back away a little bit from the -- just based upon the growth and the mix in the business and the impacts that that mix can have. As I'm looking at this -- the reasonable timeframe in this current recovery, I don't know that we necessarily will be able to hit that 30% level. I think an expectation of where we've been running, given the robust growth that we've seen in the top line in the mid-teens maybe pushing into the high 20s is probably more likely.

Okay. So, you can maintain these levels into next year?

Yes.

Okay, thanks. Great Carl.

Thank you.

We'll go next to Charlie Rentschler from Wall Street Access.

Good morning, everybody. Coming at that -- at that margin question another way, you used to, I won't use the word guide because that's too strong, but you used to steer us to think at the peak that the Crane margins could be 12%. That was kind of the top, and yet in the last couple of quarters here, you've exceeded that. And, I wondered if you could give us your thinking on operating Crane margins going forward?

Well, we're not really prepared to guide from a granular standpoint. We typically -- for 2007. As you would probably recall, Charlie, the guidance on that targeted level margin for the Crane business was established at a point in time that we were generating a 3.5% operating margin in Crane. Obviously, a lot of time has passed and we've done a lot of things with the businesses that give us all the confidence in the world that we'll exceed that level. And I think implicit in our guidance this year, is that we'll probably -- if we don't achieve it this year, we're certainly going to be pretty close to it.

And so, it's -- the -- coming off of that level to the 12% level is -- was basically our expectation at next peak of cycle. What we've been saying lately, of course, is that we believe we're years, not months away or quarters away from the next peak cycle. And, you've seen the continuous improvement that we've been able to generate in the business, and you've heard all of the commentary that we have about the strength in the market that we're in.

So I would say, "Stay tuned." We expect to give some guidance early this year. We typically guide in the -- at year-end. Financials are complete in our year-end conference call this year. I know we're having the Investor Day in New York on the 28th of November, and we expect to be in a position through our business planning process of being able to guide for 2007 at that meeting.

Okay. And my follow-up, I guess, is to Glen. Glen, could you comment about what is happening to your market share, your three main product lines and then geographically, how you think you're doing?

We -- Charlie, first of all, if you take it on a worldwide basis, I think we continue to maintain our market shares on a worldwide basis. I would say that if you look at any of the independent regions where we have done well in the past, we continue to focus on those and maintain our market shares. There's new entrants into a lot of the product lines on a regular basis. We can choose our battles where we want to maintain or increase market shares. So I think overall, we're very satisfied where we're at.

On an individual region, I know we haven't given them out by product line or anything like that before, but I think the data that we get we use the ICE statistics for the multi-hydraulics. There are some new statistics coming out from AEM on the Crawler, and they still continue to give us satisfaction as to the direction we're headed. And, I think with that said, we certainly follow every region in order. We break it down a lot of times in 13 major regions, but then we have country-specific data, and we're satisfied where we're at today and think where we will be still at the end of the year.

Charlie, if I could just add to that, Crane Group has launched 16 new products this year. We have -- we're positioned globally. We have a global reach that I think Manitowoc Company has never had. Then, we surround that all with CraneCARE. All of these are being -- are in a position to actually grow our base of business throughout the world with cranes. And I think it's -- I think it has been very effective, and we have more new products on the drawing board that we will be bringing out at BOMA next spring. So, I'm very pleased with the effort that the Crane Group is doing to grow their business as well as grow their market share and sustain in other areas.

Okay. And just a brief [brief] question. Can you tell us how you're doing at Home Depot with this machine, the roll-out for the Chinese ice machine?

Well, we never talk about specific customers. What I will tell us is, is that we have a multi-faceted approach with the residential ice machine. To this point in time the residential ice machine has met our expectations. But again, this is still in the early stages. We are looking at several avenues, whether it's big-box, private-label or through our own distribution. And in all of those -- in all of those areas, we are still in the very early stages of this product offering.

Thank you.

Our next question today comes from Kent Green from Boston American Asset Management.

Yes, great quarter fellas.

Thank you.

My question pertains to, say, incremental pricing now that you're backlog is -- has moved up quite a bit. How do you set the pricing? Or, how long will you take that backlog before you may not want to accept in the backlog just because you don't want to set the pricing?

Kent, I'll -- this is Glen. If I understood your question correctly, it's -- we're low at the pricing, given where the backlog is. There's a certain point in time -- we can -- the question, the part that was on market shares, you pick and choose again your battles, I think, on the pricing. We have to look at what we think our commodity costs are and where our costs are going. We look and see, what is a relative comparison to our competitors. Obviously, the market is going to set the price, and if we price ourselves out of that market, it's not going to matter what our backlog is. That will obviously shrink. So, I think it's really -- the economics are driving a lot of what we're doing.

We feel that there's a value to our product. And, I don't necessarily need to be the cheapest person on the block. We have a lot of things that we offer with our products. Terry talked about CraneCARE and everything else. And, our whole sales pitch to anybody that buys our products is really the cost of ownership over the lifetime of the crane. And, I think if you go not only to looking at what the prices are going to be for 2007 on [products], I think you need to also look at what the 2007 pricing, or 2006 unused prices right now, and you can see that the used prices are very strong in the market right now.

I'll grant you, some of it because the backlogs are extended. But at the same time, when you look at it model by model, vendor by vendor, we show very well in that whole economic picture. So again, the market's going to set the price. We have to be very careful with that. And at the same time, if we can't move prices, obviously we have to move other parts of the equation, which are the cost parts and manage that effectively. So again, it's really finding out where the election point is with the market with our products.

The follow-up question's about the new China facility for cranes. As you discussed earlier you expected a ramp-up on that product was with March as not being up to the rest of the company, obviously, as the start-up expenses.

And obviously, I think that there would be more direct sales instead of dealership sales over there to -- it may even be the Chinese government, I'm not sure, or specific companies. How will you say the margins of that particular operation or the differences in the profitability or the return on capital, how would you view that product on the short term or the long term as say, a return on capital versus the rest of your facilities?

Well, Kent, we've been very pleased with the ramp up of that facility. Obviously, we saw capacity restraint there and that is the reason we expended the resources to build the facility. We don't provide specific margin guidance on individual operations but as you can imagine given the fact that we did build capacity, there would be some erosion from the overall segment margin level, given the available capacity as well as the start-up issues that you expressed.

I would tell you that from a return on invested capital standpoint, that project was extremely compelling and it has met of our -- certainly met our expectations. And we're expecting that it will exceed our expectations as we continue to bring in product in that facility.

Will the sales over there be board direct instead of through dealerships? Or almost 100% direct or with dealerships be established.

No, Kent it's, mostly -- when it's within China itself most of that does go in fact direct but then, you have to remember there's outside of Asia or rest of Asia to Korea to Hong Kong, to Australia and everyplace else, and that's where some dealerships are set up. So, it's again market-specific but as you mentioned in China directly, or specifically, most of that is direct but then when we get outside Asia, it's a mixture of both.

Our next question today comes from [Shatar Minco].

My question has been answered, thanks.

Okay.

And we have a follow-up question from Seth Weber from Bank of America.

Thanks, just a quick question on the fourth quarter, I think what people are trying to get at -- are there any, holiday issues or production days going down or anything that would suggest that you just can't get volumes out in the fourth quarter that we saw in the third quarter?

Seth there's a little bit of that, I think if you think of the third quarter, we do have our -- the holidays in Europe but that's maintained in Europe and we're doing a better job at trying to minimize the impact in the third quarter, what happens there. But in the fourth quarter you start with holidays which are on worldwide basis and so you take the number of work days and it does get pretty substantial. I know people don't want to hear this, but there is a very big holiday in the Americas when it comes to our two factories in Manitowoc and Shady Grove which is deer season and that does impact the output in the month of November at Shady Grove. And it does impact, to a lesser extent, to Manitowoc, but we do have floating holidays that we use during those periods.

Okay, thank you. And Carl, just real quick. Is there any tax rate we should think about for the fourth quarter? It's jumped around a little bit here in the third quarter.

Implicit in the guidance is a 31%.

31 for the fourth quarter or for the year?

For the fourth quarter as well as the year.

Okay. Thank you.

We have another follow up question from Robert McCarthy from Baird.

Glen, I wonder if I can get you to talk a little bit about supplier issues and potential constraints. Early in 2006 when you guys were trying to make a guess as to where the crane businesses go this year. There was talk about being able to get volume up in the decent teens kind of number if supplier constraints didn't hamper growth. Well now it looks like you going to do well better than 25% volume growth for the year. I guess that says you have been able to overcome constraints, but since the issue exists, do we need to worry about that as the constraint going forward?

Rob, this is Terry, I'm going to let Glen get into some more specifics on this but I -- in my commentary, I did reference the fact that a tremendous amount of effort on our part from both our global sourcing efforts where we leverage the entire spend of the entire corporation worldwide coupled with specific Crane group procurement efforts have allowed us to be successful in the challenges. There are -- the challenges have been many. We have been able to use our global footprint to be able to overcome those challenges. I expect as going forward those challenges will be equally daunting but will also be met with the kind of format and program that we have been able to utilize so effectively over this year. That we really put in place back in 2004, in trying to deal with the steel prices.

So, I do not want to minimize that it's an issue. But I feel very confident in our position and in our team and how we go about addressing this effort. But Glen maybe you can give a little bit more color on that.

Well I think Rob, the challenge for us at any point in time is to try to identify or forecast what those supplier constraints are going to be and if it's simply a commodity component, it's looking at -- working with our current suppliers, trying to find additional suppliers. But one of the things that always comes about is that, for us, in some of the engineered products we have, qualifying new suppliers and that type of thing takes time.

So you're using -- you're coming out with new products, you're asking the engineers for their resources. It does become difficult, but when it happens as we try to put everything in the pipeline, we did say that there were some constraints at the end of last year. That if we got through them we could do a little bit better. I think we say the same thing for 2007 but it's a different pipeline of events, there's sub-contract-issues there. Where do we want to do some of these things? We just talked about the China factory, how could we get out more there? It's really every day, it's looking at what the efficiencies and the productivity are at the plant and find out different ways to move things around the world where, where we're good at what we do and find those opportunities that might be a bottleneck at a different factory.

Again, one of our strategies is to move more of our production into where the customers are asking for where the customer actually is. So we continue to do that and it's an ever-changing thing. And then with the new people we've put in our production, our VPs of production in the different regions they've done a nice job of -- I'd -- with lean initiatives and everything else that we just continue to focus on it every day.

Going back to one of the other things we talked about earlier is trying to0 do it without all new brick and mortar.

[OPERATOR INSTRUCTIONS] We'll go next to Kent Green from Boston American Asset Management, another follow up question.

Yes, CraneCARE, was it a significant cost to put up the new call centers in the third quarter and -- or will that continue into the fourth quarter?

Kent, cost from a capital standpoint nothing different I think than what Carl has forecast for the whole year. If there are any startup costs or whatnot to the P&L it -- really those are all coming in the fourth quarter. But anything but the hit to the P&L from a startup basis is minimal. Insignificant.

Thank you.

Our next question is from [Roy Johnston] of Oppenheimer Capital.

Hi, gentlemen. My question has to do with cash flow. You are kind of building a pretty decent amount of cash on the balance sheet and I was just curious what you intend to do with it.

Well you certainly saw that deduction we've been able to do for leverage spikes that we incurred when we invested in the Crane business in the early 2000's. We've done a great job of de-leveraging. We took a swipe out of the debt level with the Euro extinguishment that we did in the second quarter because that's when those notes came up through the non-call period.

We have the 2002 notes which come up at the non-call period in August of 2007, would certainly be one potential use of funds. And as you know we have an acquisition strategy that includes external investments. You know we view both Cranes and Food Service as growth segments for us and we've got strategic aims that could potentially be satisfied through acquisition.

Would you consider a share repurchase?

We've done share repurchases in the past, before we did the Crane acquisitions we had a repurchase program that we did do. So it would be something that if that type of thing made sense, given all of the strategic opportunities that were available to us --. At this point we still have some coupon debt that would be our primary focus.

And it looks like we have time for one more question and that will come from Robert McCarthy from Baird.

I'm sorry I just wanted to finish my dialog with Glen about suppliers. The thing I was going to ask Glen was whether our issue really primarily still centers around casting and bearings or are there any other elements, other supply categories that could become a bigger issue?

Kent -- Rob. I'm sorry, Rob. Yes, the castings and then the bearing are still an item that we focus on regular basis. That has been a --.

An ongoing battle?

Yes, an ongoing battle of current constraint, but I think we have some pretty good things in place to get through that, certainly in the near term and hopefully looking at some things in the long term. But I think it's not so much, Rob, the ones that we have identified and we're ongoing with. I'm more concerned about things that we don't have yet that is going to be the next go-round and I'm not saying there's constraints or anything like that but all of a sudden let's talk about maintenance, it's engines or axles or I'm not sure what it's going to be. But it's the one I don't have that I need to continue to watch that -- the ones we don't have action plans in place for already. Those are the ones obviously that keep me up at night because I feel good about the plans we have in place of things we have already identified.

Thanks, Glen. That's helpful.

And that does conclude our question-and-answer session today. Gentlemen, I'll turn the conference back over to you.

Before we conclude today's call I'd like to make three brief announcements. The first announcement is that Manitowoc will issue its fourth quarter earnings after the market closes on January 30th and will host its usual conference call with the investment community at 10 o'clock EST January 31, 2007.

The second announcement, is a reminder that Manitowoc will host an Analysts Day in New York on November 28, 2006. Management presentations for this event will be webcast and will be available on the Investors Relations section of our website.

Lastly I'd like to remind everyone that a replay of our call will be available beginning at 1 p.m. EST today until 1:00 am EST on November 1, 2006. The number to dial for the replay is (719) 457-0820. Please use confirmation code 1041978. 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 our conference call today. Thank you all for your participation.