Manitowoc Company Inc (MTW) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Manitowoc Company, Inc. third-quarter 2011 Manitowoc earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, it is my pleasure to turn the call over to your host, Mr. Khail. Please go ahead, sir.

Good morning, everyone, and thank you for joining Manitowoc's third-quarter earnings conference call. Participating in today's call will be Glen Tellock, our Chairman and Chief Executive Officer, and Carl Laurino, Senior Vice President and Chief Financial Officer. Glen will open today's call by providing an overview of our quarterly results and business outlook. Carl will then discuss our financial results for the third quarter in greater detail. Following our prepared remarks, we will be joined by Eric Etchart, President of Manitowoc Cranes, and Mike Kachmer, President of Manitowoc Foodservice, for our question and answer session.

For anyone who was not able to listen to today's entire call, an archived version of this call will be available later this morning. Please visit the investor relations section of our corporate website at www.Manitowoc.com to access the replay.

Before Glen begins his commentary, I would like to review our Safe Harbor statement. This call is taking place on October 26, 2011. During the course of today's call, forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, will be made during each speaker's remarks and during our question and answer session. Such statements are based on the Company's current assessment of its markets and other factors that affect its business. However, 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 Manitowoc Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or other circumstances.

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

Thanks, Steve, and good morning, everyone. Our third quarter 2011 results were driven by solid, year-over-year sales growth in both our Crane and Foodservice segments. We witnessed sustained success in emerging markets, particularly those geographies where we enjoy first-mover advantage. While persistent pressure in the broader economic landscape has tempered a growing recovery, we are well-positioned for the long-term as we continue to capitalize on activity driven by large infrastructure and energy projects in Cranes and momentum from new product launches in Foodservice.

We continue to be focused on executing on our initiatives to drive increased operational efficiency and new product development, which should drive margin expansion over the long-term as pricing and commodity cost pressures remain. Additionally, we continue to benefit from the expanded diversification of our Foodservice business, which moderates the impact of the cyclicality of our Crane segment.

For the third quarter, Foodservice showed positive momentum as the success of recent product launches, increased operational efficiencies and improvements across geographic markets drove another year-over-year quarterly sales gain. More specifically, our recently launched Indigo Ice Machines and Merrychef ovens continue to track well in the market. From a geographic perspective, we have seen a notable improvement in Europe, which historically is one of our toughest markets in Foodservice. This further validates that the restructuring and consolidation we implemented in that region following the Enodis acquisition is paying dividends.

In addition, Asia-Pacific had a strong quarter in Foodservice, which reinforces the fact that emerging markets are an important element of our success. We continue to deploy resources into that region as customers seek international growth, primarily through new store expansion as well as new menu initiatives.

We continue to solidify our position as a trusted and valued partner for our customers, particularly as their evolving needs demand new and innovative products. In addition, the breadth of our product offering supports our customers' initiatives as they expand their menus, streamline their operations, expand their geographic footprint and reduce their overall costs.

Moving to our Crane segment, our third-quarter results were encouraging. Consistent with recent trends, we experienced higher demand in select, emerging markets, particularly in parts of Asia, Latin America, India and the Middle East. In addition, third-quarter sales benefited from growth in certain regions within the Americas. As we have seen over the past few quarters, demand is being driven by energy and infrastructure projects, which is a clear difference from the last recovery, and should continue for the foreseeable future. Demand in the Middle East, more specifically Saudi Arabia and Turkey, further increased during the recent quarter. And we expect a high level of activity to continue in these countries in the near-term.

As anticipated, Europe was negatively impacted by seasonality. And overall activity remains soft, particularly in southern Europe. The Asia-Pacific region was stronger in the quarter, with ongoing strength in Indonesia, Singapore and Australia. In addition, India continues to be a strong market for Manitowoc, as we continue to enhance our market share and leadership in that region. As expected, we saw a comparable reduction in activity in China as the government slowed overall economic growth.

With respect to our product lines, large rough terrain cranes and boom trucks were positive contributors during the quarter, while demand for crawlers continues to lag. In addition, our tower crane product line experienced good demand in emerging markets, but softer demand in both the European and North American regions.

Expansion in emerging markets remains a key component of our long-term goals. As such, we continue to make strategic investments to capitalize on the long-term growth opportunities in these regions. Over the past decade, we have built a state-of-the-art tower crane facility in China, made an important acquisition in India and build out our Crane Care network around the world. More recently, we announced plans to build a 250,000 square foot manufacturing facility in Brazil, to support the energy and infrastructure opportunities in Latin America. Located near Passo Fundo, I'm pleased to report that construction of the new facility is tracking on schedule. And we plan to start production at Passo Fundo in the second quarter of 2012. Specifically, we will begin with production of Grove mobile telescopic cranes, followed by Potain tower cranes shortly thereafter.

Over the last few years we've repeatedly discussed the seven Company-wide strategic imperatives which have played a vital role in strengthening our business segments and positioning Manitowoc for long-term growth amid global economic recovery. In the previous two quarters, we discussed our focus on innovation, aftermarket product support and our growth initiatives. Today, I would like to focus on our operational excellence initiatives as we continue to drive world-class performance in our manufacturing and business practices.

Across the entire Manitowoc enterprise, our focus on lean initiatives helps us identify specific opportunities to reduce manufacturing costs, improve inventory turns and drive productivity gains. For example, we applied a variety of lean techniques to consolidate 2 French tower crane facilities into a singular center of excellence earlier this year. By optimizing the floor of our redesign plan, we not only integrated the necessary operations but can now produce self-erecting cranes, large weldments and hoist drums, all under one roof. In particular, this initiative enabled us to reduce the process distance to manufacture a hoist drum by more than 90% and increased our hoist manufacturing productivity by 60% on a per person basis.

In addition, we recently completed an equally successful lean project for boom support straps at Manitowoc Cranes, which not only reduced inventory by $1.5 million, but cut manufacturing times for this key component by over 100 days, while also generating significant ergonomic and safety improvements.

Turning to Foodservice, we've had dozen of lean events across our global footprint following the 2008 acquisition of Enodis. This has included the closure or sale of 5 facilities in Europe, plus the consolidation of 3 facilities in North America and 1 in Asia. Going forward, we will continue to pursue widespread lean initiatives including state-of-the-art manufacturing processes.

To conclude, our third-quarter results reflect our ongoing focus to drive increased financial strength and flexibility through the successful execution of our long-term strategy. We continue to manage through the operational challenges that come with a transitional year. In particular, these include fluctuating demand levels, rising commodity costs and other pricing pressures. We have taken proactive steps to mitigate these pressures, through pricing increases, productivity initiatives and increased operational efficiencies. While we see many areas for continued improvement, the year-over-year topline growth we reported yesterday exemplifies Manitowoc's ability to maximize our opportunities during these challenging economic times.

Looking ahead into 2012, several factors will contribute to our success as we aim to enhance our global leadership position. In addition to the operational excellence imperative I discussed, innovation, technological improvements, as well as our market-leading aftermarket product support business, will continue to be key components of our strategic emphasis. Regardless of the economic cycle, we will optimize our cost structure, pursue greater operational efficiency, and enhance the quality of our products and processes.

I will now turn the call over to Carl to discuss our detailed third-quarter financial results. Carl?

Thanks, Glen, and good morning, everyone. We reported net sales for the third quarter of $935 million, which is an increase of $128 million or 16% from the third quarter of 2010. The year-over-year increase in net sales during the third quarter was driven primarily by a 21% increase in Crane segment sales, coupled with a 10% increase in Foodservice. While the revenue increases were significant, we continued to experience broader-based supply chain constraints in the Crane segment. More specifically, we are still encountering some limitations with Tier 4 engines, as well as certain issues with supply chain deliveries that we discussed in our second-quarter earnings call.

Third quarter 2011 consolidated operating margin before amortization was 8.6%, versus 8.3%, in the third quarter of 2010. The year-over-year margin increase was primarily driven by favorable product volume and mix, partially offset by market pricing pressures, commodity cost increases, and increases in general and administrative expenses. GAAP net income for the third quarter was $23.7 million, or $0.18 per share, versus net income of $1.4 million or $0.01 per share in the third quarter of 2010. Earnings in both quarters included special items but adjusted EPS was equal to GAAP in both periods.

Moving to the balance sheet, we continue to manage working capital to ensure we maintain an appropriate balance between our ability to meet growing customer demand and our debt reduction goals. As we previously stated, our targeted $200 million in debt reduction for 2011 may be difficult to achieve given anticipated increases in production. Therefore, we now anticipate 2011 debt reduction to be in a range between $150 million and $200 million. During the third quarter, we posted cash flow from operations of $4.5 million versus $42 million in the prior-year quarter. Our cash flow from operations was impacted by higher working capital needs to support increased Crane activity. However, consistent with our historic and seasonal patterns, we anticipate strong cash generation in the last quarter of 2011, to reach our targeted level of debt reduction.

Turning to our segment results, Foodservice sales in the third quarter of 2011 totaled $406 million, which increased 10% from a year ago. Third quarter 2011 operating earnings in Foodservice were $68 million, up from $61 million in the same quarter last year. Operating margins of 16.7% were equal to those in the third quarter of 2010. Improved operating efficiencies were offset by commodity cost pressures.

Moving to the Crane segment, third quarter sales totaled $529 million, up 21% from $439 million in the third quarter of 2010. This quarter's results reflect continued growth in the Americas region, and greater demand in most emerging markets. Crane segment operating earnings in the third quarter were $25 million, versus $16 million in the same quarter last year. This resulted in third-quarter Crane segment operating margins of 4.8%, compared to 3.7% a year ago. The year-over-year comparison was positively impacted by the higher sales volume, but tempered by commodity costs and pricing pressure. The third quarter tends to be a seasonally soft quarter for order activity. Crane backlog at quarter end was $775 million, an 8% decrease from June 30, 2011. Third-quarter backlog grew year-over year by $327 million or 73%. This was driven by higher order activity throughout 2011, including a 35% increase in third-quarter orders versus the third quarter of 2010.

Before I review our guidance, I want to spend a few minutes discussing the current operating environment given uncertainty in the global markets. The challenges we face today are significantly less dramatic than during the economic downturn in 2008 and 2009. We have a stronger balance sheet today, as we reduced our debt by nearly $1 billion following the Enodis acquisition. In addition, the improved credit and lending environment enabled us to secure a comfortable covenant package at lower interest rates while extending maturities. This has significantly improved the strength and flexibility of our capital structure. Specific to our Crane segment, we maintain profitability in the 2010 trough and continue to do so today. Customers have successfully rationalized their inventory levels and they are experiencing improved utilization. And as Glen already noted, we continue to benefit from the added stability and diversification of our Foodservice business which moderates the impact of the cyclicality of our Crane segment.

As noted in yesterday's press release, we are updating our full-year guidance for 2011. We expect a 20% to 25% growth in Crane segment revenue compared to 2010, with mid-single-digit percentage operating margins. For the Foodservice segment we expect high single-digit percentage revenue growth, with flat mid-teen operating margins versus 2010. Other expectations for 2011 include capital expenditures of approximately $70 million, depreciation and amortization of roughly $125 million, approximately $150 million in interest expense, and approximately $50 million in amortization of deferred financing fees.

Let me now turn the call back over to Glen for some concluding remarks. Glen?

Thanks, Carl. To conclude, our positive third order results are further validation that our dedication to delivering innovative and superior products, and providing best-in-class support continues to resonate in the marketplace. While growing global markets will positively impact our business over the long-term, current market pressures resulting from sovereign debt issues and government fiscal policies have created significant uncertainty for our customers in terms of capital spending. This translates into a very challenging operating environment for us. That said, we believe we have the right strategy in place to drive continued growth.

As I mentioned earlier, we believe 2011 is a transition year and will further build upon our strong foundation as we move into 2012 and beyond. Significant opportunities remain to increase operational efficiencies across our two businesses, while at the same time positioning Manitowoc to benefit from improving end market demand. As such, we are conscientiously managing the business to support our ongoing strategic initiatives, while also maintaining our focus on our financial position and flexibility.

This concludes our prepared remarks. We will now begin our question-and-answer session.

(Operator Instructions). Robert McCarthy, Robert W. Baird.

My first question goes to the current, or maybe I should say prospective, state of Crane demand. You had a solid quarter for bookings. But as we move into the fourth quarter, in comparison with last year, I believe last year you had particular strength in the fourth quarter in terms of some dealer orders in North America for mobile product. And I believe at the time you described it as a surprisingly positive response to an early order program for tower cranes in Europe. And so, in terms of setting expectations for order activity in the fourth quarter, do you have concern about being able to attain the same level of Crane orders as you achieved in last year's fourth quarter?

Rob, I think, it was a good fourth quarter. And, the challenge would be to get to that same number. But if we don't reach that same number, I don't get that concerned about it. I think it's more of what's the outlook as we move forward into 2012. And what are the opportunities for the entire year of 2012. So, it's a positive sign for us. Obviously we said the third quarter, and you've seen it again traditionally, is the slowest quarter because you have that month off in Europe. But I think as we look forward, we are forecasting probably sluggish growth for 2012. And, I think you've heard us talk about a lot of the focus being on some of the operational opportunities when it comes to the gross margin line and the debt pay down.

But can I infer from that, Glen, that as you have been having conversations with your largest global customers in the Crane business that they are supporting expectations for some expansion in CapEx next year?

I think that's true. I think that holds. Obviously, and especially in emerging markets, the facility we'll have in Brazil, that will give us a boost. I can let Eric speak to some more specific markets. But I think when you look at what's happening in the Middle East, when you look at what's happening in parts of Russia right now, you look at what's happening in, again, South America. Other than China. I think our expectation for China, and I think it's the same with everybody that we've seen mentioned, I think everybody wants to jump in, that it all happens after the Chinese New Year. But there are still industrial projects and infrastructure and energy projects happening in China, despite, I would say, the residential and commercial activity in China. But I think that the support we have for that is reasonable.

Can I follow up with a little detailed question about the guidance? Carl, your guidance is $150 million of interest expense for the year and $15 million of amortization of deferred financing fees. Total of $165 million. You're only at $120 million through nine months. So, the implication would be a fairly large surge in the fourth quarter. Does that come in deferred financing fees? Or is that number maybe in the guidance on little bit high?

I think it's probably a little bit high. It's conservative. I would say that obviously we do get the bulk of our pay down in the latter part of the quarter just because of the shipping schedule that we tend to see. That would impact that somewhat. But, I would say it's a conservative number and we wouldn't necessarily look for core interest to rise in the fourth quarter.

Andy Kaplowitz, Barclays Capital.

Can you talk maybe more specifically about Latin America and Brazil in particular? Is it fair to say that it was one of your biggest contributors to orders in the quarter? And, do you that momentum continuing?

Yes, definitely, Andy. Latin America is a very, very good story for Manitowoc. We see continuing growth since 2007. And now it comes to be really the first energy markets that we have. A lot of energy and infrastructure, our product lines and our cranes are very well-positioned. Growth is definitely a very strong brand in that region, to Manitowoc, our cranes as well. And the Potain towers have made a real breakthrough, I would say, in the last five years. So adding up the Brazil facility gives us definitely a real boost because we will be, again, the first crane manufacturer to produce rough terrains and towers in this part of the world. And yes, we expect some continued growth and certainly very strong market share in this part of the world.

And, Andy, I think you have to expand -- when we talk about that whole region it's not just Brazil. Even though we talk about that facility, you look at Chile, you look at Argentina, you look at Colombia, Peru, those areas are contributing to the success that we have down there. So, I just want to throw that in. It's not just Brazil.

Just shifting gears, looking at the Crane margins for the quarter, they were down a little bit sequentially. You mentioned some Tier 4 engine delays and supplier issues. How much of it is that versus price-cost versus just mix? Maybe getting a little bit more of the rough terrain cranes and boom trucks versus the tower cranes? I guess you would say it's all of the above but is any one out-ruling the other?

I think it's a combination of all of them. But I think, you look at a lot of those areas, that some of them we can control. The one that you have a little less control are some of the pricing pressures. And that's where we look at it as -- I wouldn't call it the new norm that everybody wants to talk about, but I just think people are trying to get through these times and still have some things in their inventory. And we watch deals pretty closely. But, I think it's a combination of all of them that just hit you all at once. But I think when you look at any of the pricing actions that we've taken, and we said that, I think, in the second quarter call, really, we weren't going to get any benefit from the pricing actions until late in the fourth quarter or definitely in the first quarter of next year.

And, with steel coming off a little bit, do you see any added benefit? Or is it just flat and not too much of the benefit?

Yes, I think it's more flat. Eric, unless you have a specific comment towards that.

In terms of pricing, I would say that we start seeing some positive results on some of the product lines. The most challenging one is the GMK, the all-terrain cranes, where we continue to see a lot of pricing pressure. But on the other initiatives, we will see some results moving forward.

Matt Vittorioso, Barclays Capital.

Just trying to get a little more specific on the cash flow guidance or the debt reduction guidance for the fourth quarter. Firstly, how much cash do you need to keep on your balance sheet at year-end to run the business? And I guess the rest of the debt reduction would come from free cash flow generated in the fourth quarter and a lot of that would be inventory reduction. Can you comment at all on the magnitude of where you think inventory can go from end of Q3 to end of Q4? Thanks.

Yes, the answer obviously is that we need to have a lot of success in shipping a lot of inventory and converting it into cash. We, in addition, are expecting to yield the benefits from the cash from profitability that would be represented by that type of growth, as well. But it's really an inventory story for us to get to that level. In terms of the core level of cash, we tend to run a little less than $100 million would be the normal level of cash throughout the system.

So if you maintain your current cash balance, which is a little less than $100 million, that would imply that all of the debt reduction in fourth quarter is going to come from new cash generated in the quarter, which implies that you're targeting at least $150 million of free cash flow for the fourth quarter? Is that fair to say at this point?

Yes. That's correct. And, there's probably ability to lower the cash levels somewhat, maybe down to an $80 million level.

Charlie Brady, BMO Capital Markets.

As we look at the Crane business, can you give us a sense, and I know you don't like to break it out, but given that you've seen a lot of uptick in the RT and the truck crane, and that mix is probably impacting some of the margin on Crane a bit, can you give us a sense, if we look at the backlog today, what the mix looks like in terms of RT or crawlers or towers?

I think it is definitely going to be skewed more to the RT and the boom truck side than on the crawler side. And towers, as you know, are a little bit more exposed to the non-residential construction than some of the other product lines that we have. Obviously they can be used in infrastructure, and are. But given where we are in that end market, we've certainly bounced off the bottom in tower cranes but not anywhere near the midpoint of the cycle or normalized level that we would tend to see in towers. That's a good margin performer for us, as well.

And I just want to go back to the comment you made, you said you would forecast sluggish growth for Crane in '12. And dovetail that with some of the commentary about you are seeing still large infrastructure and energy jobs going forward, particularly going on in the Middle East and Turkey and things like that. I'm trying to square that up with those two comments, sluggish growth but yet still a lot of end market demand on energy, infrastructure and developing markets. Can you square that up for us? What's the correct answer?

You're exactly right. Timing is a big part of it. It's a matter of when are these projects going to be permitted, when are they going to be approved, when are they going to pull the trigger on them. For instance, you see things in the United States that are going through the permitting process. And, it gets delayed from, say, October to November then to December. You have people that are waiting to see what is going to happen in Europe, whether it is a European project or Middle East. Everybody is watching what's happening in the greater economic environment, and they're making their decisions based on their comfort levels of where it goes. So, I think we're taking a pretty cautious approach.

Let's go back to what happened at the beginning of the year. We did a little bit of the opposite this year on the Crane side and said we thought the beginning of the year was going to be a little bit better. We took a bet and we started putting things in place. And we were right for quite a while. And we brought a lot of the crawlers up to a higher inventory level, expecting the back end of this year to take off. And it didn't happen.

So if we look at it this year from a perspective of going forward, we've put a lot of the initiatives in place. And I think it's probably a better perspective for us to look at it as an ongoing piece of the business. Because I think where last year we were coming off the bottom, and everybody got some enthusiasm early in the year, I think people are taking a more cautious or restricted approach to what's happening. But I think when you add those projects together, Charlie, you look at what is needed for some of these projects. We talk to the customers. We like the inventory levels, where they are at right now, in the North American distribution base. I think it ties itself well together.

Ann Duignan, JPMorgan.

Can you talk about just a continuation of what you were just talking about there. You ended the quarter with about 105 days of inventory. Should we be concerned that a lot of that inventory is finished product with no buyer? Or is it inventory that needs an engine? Can you just dig a little deeper into the inventory at the end of the quarter?

Ann, you shouldn't be concerned that there's a lot of finished goods without a buyer. We did allude to some production challenges that did leave us with some inventory. But it's not that the inventory is not going to be shipped out. And much of the inventory build would be in the pre-production or raw material or work in process level for us that is anticipation of the deliveries that we expect in the next couple of quarters.

And then can you comment a little bit about the competitive environment? I know you had guided earlier in the year to pricing pressures. But can you talk a little bit about -- we see things in the press like Zoomlion introducing a large capacity crane into the North America market. Can you just give us a sense of what the competitive environment is like in the different regions?

I will let Eric answer that, he'll be more eloquent.

Ann, we continue, obviously, to see a very competitive environment. But to your point about the Chinese competitors, again, they maintain huge pricing competition in their domestic market. They are, again, very aggressive in energy market. However their penetration again in Europe or in North America has been very sporadic. And again the competitive pressure, we see that it's impacting a little bit our business, primarily due to the premium manufacturers. Not really the Chinese. We know where they operate, and we know where they are. But again, outside of China, the brains and our presence has enabled us to excel [with the cranes]. So, again, we see the Chinese as a real threat long-term, absolutely no doubt. But what we see in terms of pricing pressure is not coming from China, it's outside of China.

Are you seeing them at all to any larger extent in places like Saudi Arabia or Turkey or any of the developing countries? Because, I think that's where they're really focused.

Yes, they do, Ann, definitely. But it's more on the smaller capacity cranes that they really have impacts. You see a lot of customers with a critical lead, they would not, yet at least, trust these very large crawlers or mobile cranes that the Chinese has just developed. So they still rely upon the premium manufacturers.

And just as a quick follow-up, since the competition, the pricing competition is really coming from the premium players, what gives you the confidence that you will be able to push through price increases in the near term?

Because I believe the rationale of maturing cost is (inaudible) out. I think competition has to increase their prices, as we do, just because we are facing these commodity price increases. And secondly, I believe that we have made significant efforts in improving our product quality. We're also introducing some new products that already are having a very good impact in the marketplace. And that is these are also some pricing points.

Seth Weber, RBC Capital Markets.

I am just trying to get a sense for the source for some of this fourth-quarter Crane revenue strength. Is some of that related, do you think, to bonus depreciation orders that are expected to ship by the end of the year? That's the first part. And then did some orders or some deliveries slip from the third quarter because of the supply chain issues?

Yes, Seth, I wouldn't put a lot of temper in the bonus depreciation. We actually think that could be a positive upside to any inventory that we would have for that. But that's going to be one of those things that's going to be late November, early December when people are going to start looking at the opportunity. I think there have been spotty sales during the year as people they've had a 9/30 year end or a 6/30 year end, but that's certainly not the significant part.

What it is, what's within the backlog is good backlog. And some of it has, in fact, gone from probably should have shipped in the third quarter, and now it's being deferred to the fourth quarter. I think somebody asked earlier, what are some of the delays. It is things like you have product coming down the line in the factory and all of a sudden you don't have one certain component that was short shipped from the supplier. Those things are moved to the side and everything else goes on. That's the majority of any of the delays that we are having. But it's a solid backlog for the fourth quarter. Eric?

Yes, some of the delays also, Seth, could be coming from the lack of flexibility we have now because of Tier 3 and Tier 4. In the past, if you had a financing issue with one customer or dealing on another project, you had the ability to swap the same cranes and ship it to that customer. Now, you cannot do that anymore because it's a Tier 4 build machine, and it has to be in Tier 4 and shipped into Tier 4. So we lack a little bit that flexibility. That's impacted a little bit.

And then going back to, I think it was Rob's question, do you have a rough guess for what you think your year-end backlog is going to look like?

No.

Separate question. I think a couple months back you announced some temporary employee reductions at the Manitowoc facility. Have those workers come back?

Yes. We brought a good portion of them back. I would say there's probably, Eric? -- 25 to 30 welders maybe that we haven't called back? But that's a small portion of what was all let go and then subsequently brought back.

Just lastly for Carl, is there a tax rate we should be using for the fourth quarter?

Yes, you can see that we're doing a little bit better than we had guided earlier in the year. I would say a better effective tax rate for the fourth quarter than that previous guidance would be in the 30% range.

So I think previously it was something like 50% to 60%, right?

I think what we had previously said in the first quarter, Carl, was 50% for the balance of the year. And we did get some benefit in the second quarter, as you know, from the change in legislation in Wisconsin. And then some other things have made us a little bit more efficient on the tax line for the balance of the year than we expected. We are still going to be probably in the 40%s, full year, because of what happened in the first quarter, but only about 30% in the fourth.

Brian Rayle, Northcoast Research.

As we look at the debt pay down of $150 million to $200 million for this year, as we look at the portfolio of businesses that you have, obviously you sold off the Green business a couple of years ago. Is there any portfolio management that you guys are looking at to quicken the pace of that debt reduction, given the fact that you're expecting 2012, albeit to grow, but not as strongly as you once originally thought?

Obviously, you're always looking at your portfolio. There really isn't anything that we would be looking at, at this point, that would be motivated by a need to accelerate or a desire to accelerate debt reduction. It would be more decisions related to return on investment and strategic criteria.

The thought process -- even if it is operational, are there areas of the business that you would look at as non-core, regardless of whether you're trying to accelerate that debt reduction?

I think when you look at the portfolio of business we have, whether it is Cranes or Foodservice, we've done a pretty good job of paring those back. So I think we're pretty happy with the portfolio we have. And I think, to Carl's comment, what's the trade-off between anything that we look at from an EVA standpoint as return on capital, as cost of capital, we look at all of that. But as you've seen, we even mentioned in my comments, consolidated facilities, the small wares after the Enodis acquisition, just different levels of things that we've done. We're pretty happy with the portfolios we have. But as Carl said, we look at it every time because we look at it all the time, and it's part of our strategic planning session every year.

Henry Kirn, UBS.

Wondering if you could talk about when you expect some of the supply headwinds to abate? Maybe specifically, how much visibility do you have to the Tier 4 engine availability?

We initially thought, probably in the early part of the year, on the Tier 4 items that some of that would abate by year-end. But I think what's happening, Henry, the first part of the year was just the Tier 4 issues. Then it got into the supplier issues. And this is why I talk about the challenge of managing in this environment. When you have the backlog and you have that, and your suppliers are doing the same thing. They don't know if they should be investing in a third shift. They don't know if they should be investing in additional product lines. We work with these people on a regular basis. They knew what our forecasts were for the year and they just couldn't ramp up.

So, I think those issues, we look at abating themselves in the early part of 2012. I think you get a more normalized run rate. But I think when it comes to the Tier 4, while you think those should all be behind us, you've got to remember, we're changing out a lot different models with Tier 4. So, while we get better at it, our suppliers are better at it, you still have to marry up the new engine with the computer of the Crane and everything else. And then we do our normalized testing. So, I think we should be better at it, the supplier is better at it, but you still have a lot of models to change out for the Tier 4.

And so, do we expect to get better at it? Do we expect for those delays to be less and less? Absolutely. But, I think, each unit has to go through its testing. And unfortunately, each model that comes out is almost a prototype because it's a new crane. And so if we have that opportunity, we're also adding features and benefits to it as we redesign it for the engine. So it's not just an engine change. But I think, that's where we think we are better at it, but as I said, each one is new to us because of different issues and capacity. So we hope that those delays don't come through, and we're scheduling it better than we did because we've learned a lot. But don't think that Tier 4 just goes away because it's 2012.

And on Passo Fundo, how much of a headwind was the construction and setting up that facility a headwind to margins in the quarter?

Not much, Henry. On the expense line, there really is not a whole lot. There's obviously ramp up and bringing on some of the expertise that would be reflective of having a manufacturing facility down there that we haven't had, but it's not a lot of dollars at this point.

Jerry Revich, Goldman Sachs.

Eric, can you talk about where utilization rates for your customers stand by region? And particularly comment on Europe, just give us the trends there?

Typically utilization rate has improved. And I would say it would be in the range of low 80%s now, overall. Of course it varies by product line. Obviously, given the environment, I think customers typically, or end-users, would rely upon rental more versus really buying trends, given some uncertainties. So that is helping. I believe the rental (inaudible) are seeing some pricings. The rental rates are improving. Certainly not to the level that they would like to see to trigger a really huge investment. But they are seeing some improvement, especially again on the product and even the large RTs and large trucks.

In Europe, the situation in terms of utilization is not bad. It's again around the 80%s -- 80%, 85%. But the problem is the rental rates are extremely competitive in Europe. And we haven't seen any improvement in rates in Europe. So that's really one of the headwinds for them to significantly renew their fleet at this period of time. So, that's the situation.

And, Eric, can you comment on financing conditions in Europe for new cranes? Is that being impacted for the larger rental houses? Or is it only the smaller companies that are seeing the effect?

I think the smaller companies are seeing an effect. But I think, the fact that the rental rates are not very attractive at the moment, is slowing down the emphasis for the rental houses to achieve new equipment. They have done definitely some repeating but not to the level that the current utilization would deserve. And, the shift that you can see worldwide towards larger capacity, obviously there is a need for the rental houses to again reposition their fleet. But the credit is only an issue but it's not the main issue, I would say.

And, Glen, just a clarification on your prior comment, you mentioned that pricing may improve early next year. Did you mean that in terms of orders coming in early next year? Or does that mean you are seeing some improved discipline, not quoting activity, today? And also if you could just touch on if there's any difference in regions in term of the pricing trends.

Yes, I think, that's what you're seeing. The pricing actions that were taken either in the early third quarter or I think later here in the third quarter, early fourth quarter, it's for things that are being delivered after the first of the year. That's why I said you see the benefits of the pricing actions in 2012. Regionally, I would say probably the EMEA region. Mainly the traditional mature markets of Europe are probably the toughest pricing markets. That's probably the toughest one.

Joel Tiss, Buckingham Research.

I'm scratching my head to remember but I think you guys make some food equipment or something like that?

I just wrote a note to Carl, somebody's got to ask Mike a question.

I just wondered if there's any big customer upgrades coming in the next 12 months. And also, can you talk about any product breakthroughs? And what are you guys working on here to really stun the competition?

Go ahead, Mike.

Joe, let me first thank you for the question. I was beginning to wonder. Anyway, to answer your question, we have a lot of initiatives on multiple categories with a number of customers around the world. And I would highlight five categories. There's major initiatives around ice. Blended ice continues to get a lot of attention. Glen mentioned earlier in his comments about our Merrychef ovens getting a lot of traction, particularly in the C store segment. Our mini-combi ovens are getting adopted in the chains for the first time two years ago, and that seems to be accelerated. And then the low oil volume fires that we have out of our Frymaster business continued to take hold at a broader set of customers. So, it really is a continuum and it is happening across many categories with many customers.

And any big chains that are thinking about upgrading? I heard Chili's or some of those guys are thinking about upgrading their kitchens. I'm just asking because this is three years into a downturn and usually we don't have more than one year in a row of reduced capital spending. So I'm trying to get a sense of where the pressure points are on the guys who haven't spent any money in a long time.

First of all, it's still tempered. I think it's fair to say it's still tempered. But investment is starting to curb because if they don't, the menus are going to start to deteriorate and they're just not going to get the foot traffic that they need. So they have to continue to invest. And I think it's important to say that while it's been different than previous years, we've continued to have success on a reduced scale on the categories that I talked about earlier. There have been some major renovations or new product introductions that have occurred over the past 12 months.

And just last on Cranes, on the price-cost side, I don't know if you really gave us a sense that in 2012, if we see an improvement in margins, would it be more likely to be driven by price increases or by productivity improvements?

I think it's a combination of everything. I think, some of it, Joel, obviously is going to be the pricing just negating some of the commodity and cost increases we had in 2011. But there's a heck of a lot of opportunities we have in the manufacturing line of the cost side of our business. Eric has talked about it in the past, I've talked about it today. You look at the lean initiatives that we started, the benefits you get from any interruptions through the factories after we've made some of these changes. There's a lot of things we can do operationally.

And that's why I said the focus, if we believe that the pricing pressures are going to continue to be challenging, we are going forward 100 miles an hour with all our operational initiatives. At the same time, and Eric mentioned it earlier again, I think some of the things that we have done from a quality standpoint. And some of these products that we are bringing out, whether it's in Foodservice or Cranes, much more reliable. And sometimes you're looking at product cost take-outs out of these to simplify some of these machines. So I think all that together. It's not just going to be from pricing. That's a tough one to make that assumption and then hope on that.

Ben Elias, Sterne Agee.

A couple of questions. One is your debt reductions target, $150 million to $200 million. Will that be the senior 2013 notes or is that going to be a mix of Term Loans A and B?

We haven't really indicated. We are certainly able to pay, starting next month, the 2013 notes at par. But we haven't indicated whether or not our debt reduction will go towards those or on the senior side yet.

And, just to follow up on Brazil, now that you have a facility in there, you're going to get a benefit because there's no import duty? Either you are not importing stuff into Brazil and I think customers don't have to pay an import duty. How do we think about margins from these Latin American sales?

Yes, I wouldn't get real aggressive on thinking there's huge margin improvement there. And when you get away from the duties, Ben, it's after you have -- what is it, Eric? 60%?

Yes.

It's 60% local content. So to start out with, there are going to be kits coming from Shady Grove and then we'll do some manufacturing down there. We'll buy some components locally. But that's a whole process that we are embarking on that to get the local suppliers down there. And that's why we located in Passo Fundo because there is a good supply base. But it's a matter of getting the assembly down there, getting those products out, getting the factory up and running, and then working on the localized content. So I'd be careful to think there's a big jump in 2012.

And one last question. You talked about price and how you have some new products you are introducing. What's your NPVI right now? What percentage of your cranes have you introduced in the last two or three years?

I think when you look at -- it hasn't been a real robust new product cycle, only because we aren't considering some of these repowerings as new products. If we put it on there, it's quite a few. But I would say it's certainly less than 50% over the last couple of years. If you take it over a five-year period, it's a higher percentage. But I would say from the last couple of years, certainly that percentage decreases because so much of our engineering time has been spent on regulations as opposed to new product introductions.

Thank you. That does conclude the question-and-answer session. And I'll now turn the call back over to Mr. Khail for any additional or closing remarks.

Before we conclude today's call, I'd like to remind everyone that a replay of our third-quarter conference call will be available later this morning. You can access the replay by visiting the investor relations section of our corporate website at www.manitowoc.com. Thank you everyone for joining us today, and for your continuing interest in The Manitowoc Company. We look forward to speaking with you again during our fourth quarter conference call in February. Have a good day.

Again, thank you ladies and gentlemen. That will conclude today's program. We do appreciate your patience, you may now disconnect.