Manitowoc Company Inc (MTW) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to this Manitowoc Company Q3, 2015 earnings conference call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to 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 Ken Krueger, our interim Chairman and Chief Executive Officer; Carl Laurino, Senior Vice President and Chief Financial Officer; and Hubertus Muehlhaeuser, President and Chief Executive Officer of Manitowoc Foodservice. Ken will open today's call by providing comments related to our quarterly results and business outlook. Hubertus will then provide a more detailed overview of our Foodservice segments, performance, and outlook and Carl will discuss our financial results for the third quarter in greater detail.

Following our prepared remarks, we will be joined by Larry Weyers, President of Manitowoc Cranes for our question-and-answer session. For anyone who is not able to listen to today's entire call, an archived version of this call will be available later this morning.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 Ken begins his commentary, I would like to review our Safe Harbor Statement. This call is taking place on October 29, 2015. 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 it's 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 Ken.

Thanks, Steve, and good morning everyone. By now you have had a chance to review the press releases we issued last night discussing our third quarter earnings results, as well as my appointment to Interim Chairman, President, and CEO of Manitowoc.

Before I jump into the results for the quarter, I'd like to take a moment to discuss the leadership transition. Let me start by saying Manitowoc is at a unique juncture in its evolution. The Company has established two leading businesses in both cranes and foodservice which as previously announced will be split, with the execution of the spin off of the Foodservice business in the first quarter of 2016.

We also have a strong management team, along with our many talented employees around the world providing a strong foundation for the Company. However, the Board determined it is time for new leadership in order to improve the trajectory of the Business and to fully maximize our potential going forward. We very much appreciate Glen's efforts and his contributions to Manitowoc over the last 24 years and wish him well on his future endeavors.

The Board has initiated a search for a CEO for Manitowoc Cranes and will provide an update as soon as possible. Having served as a member of Manitowoc's Board of Directors since 2004, including four years as audit committee chair, I know the Company well and have tremendous confidence in our ability to revitalize the Business. We remain committed to innovation, product quality and superior after-market support to maintain our leading positions. At the same time, we are implementing aggressive actions in both segments including right-sizing the Business, plant rationalizations and other cost improvement activities, while driving growth in foodservice to improve overall profitability. I am honored that the Board selected me for this important role and I assure you that I am committed to delivering improved performance. Now, let me shift gears and turn to our third-quarter results.

Our third-quarter results were mixed. In Foodservice the Business appears to be turning the corner. Many of the issues that negatively impacted it's performance over the last 12 months have been remedied, which contributed to our solid margin improvement this quarter. Hubertus will provide you with more in depth comments in a few minutes.

Turning to Cranes, our third-quarter results were disappointing as deteriorating demand for tower cranes in the Middle East and Asia coupled with lower than anticipated all-terrain and crawler-crane shipments, all contributed to the short fall in revenues. The current global economic environment affecting customer demand is unlike any cycle we have seen in the past. Uncertainty among our customers is mounting, due to emerging market peers, ongoing question over Chinese growth outlook, persistent depressed oil prices and slowing domestic growth.

More specifically, rough-terrain and boom-truck demand in North America continue to be hardest hit, given this exposure to oil, gas and the infrastructure projects. However, we experienced other softness across the Business. Including pricing pressure created from unfavorable exchange rates. In September we experienced delayed crawler shipments totaling $55 million. At the same time, the devaluation of the yuan in August caused a slowdown in tower-crane sales in Asia.

In addition, we experienced broad-based global softness in all-terrain cranes. Whereas we had seen relative strength in tower-crane sales in the Middle East over the last few quarters, we are now seeing a spending shift away from energy and the infrastructure to defense, impacting our business in that region. As a result, we have taken aggressive actions to respond to those areas that are within our control.

Over the past 12 plus months we have eliminated $29 million in direct and indirect costs. In addition, we announced last night the implementation of additional restructuring activities to expand upon our efforts to date. These new efforts aim to eliminate another $35 million to $45 million in costs over the next three years, though actions including plant rationalizations and reduced or deferred expenditures. The majority of these savings will be realized in 2017 and 2018. We're firmly believe that these actions will result in stronger more agile and a more successful Company for the long-term benefit of our shareholders.

We anticipate a charge of $10 million to $15 million in the fourth quarter, most of which is non-cash. While we are implementing these actions we continue to analyze additional areas to further streamline our manufacturing processes and right-size our footprint.

The third quarter proved to be one of the most volatile and difficult operating environments in recent memory. Manitowoc has weathered many economic cycles and our team has proven its ability to manage the Business without compromising our competitive position in the marketplace. This cycle should be no different. We remain highly confident in the long-term underlying fundamentals of both businesses.

Before I turn the call over to Hubertus, I want to briefly update you on our progress toward the planned separation of our Crane and Foodservice business. We have made significant progress toward implementing the spin and we remain on track to complete our business separation in the first quarter of 2016, notwithstanding the recent performance within Cranes. We have also announced the majority of our senior management team for Cranes and Hubertus will provide an update on our Foodservice leadership. Carl will provide detail on the related separation costs in his remarks. With that, let me turn the call over to Hubertus to discuss Foodservice in more detail.

Thank you, Ken, and good morning, everyone. It's a true pleasure to participate in my first earnings call as CEO of Manitowoc Foodservice. As Ken mentioned, the momentum that we saw in June continued into the third quarter. The initiatives that had been started months ago, coupled with more recent activities that have a direct margin impact have lead to a 100 basis point improvement compared to the last quarter.

From a sales perspective during the quarter, we saw strength in cold side in North America and beverage, which was somehow offset by reduced CapEx spending by large chains, particularly in Asia.

Our KitchenCare business also demonstrated improvement with fill rights nearing our targeted range and increased efficiency running through the operations. We have realigned the team, all of whom are committed to further improving customer satisfaction, profitability and growth. As a result, we saw year-over-year revenue growth and margin improvement in the quarter. While we are pleased with this improvement, we recognize there is more work to be done.

As we look ahead, while our strategy remains unchanged we have a stronger focus on optimizing the Business. Our number one priority is margin improvement as we work toward the spin of the Foodservice business in early 2016. There are really two themes driving our efforts to close the gap from a margin perspective. Simplification and right-sizing.

From the perspective of simplification, as we have discussed before, we have stepped up our efforts in our 80/20 initiative. This is how Manitowoc [really] a transformational shift for our Business in terms of reducing our product complexity. We have made great strides thus far and are seeing positive trends that we expect to continue. In conjunction with this initiative, we are undergoing a number of activities aimed at improving our margin, including pricing optimization, taking a very critical look to delay or stop non- value added projects, reinvigorating new product introductions and simplifying the organizational structure to increase speed and decision making. We believe these efforts will be imperative in further enhancing our margin profile as we move forward.

In addition to these simplification efforts, we also announced restructuring initiatives in our press release last night aimed at right-sizing the Business and addressing our over capacity. These activities are accelerating the rationalization efforts that have been underway since mid-2014 and include reducing over capacity by consolidating various production facilities and implementing head-count reductions.

In line with these objectives, earlier this week we announced a closure of our Cleveland manufacturing facility and our Irwindale distribution center. This recently announced restructuring is expected to result in $30 million of cost-savings in 2016 and $40 million of annual run-rate savings starting in 2017. In the aggregate, all of these actions will set the stage for a more streamlined Company going forward, providing better quality and customer satisfaction. We do anticipate a charge of $15 million to $20 million in the fourth quarter of 2015, of which approximately $8 million to $10 million is expected to be cash paid out over the next four quarters. While we are implementing these actions, we continue to work on additional areas, where there is an opportunity to drive further margin improvement in the Business.

Our second priority in the Foodservice business is preparing for the spin. We have filled many of our key leadership roles including our Chief Operating Officer, Josef Matosevic, who has already had a very strong impact on last-quarter's results. Josef will also lead our right-sizing efforts.

In addition, we anticipate announcing our Chief Financial Officer, as well as our Senior Vice President of Strategy, HR and Marketing in November. The next levels of leadership have also been identified and we are already working with a full focus on foodservice. I have a deep level of confidence in the team we have in place today and believe that we are very well positioned to capture the tremendous opportunities that lie before us.

So, in summary, after spending the last several months taking a deep look at the Business, I'm pleased to say that my initial view of the Business and opportunities has not changed at all. In fact, my belief that Foodservice is a great business with very, very strong fundamentals and outstanding growth potential has only strengthened. I have spent a significant amount of time with the teams in all parts of the world to understand our long-term vision and strategy for the Business and to develop an understanding on how to get back to a more profitable growth path. It's very clear to me that Foodservice has best-in-class brands and products and that we offer a unique value proposition. In addition, my conversations with customers have been extremely positive. As we move toward separating the Business, there's an opportunity for accelerated investment in the Business consistent with our enhanced focus.

With that, I'll hand it over to Carl.

Thanks, Hubertus, and good morning, everyone.

We reported net sales for the third quarter of $863.5 million which is a decrease of 13% from a year ago. GAAP net income for the third quarter was $4.8 million or $0.03 per diluted share versus net income of $73.1 million or $0.53 per diluted share in the third quarter of 2014.

Unfavorable currency exchange rates had a $48.4 million negative top-line impact during the quarter but a slightly positive EPS impact of just under $1 million for the same period. Excluding special items, third-quarter 2015 adjusted earnings from continuing operations was $12.8 million or $0.09 per diluted share versus adjusted earnings of $50.1 million or $0.36 per diluted share last year. Since midyear 2014, we have generated savings totaling approximately $115 million at the enterprise level, resulting from manufacturing improvements, procurement savings and reductions in our workforce. That said, many of these savings have been offset by our manufacturing under absorption, various costs associated with factory consolidation and the KitchenCare launch. By its completion in 2017 we continue to expect to achieve total savings of $125 million to $170 million which is before the savings associated with new the restructuring activities we announced yesterday, which are expected to generate an additional approximate $135 million to $145 million in total savings by the end of 2018.

During the third quarter, cash generated from continuing operations was $6.2 million compared to cash generated from continuing operations of $60 million for the third quarter of 2014. The decline was primarily due to weaker revenue, product mix and resulting lower profitability. As is traditionally the case, we expect to achieve strong cash flow in the fourth quarter.

Turning to the results for the two businesses, third-quarter crane sales totalled $438.2 million, down 23% from $569.2 million a year ago. The decline was broad based but was most pronounced from lower demand for all terrains, rough terrains, and boom trucks as well as lower tower volumes in Asia and the Middle East. Crane operating earnings in the third quarter were $4.3 million versus $41.6 million last year. This resulted in a third-quarter operating margin of 1%, compared to 7.3% last year. The margin decline was fueled by significant under absorption as well as pricing pressure exacerbated by currency headwinds. These factors were only partially offset by ongoing operational efficiencies and cost reductions. Crane backlog at quarter end was $631million down from the third-quarter 2014 backlog of $716 million reflecting a book-to-bill ratio of 0.77 times.

Third-quarter new orders of $337 million decreased from $557 million in the year-ago period. Foodservice sales in the third quarter of 2015 totaled $425.3 million, up 2% from the prior-year period's $417.1 million. Sales were driven by an increase in KitchenCare revenue and strength in North America cold-side products including beverage which we're partially offset by continued weakness in large chain role outs, particularly in Asia and unfavorable exchange rates.

Third-quarter 2015 operating earnings in Foodservice were $70.4 million, producing an operating margin of 16.6% compared to 14.8% for the third quarter of 2014, reflecting a 180 basis point year-over-year improvement and the 100 basis point sequential improvement. The improvement was driven largely by operational efficiencies, cost-savings initiatives and a favorable product mix, partially offset by currency and lower absorption rates. We have taken $20 million in manufacturing costs out of the system year to date, which is nearly 70% of our full-year 2015 goal of $30 million. Again, this is before the impact of the restructuring activities announced today.

As we have previously noted in our press release, our full-year outlook is as follows: Crane revenue, approximately 15% to 20% decline. Crane operating margins, low single-digit percentage. Foodservice revenue approximately flat. Foodservice operating margins mid-teen percentage range. Capital expenditures approximately $70 million.

Depreciation and amortization approximately $110 million. Interest expense approximately $90 million. Amortization of deferred financing fees approximately $4 million. Total leverage, approximately four times debt to EBITDA and effective tax rate excluding one-time costs caused by the spinoff approximately 30%.

We continue to anticipate that our total pretax, separation expense will total $130 million to $140 million. The majority of these expenses most notably debt breakage costs and financing fees will be realized at closing during the first quarter of 2016. In addition, run-rate costs associated with separating into publicly traded companies are expected to be in a range of $20 million to $30 million on an annual basis.

I'll now turn the call back to Ken for some closing remarks. Ken

Thanks, Carl. We expect the global macroeconomic backdrop to remain difficult through most of 2016. While we are encouraged by the momentum in our Foodservice business and the resilience of certain portions of our Crane business, we remain highly committed to rationalizing our cost structure to fit the near-term demand environment. The restructuring activities we discussed today will undoubtedly make us stronger and more agile, while at the same time allowing us to maintain our leadership positions and set the stage to deliver better results.

That concludes our prepared remarks for today. Allen, will you now begin our question-and-answer session.

Thank you, sir.

(Operator Instructions)

We'll take our first question from Jamie Cook, Credit Suisse.

Hi, good morning. Two questions.

One, as I think about just -- you know given the split and the deterioration we have seen in the crane business, Ken or Carl, if you could just you help me walk through when I think about the next 12 months or when I think about 2016, how much benefit do we get from the restructuring actions you announced previously versus today -- versus the new ones you have announced today because as I look to 2016 based on the order as it seems like sales are down again, which imply EBITDA is down again next year. I am just trying to understand how to think what could be incremental, because, again, it just questions why we would do the split where the profitability of cranes would be negligible?

And then, Ken, as a board member, I would just like to hear your -- why you are comfortable with splitting cranes today, just given the leverage. I mean the prior management team would say profitability of cranes would never get below prior trough. We are going to be here this year and could go again below that next year. Just given the leverage of crane deterioration profitability below prior trough, why you are comfortable with splitting the Company in the first quarter? Thanks.

Thanks, Jamie.

As far as the flow through benefit and calendarization, there's probably going to -- as we eluded, there is going to be some additional actions that we will be looking at, but in terms of the identified actions, the greater part, because of the timing of some of the things that will benefit us, in that three-year period that we talked about, the total benefit is going to be skewed to the 2017 and 2018 period in cranes. I think we were much more granular on the foodservice side. As you look at those benefits, but that wasn't your question.

As far as the comfort level with the split, obviously we've seen high leverage levels historically. I think that there is a view in the markets that there is not a whole lot of debt that's possible to put on the crane business, and that's not our view or expectation. We're not quite at the point where we can get real specific about the capital structure, but I think its fair to say that a lot of the assumptions that people make about the amount of debt that cranes can handle is understating the case. And, obviously, structure plays into the sustainability of the debt load, as well.

Yes, I think the underlying case for the split, which is that the value to our shareholders in two separate companies remains in place. Clearly, the third quarter made to leverage a little more difficult, but I am confident we will still be in a range where we can separate the two companies and they can both survive and in fact thrive with their capital base. Made it a little tougher, but I think we are still in the range that we can be -- have successful spin.

But Carl, as I just look at, if we just look at the orders you've seen over the past sort of three quarters in cranes and then you listen to what H&E Equipment said this morning about don't expect the normal seasonal pick up in cranes in the fourth quarter. It would imply your crane sales are going to be down again next year. Could be down another 10%, 15%.

Based on what you are saying, because we don't expect a lot of the restructuring benefit until 2017 or 2018, we assume -- the way to think about it is in normalized decremental on that sales decline, and, again, under that environment you are comfortable with splitting cranes? Or are you assuming a more -- or am I being too negative with regard -- or do we have a difference in terms of how we ere thinking about 2016?

Yes, I think there is certainly a difference, especially if you take Q3 as a context, because some of the things we put in place are really going to get to some of the things that we have suffered to some extent even on a full year-to-date basis, that will be less impactful in 2016 and, really, I am alluding to the factory variances that we see in the absorption issues, given some of the adjustments that will be made --

But on a top-line basis, given what you are seeing in orders, I don't understand how cranes are down again another -- you know what I mean -- 15% or so. I'm just trying to thinking about how you're thinking about the crane outlook for 2016, given the fact that you want to split the Company in the first quarter.

Yes and the other thing that I was going to say that also I think skews things a little bit is the deliveries of the VPC that also affected us in the third quarter that were pushed off to the right and some of those shipments will go into 2016. I don't know if, Larry, you wanted to elaborate on anything?

No, Carl. Hi, Jamie, yes, I think obviously the third quarter was disappointing, but I think one of the big parts as far as the shipments go is the delay in the shipments of the 300 and the 650, and clearly had those been on where we wanted them to be it would be a much different picture. I know we are not giving a lot of outlook for 2016 right now, so I don't want to elaborate on that. But I think there is a number of new products we are bringing into the market, as well that when we do that we experience an up-tick in certain specific products. I think that's the big note for the third quarter.

I also just want to talk a little bit about the other side of the equation and Carl alluded to it a little bit. I think our restructuring plan and activities in the foodservice side are well seasoned, they are granular, they are detailed and there is very good timing to them. I think we have a little bit of work to do in the near-term here to make the restructuring activities a little more granular, a little more detailed and mort importantly a little more near-term impactful, I will call it in 2016. That's one of the first priorities that I have and we collectively have and I think we will also be able to make some headwind or make some headway rather on the cost structure earlier than the 2017 and 2018 that we talked about in the prepared remarks.

Next will go to Stephen Volkmann with Jefferies.

Hi, good morning. I'm just going to follow on Jamie's question and ask it the opposite way. Why not wait and do the spin after you have demonstrated a little bit more of your cost saves and maybe when the market has shown some signs of bottoming and people can make more intelligent decisions about what they think the crane piece is going to be worth? Is there any cost to you to push this thing out six months or something? I am just curious why you would want to do it into the storm here.

The spin process itself, as you can imagine, is quite an undertaking and the have made great progress on a lot of fronts. That the tax and the legal work is done and largely in place and the entity restructure makes it possible to do it. The underlying systems and processes, the just recently were able to prepare financial statements for both of the individual businesses separately, which is a bigger deal than it sounds like. And we were also able to segment the underlying infrastructure systems.

And lastly, the people have been aligned and put into the positions to serve in these businesses. While -- the question can be put on timing. I think right now we are staged to do it. It think it's the right thing to do for the Company and we are able to do it. Could things change over time? I don't think so. I hope not. But I think right now, given the moment that we have, given the underlying efforts that are in place and given the projected success of the spin, I think we are on the path to complete it as we had targeted and as we had announced previously.

Okay, great. I will leave that one then. And maybe for Carl then, I'm curious, I'm having a little bit of trouble getting to your full year interest expense. You are assuming a fair amount of debt pay down in the fourth quarter.

But even -- I think you said something about four times leverage and I was skimming through some of your covenants and I thought they were actually a little lower than that. I am curious about one, your degree of confidence and meeting that cash goal in the fourth quarter, and two, where we stand relative to covenants?

Absolutely no issue with covenants as it relates to the interest expense question. One of the expectations, as you probably are aware, we get through the noncall period on one of the bonds actually next month. And there is an expectation that as we devote some of the debt pay down to that instrument that there is a benefit that hits the interest expense line, not just from the debt reduction, but also from the accounting of where you carry the expense that would benefit as we do the pay down. That's the reconciliation.

Next we will go to Mic Dobre with Baird.

Thanks, good morning. Can you maybe remind us of really old one-time cash, I'm talking cash cost that you will be incurring in the fourth quarter whether they be related to restructuring or separation or whatever else.

I think the run rate that we have been seeing from a separation cost, we've got a line item on the balance sheet in the third quarter that was about $10 million, most of that cash. And there wouldn't be a lot more of that that we would expect to see.

Okay.

As I mentioned in the prepared remarks, a lot of the one-time costs are essentially at closing costs we expect to see in 2016, first quarter.

I see. Then maybe, I don't know you can bridge the gaps for me in terms of how you were thinking about cash flow, specifically, in the fourth quarter because, obviously, year-to-date we have seen quite a bit of cash consumption, which I know is seasonally normal. But, obviously, the business is also behaving quite differently than normal. How should we think about cash generation in the fourth quarter?

As I mentioned, the normal seasonal pattern is extremely consistent, very strong cash generation in the fourth quarter, and we would expect that to continue. One of the things that did constrain the results in the third quarter specifically was -- is some of the shipment issues that we had in our crane business that will normalize this quarter.

Can you be more specific?

Sure, but Larry can maybe expand on it, but the VPC, deferral of some of those shipments on the delivery dates that we had there was the key item there.

Yes, that is correct. We had a large number of cranes we anticipated shipping in Q3, and those cranes are rolling into Q4 based on the fact that we found one reliability issue on the MLC300 that we were not happy with. We have cleared that issue, along with some hurdle rates experienced from our SAP implementation on material flow. But we also have those headed in the right direction. We expect this to ramp-up in the fourth quarter.

Thank you.

Next we will go to Ann Duignan with JPMorgan.

This earning season my name seems to be getting more creative every time. Good morning. Good to hear your voice, Ken.

Good morning, Ann.

How are you? Just on the VPC delivery deferalls, those -- I think you just answered the question; those were the result of internal issues, not customers requesting deferrals.

Yes, Ann, that is correct. The two issues were internal for us and so the backlog remains intact and our team is focused 100% on delivering to those customer orders.

And are you seeing any cancellations on the claim side in terms of orders?

No, we have not seen any substantial movement in the order rate from a backlog standpoint.

Okay. And just to beat a dead horse on the foodservice and cranes, are you exploring any other options for cranes other than being a stand-alone business? Is that business potentially on the blocks for a strategic buyer?

Ann, I think on the blocks for strategic buyers are strong words. Obviously, the board remains positioned and is always open to listening to anything that might add value to the shareholders. But at this time our intention is to proceed with the spin in of February 2016.

Okay, I appreciate it. I will get back in line. Thanks.

Next we will go to Joe O'Dea with Vertical Research Partners.

Good morning. Just in terms of where you are right now in conversations with rating agencies, could you give us any update there? And then how you anticipate communicating the planned leverage, whether that's going to be through filings or whether you plan a separate announcement, and how we should think about timing?

As far as the rating agencies, we expect to be in front of them within a couple of weeks. Obviously, there has been some changes in the business and we were incorporating all of that as we prepare to do that, so that's the schedule there. Your second question, I'm sorry?

Just when we should think about some more visibility into the planned leverage split between the segments --

Got you --

And so whether --

Sorry.

-- we will see that on filings?

Yes, so that's obviously a gating issue for us. We want to make sure -- I think we mentioned in an earlier conference call that we are going to take a scenario-based approach and want to make sure we don't get in front of that with some of our communications and get that clarity prior to giving any granular split of what the cap structures are specifically going to look like. That's the sequence, and, obviously, within a reasonable timeframe after meeting with the agencies, we will be able to provide that.

Okay. And then on the various cost savings initiatives, could you just give a high level view across the Company considering the 80/20s on the operating improvements that are now restructuring? Just at a high level, what the annual run rate savings are anticipated to be in 2017, 2018 timeframe?

Yes, for foodservice we said that the 2016 impact is going to be $30 million, roundabout and the run rate then as of 2017 is going to be $40 million. And actually foodservice as stated, we are in implementation. We started the facility moving Cleveland. This was announced on Monday. We have also started to address headcount reduction, so we are in implementation.

The other thing that I would mention about those numbers is that they are specifically toward the project that we talked about, the Cleveland project, and some other restructuring activities exclusively. The 80/20 simplification process we mentioned in an earlier call, we indicated over the next three years would add about 150 basis points to the margin. So that would be additive to that $30 million to $40 million on essentially the restructuring activities that Hubertus just articulated.

And what we have done on the 80/20 is we have pulled forward a lot of the actions that were initially planned for 2016 we pulled into 2015. So we're going to see already this year some benefits from that.

Okay, next we will go to Nicole DeBlase with Morgan Stanley.

Yes. Thanks, good morning.

Good morning.

My first question is around the leverage again post split. I know you cannot say a whole lot, but I guess my question is if you are still committed to both post spin entities being investment-grade credit rated?

No. That's not -- that's not a core objective. Obviously over the long term that could be a sensible target for us to look towards. But we -- I think what we have been saying pretty consistently is that we would seek to have the ratings be as close as possible to the existing enterprise rating for Manitowoc and try to adopt a structure for both businesses that would enable us to do that.

Okay, okay, got it, understood.

I would also clarify that we are not investment-grade today, nor have we actually ever been.

Okay, fair enough. And then on the crane business. This question has been asked a few ways, but how much was the business impacted by VPC execution issues during the third quarter? I guess what I'm trying to get to is, if we assume that you have another step down in volumes, can you still grow EBIT margins year-on-year or do you expect EBIT margin deterioration in crane? What is the run rate EBIT margin potential of the business at like current and maybe lower levels of volume?

I'll take the first part of that and I will let Carl take the second part. The first part, the impact was approximately $55 million to $60 million in the third quarter due to the delayed shipment of the two cranes. I think the -- some of that miss will push in to 2016, but the majority of that we will focus on shipping to meet those customers orders in the fourth quarter.

Okay but what was the impact on profitability rather than revenue? Do we just drop that through at like a 25% incremental or something to get to the profitability impact?

Rough numbers. That's ballpark, correct?

Okay.

The other thing, obviously we're not in the position at this point to provide specific guidance for 2016, but one of the things that I think is important is what I mentioned before, that some of the factory variances issues that we've been struggling with this year will turn around in 2016. That will enable us even under an expectation that we do see continued decline in the top-line that we will be able to generate better EBIT in our crane business.

Okay, thanks. I'll pass it on.

And now we will go to Steven Fisher, UBS.

Thanks, good morning.

How should we think about the right-sizing and plan rationalizing you plan for the crane business? Is this a permanent capacity reduction, because you mentioned those things in addition to head count reduction? Or are you somehow making the business more flexible, while keeping the same capacity?

That's a great question but -- and you are correct, the right-sizing of the footprint will be what I would consider a permanent, because what we're finding with a lot of the lean activities that we have put in place, we are utilizing the floor space that we have more efficiently. I think our focus on improving our agility -- the two go hand-in-hand. This is strategic as well as how we set the footprint for cranes going forward from a manufacturing standpoint.

Just to supplement what Larry said though. As he said, the majority of this is permanent reduction in the capacity, but I think we will also use this opportunity to introduce the concept of mothballing some of our facilities in order to preserve our opportunities on the upside. We need to look at the cost to that, but I think the perception is is that we can have relatively low cost and sort of park some facilities and park some capacity for the future. The majority of it will be permanent reduction, but some of it will be set aside and mothballed.

When you say a permanent reduction, is this sort of an acknowledgement that the crane market overall and/or your market share is not going to be back to what it was in the past?

No, I don't think that's it at all. I think its more of looking at how we have been utilizing the space we have in our plants to begin with. We've gone through a transition of lean implementation over the last four years and as we do that one of the things you get from lean is you free up floor space.

I think this is the point now where we can take a solid look at what do you do with that excess floor space. You can either insource stuff into it or you can take and look at how you right-size your facilities. Our approach would be the latter.

Okay, that's helpful. And with Highway Bill discussions underway, have you thought about what a flattish three year bill would mean to your crane sales? Would it help materially? Where would you see -- what kind of cranes would you see the most benefit in if you would at all? Are customers already talking to you about a potential pick up in orders at all?

Well, I think the Highway Bill would be great because it would definitely affect our RT sales and small crawler sales. I don't think customers, right now, are looking much out the window at all. I think when it becomes a reality, I think that's when it will start. But that would definitely be an up-tick for the sales of those two specific product lines.

Okay, thank you.

Next we will go to Charley Brady with SunTrust Robinson Humphrey.

Okay. Thanks. Good morning.

Just on the foodservice side, I wonder if you could give a little more comfort on closing the plant in Cleveland. Obviously, some of the restructuring activities and the plant moves in the relatively recent past, there has been some good disruption there that has been a pretty big negative on margins. What do you learn from that, and what's going on differently now with this large plant move, and give us some comfort that maybe we're not going to have a hiccup that's going to hit the margins on foodservice again?

I'm happy to answer that. Obviously, we have done some learnings over the past and I think a lot of the execution issues that we had was down to bad planning. I think this move is very, very carefully planned out with people that really have shown in the business that they can do these plant moves.

Secondly, we will only shutdown once we know that the receiving facilities can produce, so we're going to have a time of parallel manufacturing. The intention is also to bring the customers to the receiving side to see the quality that comes out there.

Thirdly, I think the receiving sides have a history of producing similar products, so it's not that they are going to get something that is brand-new to them. Therefore, we feel very, very comfortable. And in reality, we have also had a couple of successful moves, but you have not heard of them and we have taken those good examples and we're going to apply them here. That's why we are very, very comfortable that we can do this very, very smoothly.

Thanks and switching over on the crane side again, Carl, I mean we've had three consecutive quarters of crane declines. The outlook looks pretty bleak from anyone ordering cranes. You have to go back to 2009 to see a margin level. Even adjusting for the VPC push out you go back to 2009 to go to a margin level this low and a crane order this low. And as we go into Q4 here, are you hearing any sign that you think that as you get into 2016 that we are going to have any kind of lift in 2016 at all? And that this crane business isn't going to have at least one quarter where they lose money? Thanks.

Charlie, I would say that there certainly is not any pie-in-the-sky expectations about a turnaround at this point in time in the crane business. We're expecting 2016 to be a challenging year, given the trends that are out there and the overall environment that we have talked a lot about during the call. We're adjusting to that and do not -- as I mentioned before, we will get into more specific guidance at a later date but we expect to be able to perform better from a margin standpoint, even with the top-line decline.

Yes, Charley, one other thing I would say is I think the biggest impact to that margin so far has been the client absorption issues. We have a clear plan of how to address the loss through that absorption loss, which will have an impact.

But you're not going to see that impact really in 2016, right? From what I understand, you said 2017 and 2018 is when you see the restructuring on crane? So the impact on 2016, is there any benefit at all to that?

Yes, because the things we are talking about here are additional steps. We've already taken a number of steps this year with what we've done in specific clients that are going to affect the variance for next year, clearly.

We will next go to Robert Wertheimer with Barclays.

Thanks, good morning. My first question for Hubertus on -- do you see structural opportunity -- have you had a chance to look at your customer concentration, your customer base, where you have share, where you don't have share? Maybe there is a chance to really broaden out and pick up share? I wondering if you think that is accurate and the timeline which you might think that is attackable if so?

Well, definitely and I think we have a very, very strong position with the large change. We're very happy on that and we know that we have room for improvement and growth in the larger market and that is what we are addressing. We have an active dialogue with all of the buying groups. We like what they are doing and we have already a share with them. We would expect and hope that we can grow that with the general market. We are also very comfortable with our reps.

I think what you are going to see is that we continue to grow with our large customers. As you know, some of these large customers are actually in a turnaround situation, successful turnarounds as well, talking about McDonald's. I think you've seen the last quarter results. I think they are turning definitely the corner. This is going to benefit us and on the back of that we would like to grow with them and also in the general market through our the distribution. That's the plan for the US but also in Europe and in Asia.

Would you say you are focusing more of your time on cost opportunities than trying to reignite something in the revenue side, or is that unfair?

No. I would say we have a very good balance. Obviously prior to the spin we do everything to close the margin gap to our competitors as much as we can. But we are actively working of course also on the time after the spin. In fact, I just came back from a four-day show in Milan, the host show, it's the biggest foodservice show, and the feedback that we got from the customers of our newly introduced product was fantastic. I've never seen that.

We turned 2 million of sales every day, which is very unusual for these shows. And specifically our new product introduction this year is the Convotherm ovens, which is really the product on the market, if you compare it by the functions. Our new Merrychef HUS and also the quick filter fries from Frymaster: they are really hot sellers that we introduced this year and we are going to see the benefits of that.

And then for next year, we have 25 new product introductions planned. I think we are doing a lot in order to make sure that once we are an independent company that we cannot only show profitability but also growth.

That was great. Thank you. Carl, if I can just ask one quick process question. I don't know if it is answerable or not, but at what point would you have locked in commitments on financing. You know rate and commitment? Is that just at close or is there some point before then where you have got the financing all dialed in?

It's not really answerable. What we would seek to do is to make sure that we have got the largest window. As you know, some of these debt capital markets can be lumpy in terms of the receptivity in the markets. And so we would want to have the luxury to make as wide a window as possible so we could hit the market at a more favorable time. Practically speaking, the expectation would be the ability to do it would be sometime in the December, January timeframe, all the way up to the anticipated close, whenever it might be in February.

Next we will go to Ted Grace with Susquehanna.

Good morning, gentleman.

Good morning.

Ken, I was just wondering if you could touch on -- I know you talked about the priorities as interim CEO, but what your immediate focus is, whether it's helping with the operation, helping with the leadership changes? They are probably similar in importance, but just kind of what your immediate focus is on in the next 30, 60, 90 days? And then also what your priorities are on looking for new leadership within cranes, whether it's industry expertise, turnaround expertise? They may or may not be book achievable. But can you just walk through those two questions to start?

Sure, thanks, Ted. First of all, the near-term priorities, one is the financial performance. I mentioned it a little earlier is we have a detailed granularity timing on the restructuring activities and foodservices is very good and they are in the execution phase. Cranes has been doing a lot of things throughout the course of the year.

Another good hard look at the capacity and at the -- really the levels of the crane business is needed. We've got a good first pass at it. We do need to get that more granular, more detailed and understand the timing better and try to make sure that we are bringing as much of the impact up as we can. So near-term financial performance is obviously front of mind.

The other priority is to keep the spin on track. As I mentioned earlier in detail, the guys are doing a great job at it but we've got to keep that moving and keep that momentum going. And then as you said, the third priority is to work with some of my other board members in the recruiting of a CEO for the Cranes business.

I think we will be looking for somebody who has good operational approaching turnaround or turnaround capabilities, somebody who has been through a situation where there was a need to substantially improve the profitability both from primarily a cost reduction leading into it, but also setting the stage and understanding how to bring growth into the equation. Somebody who is able to evaluate the portfolio of products and geography and determine where do you invest? Where do you cut back and what is the path forward for improved profitability and profitable growth? Those are going to be really the two primary things. I expect it will be somebody quite seasoned and a been there, done that kind of guy.

And maybe this is a question for you and Larry but when you think about cranes, specifically, I'm not asking to throw anybody under the bus, but you look at the leadership changes that you have already put in place and you look at the Company's performance versus even the public peers and some of the privates where you can get visibility. When you look at the challenges the business has faced, how much do you think was self-inflicted versus market dynamics? Market dynamics could be obviously the market is very difficult. You could have FX challenges and competition, but when you think about maybe the 80/20 rule, 50/50 splits, how much of the under performance in cranes do you think was more execution versus just a really tough environment?

I think the environment we are facing is not unsimilar than a lot of the environment that Cat and JCB and a lot of the other industrials are in the market. I think specifically for cranes because of the level of impact from the oil price has driven the market to a level that we have not seen and probably reiterated by H&E that we have not seen a cycle like this as long as I've been with the Company. It's clearly a very, very tough market right now for the crane -- the crane side of the business.

I think the organization we put in place in March last year, we have the roadmap in place to execute. It's a question of, we're trying to do things in a market that is so depressed that we are trying to make sure that we have the right products at the right time. It's a tough market, clearly.

And Larry gave -- and Ted your question was internal versus external. That's impossible to relate any percentages to. Larry did a good job of describing the external factors. I would say internally there are things we could have done better and will do better. And I think really to me it boils down to timing.

To be able to react, we need to be a little more agile, flexible and be able to react to these quicker. That's what we are working on right now is to be able to get to this so that anticipating that if there is a decline, what are we going to do and get it done. I think I would boil it down to timing and being able to get ahead of the curve. It's like trying to catch a falling knife for the last period of time. But we do need to get ahead of the curve.

Next we will go to Seth Weber with RBC Capital Markets.

Thanks, good morning. Hello.

Hey, Seth.

Good morning. I wanted to go back to the reliability and testing issues on the VPC. I was under the impression that you had started shipping them earlier in the year. I'm just trying to understand, are these issues that were highlighted by a customer that ended up getting put back to you, or did you ship any of the VPC of these cranes in the second quarter? I'm just trying to understand how this came about?

Sure, Seth. When you look at the crane, there is two parts of the crane. There is the base crane and then there is the attachment the goes on the back. The reliability issue that we were not satisfied with was found in one of the hoist drums with one of the attachments that goes on the crane. So the crane itself we have, yes, we have shipped cranes. They are working fine.

But I think the forward cranes coming have more of the attachments with the orders than just the base crane. We were not satisfied with the reliability of this component, so we did further testing and it didn't delay the shipments. We have the issue resolved and we are satisfied with it but we have been shipping cranes. It was discovered by us during our testing process for those attachments.

Is this a function of the Company using a new supplier? Is there -- I'm just trying to understand how --

I'm not going to throw a supplier under the bus, but I think anytime you have a crane of this size, you have a number of suppliers involved. But I think the key thing is our testing protocol and our reliability testing caught the issue, and clearly our decision was not to push a questionable issue into the marketplace, so we fixed it, resolved it and insure our customers are going to get the highest quality product that we promised them.

Sure, okay. Then on the order number, the 337, is it possible to characterize what areas of strength that you are seeing in that number? I know you've got a military order at some point, but can you -- what are the areas that are still generating -- still a source of order activity for the Company at this point?

I would characterize the third quarter and what we saw with the change in the market first. I think one of the markets that has been strong for us has been the Middle East, specifically, Saudi Arabia. I think what we saw there in the month of August and September is the government delayed payments to a lot of the contractors and so that caused what I would call a backup in that market. Similar effect in China when the currency play was in place by the Chinese. We saw a push out of tower cranes from our customers and we are seeing some of that come back now.

But I think, in general, the tower crane business has been stable with the exception of this push out in Asia for the third quarter. I think the all-terrain crane business had been running fairly good, but I think it's an overall global impact that we are seeing on the overall markets that's got the product lines, the demand slowing down. I think, overall, the towers and the ATs and obviously the large crawlers, we still have a lot of excitement and interest in the new VPC technology.

At this time I will turn the call back over to Mr. Khail for any additional closing remarks.

Before we conclude today's call I would like to remind everyone that a replay of our conference call will be available later this morning. You can access the replay by visiting the Investor Relations section of our corporate web site 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 January. Have a good day.

That does conclude today's conference. ( Operator Instructions).