Manitowoc Company Inc (MTW) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the Manitowoc Company first quarter earnings conference call.

At this time for opening remarks and introductions I would like to turn the call over to Steve Khail.

Good morning everyone and thank you for joining Manitowoc's first quarter earnings conference call. Participating in today's call will be Glen Tellock, our Chairman, President and Chief Executive Officer, and Carl Laurino, Senior Vice President and Chief Financial Officer. Carl will lead off today's call with a review of our financial condition and first quarter results. Following the financial review, Glen will give you his outlook for the business. Because of the need to take more time this quarter to discuss financial matters, we will depart from normal practice and not have formal remarks by our segment Presidents.

However, Eric Etchart, President of Manitowoc Cranes and Mike Kachmer, President of Manitowoc Foodservice, are also here with us and will be available for our question and answer session. For anyone who is not able to stay on the line for today's entire call, a replay will be available beginning at 12 noon central time today until 12 midnight on May 8. The number is area code 719-457-0820. Please use confirmation code 4627780. You may also access an archived version of our call at www.manitowoc.com. Before Carl begins, I would like to review our Safe Harbor statement. This call is taking place on May 1, 2009.

During the course of today's call our remarks will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements 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 which are also available on our website. The Company does not take any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or other circumstances. With that I'll now turn the call over to Carl.

Thanks, Steve. And good morning, everyone. Last night we reported net sales of $1.03 billion, an increase of 4% from $989 million in the first quarter of 2008. The increase is due primarily to the acquisition of Enodis in October. Net of acquisitions and the marine business sales declined approximately 24% from the first quarter of 2008 to $745 million. The year-over-year decline in financial results was driven by one of the sharpest decline in crane demand in our history and by constraints in global credit availability. The Company operating earnings before special charges declined by approximately 53% to $63 million from $133 million in the prior year's quarter.

There were a number of components contributing to this result including a decline of $78 million in the crane segment an increase of $15 million in the foodservice segment, and the impact of restructuring integration and higher amortization expenses. On a GAAP basis, we had a net loss of $656 million or $5.04 per share compared with $103 million or $0.78 per diluted share in 2008. Obviously, this decline was due mainly to the $700 million impairment charges. As you know, we have acquired a number of companies in recent years including Enodis that have generated goodwill on our books. GAAP accounting rules require us to test these assets. Based on our analysis we recognized the write-down in the foodservice segment of $700 million in the quarter out of a total of $2.9 billion of goodwill and other intangibles.

In addition, due to the price that we are receiving for the sale of the Enodis ice machine business, we recognized the previously announced $29 million impairment charge in discontinued operations in the first quarter. These are all non-cash expense that is do not affect covenants or our liquidity metrics. The quarter's results also include accruals for severance cost related to the actions we are taking across the enterprise to reduce cost and increase efficiency. Reductions have been made at every major manufacturing facility worldwide. This resulted in expenses booked during the quarter to reduce and redistribute our global crane production, as well as to integrate the Enodis acquisition. Excluding the asset write-down as well as the accruals for restructuring, severance cost and the integration adjusted earnings per diluted share were $0.18 compared with adjusted earnings of $0.72 per share in the first quarter of 2008.

Looking at our segment results, crane segment sales for the quarter declined 24% to $673 million from $884 million in 2008. Operating earnings were $57 million, down 58% from $135 million in the first quarter of 2008. This resulted in crane segment operating margins of 8.4% versus 15.2% in the first quarter last year. Since we are operating at full capacity in the first quarter of 2008, the Q1, 2009 sales decline had a significant impact on margins. Lost absorption coupled with unfavorable year-over-year cost of materials as well as pricing pressure in product mix all contributed to the severe operating margin decline. This impact was offset by a year-over-year $23 million reduction in SG&A which equated to a 60 basis points drop despite the sales decline. Low commodity prices have been coming down.

During the first quarter we were still working primarily from raw materials purchased at higher prices. We do expect to see a benefit from lower commodity prices especially during the second half of this year. We expect crane sales to continue to decline throughout 2009 which will put further pressure on segment margins and operating earnings. However, we continue to expect to outperform margins in the last downturn due to our global manufacturing base, broader product line as well as cost savings and restructuring initiatives. Crane backlog as of March 31 was $1.4 billion down from $1.9 billion. The backlog declined for the third consecutive quarter. However, the net negative order driven by backlog cancellations have stabilized to net positive orders. There are some pockets of stability on the heavy left side of our product line most notably in China and in South America which are up over the prior year. However, in most products and regions demand continues to be soft.

Moving to the foodservice segment. Sales increased to $355 million from $104 million in the first quarter of 2008. This excludes the Enodis ice business that is being sold and is categorized as discontinued operations. Excluding Enodis, foodservice revenue on a same store service for the quarter was $81 million down about 22% from the prior year period. This has been driven by a contraction in capital spending in the industry that has now lasted. On a pro forma basis for the continuing foodservice operations currency adjusted sales declined a more modest 15%. Operating earnings excluding the special items were $28 million compared with $12.3 million in the first quarter of 2008. This resulted in foodservice segment operating margins of 7.7% versus 11.9% in 2008.

Moving on to cash flow. We did have negative cash from operations in the quarter due to a settlement of a previously disclosed legacy Enodis legal matter that is now fully resolved. The negative impact on cash from this resolution was $58 million in the first quarter and the final payment of $14 million will be paid in the second quarter of this year. Excluding the cash out flow for the one time legal settlement we generated $41 million in cash from operations, the best first quarter cash flow in the history of the company. For the full year we still expect to generate significant cash flow from our operations and we are focused on debt reductions.

Overall, we have reduced our capital spending by approximately $50 million in 2009, which is down 40% from 2008. And we generated revenue and expense energies of nearly $30 million with more progress expected in the second quarter. Maximizing cash flow is our number one focus and priority given the speed and magnitude of the downturn in cranes, we have opportunities to reduce working capital. The most significant portion of this opportunity is inventory management. While we have made significant progress in raw material and work in process efficiencies the high rate of order cancellation has thus far constraint progress in finished good inventory reduction.

We also have a very manageable distribution of maturities which are several years out. The first is our term loan which matures in April of 2010. Proceeds of approximately $150 million from the sale of the Enodis ice business which will close later this month will leave a balance of approximately $30 million on this loan. It will be paid in full in the second of half 2009 with cash from operations. The next maturity is 2013. As we have previously disclosed, we set a debt reduction of $700 million for 2009. The lower expected price for the sale of the Enodis ice business which we disclosed in March 30, coupled with the significant decline in crane demand has made that goal a significant stretch. Although we have not lost site of our $700 million debt reduction we expect minimum debt reduction to be $450 million in 2009.

We have also previously disclosed that the lower price for the Enodis ice machine business combined with the substantial decline in Manitowoc's sales due to the global recession has made it likely that we'll need to renegotiate certain debt covenants by mid-year. We have been discussing this issue and have had informal update meetings with multiple members of our bank group. We are preparing to embark on a formal request in the very near future and we anticipate that a revised and mutually agreeable amendment with the covenant relief would be completed during the second quarter.

I would characterize the tone of the informal discussions we have had thus far as cooperative and reflective of the fact that in light of the global slowdown of our 180 companies they have obtained amendments to their credit agreements since the beginning of the year. Our request will certainly not be unique. As of the end of the quarter our total debt was 3.7 times compared to the current requirement of 4 times and our interest covenant was 7 times compared to the current requirement of 2.5 times. Trailing 12 month EBITDA calculated for compliance purposes was $740 million. We do continue to have substantial liquidity available for working capital and other operational needs. This includes more than $156 million of cash and investments as well as nearly $350 million available on our bank lines of credit.

Looking ahead to the rest of 2009, as previously announced, we are suspending specific earnings guidance. Generally we expect crane sales to be worse than the 20% decline we previously expected. We expect foodservice revenues to be seasonally higher in the second and third quarters than they were in the first quarter this year as it's typical in our business. We will continue to update underlying trends of our business as they materialize. I will now turn the call over to Glen for his prepared remarks prior to our Q&A. Glen?

Thanks Carl for that update and good morning everyone. Obviously we continue to face a very difficult economic environment at a time when we have a significant level of debt, but we have acted early to deal with the global recession. So what I would like to do today is to outline some of the steps we are taking to address these challenges. However, I want to be clear that these initiatives are intended to improve our long-term competitiveness and financial strength. They are not short-term fixes.

The reputation of Manitowoc in our industry leading brand are key drivers of our long-term growth and it is our responsibility to strengthen our brands and reputation especially in difficult times. That is what customers remember and that is what guides our decision as we manage through the recession. We have taken swift and aggressive steps to reduce costs and improve the efficiency of our production in every area of our business. This includes staff reductions and related employee costs including salary freezes as well as reductions in other SG&A expenses. Of course this has been tempered somewhat by our desire to maintain what we have throughout the business. This core team would be essential to future growth when the economy begins to recover.

We have made permanent cost structure changes to manufacturing and supply chain costs such as realigning and redeploying certain manufacturing operations. Overall, we have reduced our cost structure by approximately $200 million in the crane segment, $60 million in the foodservice segment and $10 million in corporate expense. We will continue to implement other opportunities that will make us stronger coming out of the downturn. This includes investing in new product development and production efficiencies while leveraging our industry leading after market support. We are confident that this is the right approach. Both of our business segments focus on core areas of the world's economy that are certain to grow over the long term.

Our cranes are an essential tool of economic growth during the heavy lifting that practices and delivers energy and other vital resources to developed countries as well as emerging markets. Our customers are intently focused on doing more and we continue to introduce new products that will improve productivity and expand capabilities while delivering the best possible end results. Last week we demonstrated four new products at the trade show in Paris.

One of the highlights was CraneSTAR, which uses state-of-the-art communication technology to monitor a crane's location and provide operational and performance data for fleet management, system diagnostic and ongoing maintenance anywhere in the world. Financing innovation, of course is equally important. These customers rely on us to stay ahead of consumer trend. They rely on us to support and enable their changes as well as to make their operations more efficient, faster and safer.

Foodservice is a huge global market, supplied by mostly equipment manufacturers. We continue to see substantial opportunities to lead this worldwide market by capitalizing on economies of scale unavailable to most of our competitors. And the Enodis acquisition is already enabling these scale pursuits. Integration of Enodis is proceeding ahead of plan which demonstrates great execution during a difficult business environment. You witnessed our success resulting from product line expansions, the ability to integrate acquisitions, and the globalization of our crane business. The Enodis acquisition is a continuation of that proven strategy for our foodservice business.

We have now lined our enterprise into two segments, and we will continue to execute our strategy to be the global leaders in both of them. In fact, the Enodis acquisition is already working as planned and it is providing greater stability at a time when demand has dropped significantly, and it has expanded our global manufacturing capabilities with procurement and distribution networks. This is exactly what it was intended to do. We expect this strategy to continue to generate sustainable growth and to deliver value to our shareholders. So looking ahead I'd like to briefly outline the near term business objectives that we have set for ourselves.

First, as Carl discussed, we are working aggressively to generate cash and reduce debt. This objective is top priority across the company. Second, we are aggressively integrating the Enodis business and remain on target to deliver $29 million in synergies in 2009. We are now finalizing plans to realize a total of $77 million of synergies in 2010, which includes the annual run rate of $45 million from 2009.

Third, we are taking many significant actions to drive operational excellence within the crane segment. This includes adjusting production and capacity around the world to reduce our cost structure and accelerate innovation. The recession provides the opportunity to introduce many of these changes without impacting customer delivery. Manitowoc is a strong company with substantial resources. Industry leading innovative products, state-of-the-art technology, unparalleled after market service and support, plus highly motivated employees. We will continue to drive innovation in the crane and foodservice industries. Thank you. We will now take questions.

Thank you. (Operator instructions) Our first question comes from Meredith Taylor with Barclays Capital. Please go ahead.

Good morning. I wonder if you can talk a little bit about the crane orders. Clearly you talked about positive swing in net orders. Can you talk a little bit about what the growth orders might have been, how much the swing cancellations were, the factor there and maybe if you can talk a little bit about what you are seeing on the end market by end market basis and the expectation going forward?

I have one question. Did you say what we've seen in the growth orders?

In the gross orders. Sorry. Taking gross orders as opposed to net which includes cancellations.

The gross orders for us in the quarter were $115 million.

Okay. And then how would this compare to the last few quarters? I realize that cancellations were a big swing factor last quarter.

It's pretty comparable. What you are seeing, when we talk about the stabilization of it, the net is, the cancellations in the November, December time frame and actually in the January and February, when you look at some of it, I would put a little bit in the early part of this year, the North American dealer network, they had the opportunity to confirm their orders and that was late in the quarter. So I think when you see that, it's actually encouraging, certainly not good, but I think it's encouraging to get to that net positive out flow.

Okay. And then just any color on the end market by end market basis?

Well, I think, if you look at the product lines by themselves, the power cranes are the hardest hit. And that's the three biggest markets there, France, Spain, Italy. There's a high end on all the products on large tour cranes, the large all terrain cranes, continue to hold pretty well, and as we talked about in Carl's comments, you are seeing some positive signs coming out of China with some of their stimulus packages they have had and I think you are seeing a little bit in South America. That is the two private spots you see around the world. But other than that, it's similar to the rest of the product lines.

Got it. And then just Arizona follow up, if you can help us think about the cranes going forward. The $200 million of cost savings that you talked about, if you can talk about the timing when you expect to see that and maybe talk a little bit about the pricing pressure you saw in the first quarter and how you anticipate the efforts to work through the inventory of finished goods that you have in cranes could impact the business over the balance of the year.

Well, I think when you look at it again this is very similar to 2002 and 2003. When you look at the finished goods inventory, that is a timing impact. Some people are canceling orders. But if the credit becomes back, the beauty you have, the projects are still out there. I will give an example of that and that is why it's so hard to give any guidance and we don't want to do it because the timing of some of the things we are doing. The first quarter had some benefits of the actions we've taken already Meredith and so it's the impact we have quarter-by-quarter. In the Middle East, look at some of the recent developments you've had from a political standpoint where we are going to pay for finishing some of the projects that already started doesn't do much more for new shipments but does things for the parts ordered. So what is it going to do to generate cash for our business. That is one of the reasons to stay away from the guidance outlook and also look at the impact of the changes we are making. But, I would tell you if you go back a couple of years when we were making some of these investments in our areas of crane and even foodservice, the acquisition of Enodis, it was to take advantage of the next time we had a slowdown as we do right now to emerge from this and make some of the changes you wouldn't necessarily make when you are running at 100% capacity.

Our next question comes from Henry Kim with UBS.

Good morning guys.

Good morning.

I wonder if you can talk a little bit about pricing discipline in the market today, how you see that, if there's anybody chasing, and maybe a little bit about what you are seeing in the use market and the fast pressuring.

I'll let Eric talk to that a little bit.

Well, we've seen some in the marketplace, but I should say we have seen a certain degree of discipline being maintained by the primary competition. Obviously the used crane markets, because used cranes are becoming more and more available, but overall we have not seen anything substantial or any unusual terms by the primary competition.

Henry, I would add to that when you look at some of the used pricing, even 12 to 18 months ago whether you looked at auctions or just what was being sold, some people were paying some very high prices just because of availability. They needed the cranes so that drove pricing up. I think the used crane prices while they have fallen because of that, there's still relatively decent prices when you go back to historical levels.

That's fair. Is it possible also to talk a little about the impact of the global recession on the financial health of your dealer network and your customers?

Yes. We can. I think that's certainly a concern anytime this happens. When you look at it regionally, again we just had the trade show in Paris, and I think that's a question that was asked quite a bit. I think we feel pretty comfortable with what is happening in Europe. When you look at -- again it seems long ago, but personally it wasn't that long ago 2002 and 2003. You had a shake out of many of those customers that thought this was a place to be and they are no longer in this business. So you have a much healthier customer base because of what happened in 2002 and 2003. When you look at our dealer base in in North America, I think it's pretty solid. I feel very good about it so when we go about the rest of the world, when customers need financing, we can use Manitowoc finance or they can use credit that they have available to them, but that number of financing alternatives is smaller and smaller, so that is more of a concern than just the customer themselves.

That's helpful. Thanks a lot.

Our next question comes from Charlie Brady with BMO Capital Markets.

Thanks. Good morning, guys.

Hi Charlie.

With respect to the crane segment margins, can you give us the impact in the Q1 the raw materials? You said you are still working through some of that higher cost raw material which ought to get a little bit better as we go forward. But what is the margin impact that we are seeing in Q1 that might mitigate somewhat going forward?

It was probably in the order of 2% hit to the margin just from materials in the first quarter.

You expect that to steadily improve through 2009 or how does that work out? It's more of a back half?

It's more of a back half because you do have the existing inventory that has a fairly long tail on it at this point in time and back to the higher cost period. So it's mostly a second half benefit.

Okay. Can you talk a little bit about cancellations? There were some cancellations in the quarter, yes?

Yes.

Can you get some granularity where those are coming from or what you think is driving some of those cancellations? Is it customers having financing troubles? Is it their projects been pushed out? What are the underlying drivers on some of those cancellations?

I think you answered your own question. It's both of those. I would say it's not as much in the tower crane any more. I think those have washed themselves through. In the current quarter, it was probably -- I would say generally on the AT side of the business more than anything else, but not significantly different. But it is the financing. Some people get it and all of a sudden the financing they had is no longer available to them just because of the bank availability and the bank credit themselves not because of the customer. And that's one of the things that we are trying to push through. If you think about it on the mobile hydraulic side, it doesn't necessarily have to be project specific because the thing is on wheels. We need people putting on their inventories. They are investing in their fleet. That's what we are trying to help out whether it's Manitowoc Finance or anybody else. But I would say financing and some of the bigger projects that are being pushed out but again a little bit different than what we did see in 2002 and 2003. There are projects out there. It's just a matter of when do people want to start spending money on them.

Thanks.

Our next question comes from Charlie Rentschler with Wall Street Access.

Good morning. My focus is entirely on the balance sheet. You said in your comments I think Glen or maybe Carl, but $700 million of debt reduction would be a significant stretch but you thought you could do at least $450 million of debt reduction. What is your goal here for debt reduction?

Well, my goal is $700, and I put that out there Charlie because it is a stated goal that we said at the beginning of the year, and it's certainly, if it's not my top objective, it is one of the top two and I don't want our people to lose site of that on a revised objective. We are very comfortable. You have to remember we thought we would have a different price on the sale of the Enodis assets, the ice assets and when we put the $700 million out there we didn't think the crane market, again we forecast a 20% decline in crane and it's a different number than that. So I think it's a matter of how do we adjust accordingly and what are some other things that we have opportunities that we didn't necessarily look at at the beginning of the year that might make up for some of those shortfalls. So I think we are very comfortable saying it's $450 million. I can tell you that we still have that stretch of $700 million. So I want to do everything I can to chip away at that number.

Well, it seems to me the most (inaudible) number certainly in the asset class is inventories and you obviously could not make a lot of headway in the first quarter. I'm sure you tried mightily, but can you give us your thoughts on when you think you can drive inventory by the end of the year from the 916 at the end of March?

One comment to that, Charlie, I think it's fair to say that it's difficult to make as much headway as you'd like to given the speed and magnitude of some of the cancellations on finished goods. But as it relates to some of the cost savings measures that we have taken and essentially taken the opportunity or the need if you will to rationalize the manufacturing base and lower our cost structure. That goes to what we are doing from an inventory management standpoint that affects the raw material that's brought into the facilities, as well as the work in process that is utilized. Those metrics have certainly improved. Every bit as strong as we expected them to be and the finished goods part of that is one that, takes you a little bit of time to try to reconfigure some of those finished goods for new customer names in order to achieve some of the reductions on that front.

But do you think you can get $250 million out of inventory by December 31?

Well, again in keeping with the forward, the guidance issue, we are putting the minimum of $450 million out there as a way for people to make a determination as to how much of that might come from cash from profits and how much would come from inventory. But I can tell you a significant part is going to come out of working capital and the biggest part of that being inventory reduction.

And one more comment or question about working capital. Are your suppliers pretty well working with you on the accounts payable aspect of things?

I would say relatively yes. There are some new things in Europe. They've passed some laws that are a little different on timing of paying suppliers, customers, vice versa, but I think for the most part our people have a pretty good relationship with most of the suppliers.

You certainly have to, obviously cash is king for everyone these days and those are individual discussions that are taking place with the suppliers, and I think to Glen's point it needs to be remembered on all fronts that it's a relationship and that relationship has got to work for both sides, and I would say overall as it relates to those relationships and what it means from a working capital metric standpoint, that we'll stay relatively even as far as the working capital dynamic, or the pay trade payable dynamic of working capital.

And one last thing. The $350 million bank line of credit, there are no strings attached to that where that can be a pulled back? You have access to that? That is something you can count on?

Yes.

Okay. Thank you.

Our next question comes from Matt McConnell with Robert Baird.

Good morning. Glen, you mentioned other opportunities that weren't included in the outlook before that could help you reach the $750 million debt reduction target. Would that be other asset divestitures beyond Scotsman or is there something else that is being considered now that wasn't before?

Well, yes. First would be just what we talked about, finished goods. When you have one number that you are out there versus the sale of cranes, yes, that's certainly one. You take a look at other assets that you have on your balance sheet and what can be monetized, whether it's a piece of property we got with Enodis, that's just land that was being held for whatever and we look at land that we have with the legacy Manitowoc businesses. It's all those types of things that now that we are in a different period than we were before you take a harder look at and those are the opportunities that may not have been in the $700 million number originally and as I would say is the other divestitures. We don't talk about those things but you certainly have to look at if they come along.

Thanks. That's helpful. Of the $260 million cost reduction so far, do you have a target for what that could reach by the end of the year or --

Actually Matt that $260 million is as of the actions that we have taken right now. That is the annual run rate for -- $260 million between foodservice, cranes and corporate. That is the annual run rate and that translates to about $205 million realized in 2009 just to clarify.

Are there additional actions that are being contemplated that would take the run rate above $260 million?

Every day.

Is there any kind of target there?

No. I think the target is when we look at our operating margins and we look at what we are doing in foodservice, you look at cranes, basically when you look at the last troughs in cranes, we said we certainly, we've made long term commitments and we would exceed any of the margins from the prior troughs and that's the goal.

Okay. Thank you very much.

Our next question comes from Alexander Blanton with Ingalls & Snyder.

On the raw material cost, they've come down quite a bit. You haven't been able to pass that along to profits so far. Do you expect them to go down further as time goes on?

Well, I think you have different areas of opportunity. I don't want to speculate on some of the commodities of copper or steel or some of those type things, but I think there's always opportunity within our cost to be driving in this type of a market. And maybe it's not so much the commodities but let's say it's logistics or we've consolidated some of our crane care after market parts. Those will come into play later in the year. So there's always opportunity. I would always expect our cost to come down.

I'm not just speaking of costs, I'm talking about the steel cost for example which have been reduced but you are still delivering higher cost steel.

If you go back to -- right now if you look at the steel prices in some of the products that we've purchased, it's no lower than it was at the beginning, right now it's no lower than what it was in the beginning of 2008. So you have a huge ramp-up in 2008 which we couldn't pass along some of that, so we are trying to work through that. You couldn't pass on to pricing, so we are working on that. So I think there's opportunities in this environment and I also think if we look out I would say two or three years, there are other suppliers that may come online so let's use steel as an example, since you bring it up, there will be more suppliers as we look around to low cost countries longer term. So where it goes from today? Perhaps. You read all about U.S. steel and some of these others that are in very difficult times. It depends how long this lasts.

Well, I guess what I'm trying to get at is you mentioned that at the moment you would get a 2% benefit on margins if you were able to use the current price of raw materials as your cost, but you can't because you paid more for what you are delivering. What I'm saying is between now and let's say the end of this year, do you expect those raw material prices that are currently in vogue to be lower so you can get an additional amount beyond the 2%?

Yes.

How much do you think? Can you actually take all that in into your profits or how are your contracts written? Do you have to pass along some savings or not?

Well, we didn't pass along the upside in the middle of the year last year.

Yes.

That costs were rising we could not pass along any additional increases to customers. So if they just come down to last year's level. We get a benefit from there and that's where Carl is talking about the 2%. If it comes down even further than that, you are going to start seeing in the back half of 2009 and first part of 2010. Because pricing has stabilized and we've worked with our customers as best we can but obviously pricing is very difficult in this environment.

Okay. Thank you.

Yes.

Just to clarify on that also, the issue with the higher cost is partly because of the ramp-up that Glen described, it's partly because of the overhang in the inventory that we have that we have to distinguish to get to from that higher cost level, the accounting treatment of the inventory. It's not really driven by the fact that we have long term contracts with suppliers that we are still honoring.

Okay. Thank you.

Our next question comes from Barry Haimes with Sage Asset Management.

Good morning. I wonder if you can give us a little more color on what is going on in the crane rental tal channels in the U.S. first in terms of their ordering pattern, but also just in terms of used crane pricing and rental rates that we might be seeing. A lot of times that's indicative of the sense of the market. Thank you.

Go ahead, Eric.

Well, obviously since the beginning of the financial crisis you've seen the rent rates going down in the U.S. and you've seen especially in the low end market, the 30 ton and 50 ton cranes, you see, of course, dropping we follow that and track this but the average utilization was about 90% and it's fair to say in the low end that capacity is probably around the 60%, 65% right now. So consequently the used crane market in that segment on the low capacity, that pricing is going down. In terms of rental rates, the high end, high capacity cranes, the pricing are holding well and we expect that it should continue because the utilization rates on the high capacity cranes is still pretty good for our North American dealers.

Thank you.

(Operator instructions) Our next question comes from Barry Henry with Siemen Financial Services.

Good morning gentlemen. One clarification to the extent you can with regard to the crane segment and order cancellations given Glen your affirmation, reaffirmation essentially that the infrastructure needs particularly in developing countries have not gone away. Those projects have been tabled temporarily rather than disappearing necessarily, but your sense of the proportion of cancellations that you've seen in the last several months that are really deferrals. I'm not looking for specific percentage per se, but if you can give us perspective on the reality that a fair portion of those orders you think will re-emerge whether it be late 2009 or early 2010, or indeed do you see them as cancellations that need to be completely replaced?

That's the million dollar question, and I wish I had a good answer for you, but from where we are sitting in the seat we are at, I think we are looking at them as basically cancellations.

Okay.

I think -- again I want to go back to what I said. If there was financing availability from the credit markets, many of these people would be able to take some of this equipment and they would sit on it. That's the customer base that's out there. But the problem is you'll don't get into 30 days from this crane being delivered and all of a sudden the people that had the financing, it's no longer there. So we track -- we watch what is financing, what is cancellation, but I can't give you a great answer that is it a deferral cancellation. All we know is they are not taking the crane and all we can do is stay close to them at to what projects they may have had for that or what they were anticipating. I would say that I still think as my comments were, there are projects out there which is different than before. Maybe not the same number of projects that people were a little overzealous, but that doesn't mean that there aren't projects and you look at the Middle East, you look at China and you look at what is going to happen in the United States. Again, credit availability -- Russia, for instance, if China or the U.S. or Europe starts lending money back to Russia, that's a big impetus. For me to predict that, the way I see things right now it would be very difficult. That's why guidance is so difficult.

Fair enough.

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

Thank you Lisa. Before we conclude today's call I'd like to remind everyone that a replay of this call will be available beginning at 12 noon central time today until 12 midnight central time May 8. The dial for the replay is area code 719-457-0820. Please use confirmation code 4627780. You may also access an archive version on today's call at our website on www.manitowoc.com. Thanks again for joining us everyone. Have a good day.

That concludes today's teleconference. Thank you for your participation.

Thanks, Lisa.

You're welcome. Have a good day.