Manitowoc Company Inc (MTW) 2016 Q3 法說會逐字稿

Good day everyone and welcome to this Manitowoc Company third-quarter 2016 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the conference over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead sir.

Thank you, Catherine. Good morning everyone and welcome to Manitowoc's third-quarter 2016 earnings conference call. We're glad you could join us today. With me today is Barry Pennypacker, our President and Chief Executive Officer. And Dave Antoniuk, Senior Vice President and Chief Financial Officer. On today's call we will provide details of our third-quarter 2016 performance. As well as an update on our fourth-quarter business outlook as outlined in last evening's release.

Please turn to slide 2. Before we begin, I'd like to review our Safe Harbor statement. During 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 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. Today's webcast includes a slide presentation which can be found in the investor relations section of our website. We will reference these slides throughout our remarks. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to one and a follow-up and get back in the queue for further questions in order to ensure everyone has an opportunity to ask their questions. And with that, please refer to slide 3 and I'll now turn the call over to you Barry.

Thanks, Ion and good morning everyone. The global economy remains stagnant, and many key industries we serve continue to be weak. [The] in take rates for our mobile products in the third quarter continued at the same rate as we experienced during the second half of the prior quarter. And this trend has continued into the fourth quarter, as we have experienced so far. Tower order intake rates for the quarter reflected the seasonal affect we have seen in the past. And were in line with our expectations. Past season order rates in towers indicate that we will experience an uptick in order rates in the fourth quarter. And we're confident with our new, renewed product line particularly our self-erecting tower cranes this will be the case.

For the North American region, conditions in the oil and gas sector remain challenging. As oil prices have remained low and demand has remained depressed. So, there has been somewhat of a stabilization. Which is creating some optimism. Faced with uncertain markets, and lower used crane values, fleet owners have not been able to replenish or grow their inventory. And we do not see any evidence of this turning around in the near term.

In the Middle East, we have seen significant order deterioration particularly in Saudi Arabia. The number of current projects in the region has been greatly reduced shrinking the demand for crane products in the region. The recovery in the commercial and residential construction markets, particularly in Western Europe that across all product lines has partially mitigated the declines in other regions. Although we see pockets of stabilization across the globe, make no mistake the overall crane business is very weak and at historical low levels. We continue to maintain our increase market share and selective product categories. Based on current activity levels, particularly in mobile cranes, we do not anticipate meaningful recovery in global demand for cranes in the near term.

Moving to slide 4, we are aggressively taking actions to reduce costs to offset the impact of weak orders and balance capacity with demand. Specifically we are approaching costs from three angles. First, we continue to reduce our manufacturing footprint. We are accelerating the relocation of our crawler production from Manitowoc, Wisconsin to Shady Grove. Which we now expect to be virtually completed by the end of 2016. Consistent with our continuing effort to consolidate the manufacturing footprint of the Company, we've announced the consolidation of our two tower crane manufacturing locations in Portugal into one. Which we expect to be completed by the end of the third-quarter 2017.

Secondly, as previously announced, we are significantly reducing the production of our mobile cranes in the fourth quarter to align our build schedule and inventory levels to incoming order rates. Production levels in our North American plants will be reduced by approximately 50% sequentially. This will have an adverse effect on our near-term earnings. But will have a positive impact on our ability to maintain adequate liquidity levels, to support the ongoing business.

Finally, we continue to make additional headcount reductions in all areas of the business. We plan to end the year approximately with 5000 employees. Compared to approximately 6400 employees at the beginning of the year. A reduction of approximately 1400 employees from January 1,2016 or 22%. As we look forward to the end of the year, we are adjusting our outlook to the reality we are facing in the global crane market. Which reflects the impact of reduced manufacturing rates, lower SG&A expenses, and focusing on maintaining adequate liquidity levels. David will also discuss this in a little more detail. And with that, I'll turn the call over to David.

Thanks Barry, and good morning everyone. Let's move to slide 5. As Barry mentioned, we reported net sales for the third quarter of $349.8 million. Which decreased $88.4 million or 20.2% from year ago. The year-over-year revenue decrease was most pronounced in the Middle East and the Americas regions. SG&A costs for the third-quarter of 2016 were $73 million. Which is $4.6 million below the prior-year, and slightly less than the second-quarter of 2016. Included in the third-quarter 2016 SG&A costs were approximately $7 million of charges. Primarily related to the decline in the fair market value of used cranes. Operating loss in the third-quarter was $133.5 million. Compared to a loss of $8.2 million last year. On an adjusted basis, our operating loss in the third quarter was $31.5 million. Compared to a loss of $7.7 million in the prior year.

The current year loss includes $96.9 million of non-cash impairment charges primarily related to certain software assets and other charges related to the relocation of crawler and tower crane manufacturing operations. In addition, $3.9 million of restructuring costs were recognized during the third quarter, mainly related to severance costs. As noted in our release, our adjusted operating loss included approximately $30 million of unusual items related to the acceleration of the relocation of crawler crane manufacturing operations, continued investment in quality improvements as well as cost related to the declining market value of used cranes. Excluding these items, our adjusted operating loss would've been $1.6 million for the third-quarter of 2016. GAAP net loss from continuing operations for the third quarter was $138.2 million or $1.00 per diluted share versus a net loss from continuing operations of $29.6 million or $0.22 per diluted share in the third-quarter of 2015.

Excluding special items, non-GAAP adjusted net loss from continuing operations was $38.1 million or $0.28 per diluted share in the third-quarter of 2016. Which compares to a non-GAAP adjusted net loss from continuing operations of $29.8 million, or $0.22 per diluted share last year. With regard to the relocation of our crawler crane manufacturing to Shady Grove, Pennsylvania we confirm our expectations to incur cash outflows of approximately $35 million to $50 million related to this project. While this transition will be substantially completed by the end of the year, most of the cash outflows will be incurred in 2017. The majority of the cost to be incurred in 2017 will relate to capital projects and related expenses, inventory relocation, and training costs.

In the third quarter we incurred approximately $2 million of cash outflows. In addition we expect to recognize non-cash charges of approximately $95 million to $100 million reflecting a reduction from the original guidance of $105 million to $120 million. We recognized $93.9 million of non-cash charges in the third quarter. Total annualized savings to be generated from these actions continue to be in the range of $25 million to $30 million per year once completed and demand returns to normalized levels. During the third quarter, net cash used for operating activities of continuing operations was $1.4 million, versus a use of $37.2 million for the prior year. The increase was primarily from working capital efficiencies. Third-quarter capital expenditures totaled $10.1 million which was in line with our expectations and compared to $9.4 million in the prior year.

At this time I would like to make a few comments regarding our liquidity. As most of you know we have a $225 million asset based loan credit facility. At the end of September, the availability line under the agreement is approximately $182 million. Against this availability we had approximately $4 million of net borrowings and $17 million of outstanding letters of credit. Therefore, our excess availability as of the September balance sheet date was approximately $161 million. Backlog at quarter end was $353.6 million a decrease of $40 million or 10% from the second-quarter of 2016. And a decrease of 44% from the prior-year period. For the third quarter, orders totaled $310 million compared to $349 million in the second-quarter of 2016 and $338 million in the third-quarter of 2015 representing a.9 times book times book to bill]

Turning to slide 6, and as Barry has noted, we are adjusting our fourth-quarter outlook to reflect the impact not only from the weak mobile crane market but also the negative impact on our plan absorption from the reduced build schedules. Accordingly, our fourth-quarter guidance is as follows: revenue down approximately 25% to 30% year over year, adjusted operating loss margins, approximately 4% to 6%, depreciation, approximately $11 million, amortization of intangibles approximately $1 million, and capital expenditures approximately $10 million to $15 million. I will now turn the call back to Barry for some closing remarks. Barry.

Thanks, David. Turning to slide 7. While the global crane business is still weak, we remain committed and focused on implementing our strategic priorities to achieve our target of double-digit operating margins by 2020, what we call, 10 by 20. Our first initiative is margin expansion. As we accelerate the reduction of excess manufacturing capacity, thus eliminating waste and positioning the Company to drive shareholder value as markets improve, we remain committed to including our customers in open dialogue. And are proactively seeking their input as we transition this Company.

For example, in the last two months, we invited over 170 customers to Shady Grove to see firsthand the overall progress we're making in this facility. The feedback was extremely positive. As they can see for themselves the progress we're making with regard to store operations. As I mentioned earlier, we have made the decision to accelerate the relocation of crawler crane manufacturing. We remain on track to realize the savings that we previously committed once demand returns to more normalized levels. We also have begun the footprint rationalization in Europe, by announcing the consolidation of two of our Portuguese manufacturing facilities into one. As I'm sure you are aware, we are making very good progress. But we still have a lot more work to do and I look forward to continuing on this much-needed path.

The second key element of our strategy is growth. Despite the difficult macro economic backdrop, we are maintaining, and in some cases growing our market share within mobile cranes and continue to expand our share in tower cranes. I am convinced that this is not by accident. Our customer satisfaction with our quality improving, and as I said in the past this is the key to growing successfully in any market.

We recently completed a tower crane dealer meeting in [Niela], Italy to introduce our new Hup 40-30 product line. As well as to show their customers the investment we've made in this new production line that I have been talking about. And again, we have gotten very positive feedback from our customers.

As a reminder our new Hup product lines allows our customers to purchase two models instead of six and cover the same range of lifts as before their introduction. Our customers are extremely excited about the lead time. And inventory reduction that we were able to achieve for them as a result of this investment. I also remain cautiously optimistic that next year the FAST Act will provide opportunities for our products as both presidential candidates have positioned this as a jobs creation priority.

The third key element of our strategy is innovation. Our investment in design and technology is paying dividends, as we are seeing strong acceptance to recent product introductions. In particular, our new GRT 8100 rough terrain crane launched in the second quarter, has been well received by our customers for its excellent performance characteristics, quality, and reliability. Customers of this crane tell us that this product launch has been nearly flawless. And has been the best new product launched by Manitowoc in recent history. This success story demonstrates the powerful impact of the Manitowoc Way on our product development process.

Another great example of our innovation is the previously announced and discussed military order. As background, in June of 2015 we were awarded a 5 plus two-year option contract with the US Army valued at $192 million with the options of the contract value nearly $270 million total. Since that time, we have designed and built the first three test cranes. These cranes have been fully tested by us, and have now been delivered to the US Army for their portion of the testing which is expected to last approximately six months at the Aberdeen test center in Maryland. During this phase, the cranes will be subjected to multiple performance and endurance tests to prove out their worthiness for our soldiers.

This crane is capable of operating in the worst environments and in the harshest conditions known to the material handling equipment market. We know that this crane is up to the challenge. And our teams have worked diligently to ensure a solid design and test plan and platform were delivered. When fielded, it will become the military crane used across military forces for light, medium, and heavy lift requirements for the next 20 plus years. We believe the success of this project could lead to significant opportunities within the military and we are pursuing them aggressively.

We also have made significant progress in developing our next-generation crane. We currently have three working prototypes undergoing performance and durability testing here in Shady Grove. The project is on schedule and the performance is ahead of expectations. I'm extremely proud of this project and the team. They are doing a super job and have clearly embraced the Manitowoc Way by better engaging our customers, increasing our speed to market, and truly making a cross functional team responsible to deliver superior results. We will showcase this new product at CONEXPO in March of 2017. And we have already begun to book orders.

The fourth key strategic priority is to drive velocity throughout our enterprise by implementing the principles of the Manitowoc Way. As discussed in the past our lead transformation is well underway at our Wilhelmshaven, German facility where we manufacture all of our all terrain cranes. When I joined the Company, a large investment was in process to optimize the manufacturing of our boom assemblies. I challenged the team to reconsider their approach using lean principles. A number of things have resulted from this challenge. We are now building booms sequenced with cranes in assembly.

The team has also developed a variety of ways to optimize the overall flow of the production in the plant to improve sequencing. And lastly, based on our recent Manitowoc Way boot camp, the team identified several smaller activities to enhance the overall manufacturing process. There is still a lot of work to be done. But I am satisfied by how the team has embraced the Manitowoc Way.

During the third quarter we trained 80 of our most senior operational leaders in Europe on the principles of the Manitowoc Way. And as a result, each operation in Europe now has a team of qualified people to champion the culture of continuous improvement with each site having one person as the leader of the implementation of the Manitowoc Way. While the market remains extremely challenging, we are controlling every aspect of the business from a cost perspective. We are improving our quality of our products, we're expanding our market position, we're rolling out lean initiatives and continued with a disciplined approach to new product development.

While the additional restructuring actions we are taking are significant, they are necessary to manage through the downturn and position the Company for the long-term. That said, we are maintaining our ability to quickly serve our customers when our business recovers. And once it does recover, we expect to realize substantial incremental profit improvement as we realize the benefits of the tough actions we are implementing now.

In a lot of cases talk is cheap. I've talked very passionately about this business. But I guess the proof is in the pudding or should I say, in the results. I'm extremely excited to show all of you these results at our first analyst day in Shady Grove on Thursday, November 10, at which time you can judge for yourself. Our long-term outlook remains bright, and I have every confidence we're going to exit this cycle significantly stronger than when we entered it. Our success would not be possible without the effort and commitment of our team. I thank each and every one of them for their strong dedication to ensure the future success of Manitowoc. Particularly during these challenging times. With that, we will turn it back over to Ion to introduce the question and answer session.

Thank you, Barry. And Catherine open up the line please so we can start accepting the questions please.

(Operator Instructions)

Mike Shlisky with Seaport Global.

Good morning guys.

Good morning Mike.

I want to touch first on the used crane pricing issue that you had in the quarter. It was like $13.5 million. I just wanted to make sure I get what is going on there. Is that a one-time issue that you had? Or are you going to be having to mark-to-market as you go along here in the coming couple of quarters?

Right. So Mike it is a mark-to-market adjustment with regard to the charge that we took within the quarter. And it related to what I'll say is the value that we had on the books at the time. And what we anticipate the used crane market is today. We believe that the used crane market is at a low point. And so I would not anticipate having any of those. However, should market conditions deteriorate there will be pressure to reduce the values that we currently have on our books.

Okay great. And my other question was, Barry you had mentioned CONEXPO coming up in the first quarter of next year. Are there any other SG&A costs that you will in the first quarter before CONEXPO and any elevated R&D costs both in the fourth quarter or the first quarter as you get ready for CONEXPO?

No, we are taking CONEXPO into the account for the SG&A percentage that we are targeting next year. And as far as R&D is concerned, the spending that we've had exhibited over the last three quarters will continue as far as I can see.

Okay. I will leave it there. Thanks guys.

You're welcome Mike.

Ann Duignan of JPMorgan.

Good morning it's Ann Duignan. How are you. More fundamentally on the use crane values can you talk about exactly what you have been doing there? Have you been leasing equipment to your rental customers, or to end customers? And that's why we are now having to write down residual values? It's not something I would've necessarily expected Manitowoc to have risk of.

Yes, it has absolutely nothing to do with rental, because that's really not our business. As you can imagine Ann, we have a substantial amount of cranes that we continuously use for testing to ensure that the load charts and different lifts that our customers are requiring of these cranes have that capability.

Those cranes are the ones that are in our test yards around the globe. In our PVCs that we use. And what we have discovered is, that of course, as used crane values in the market continue to deteriorate we have these cranes that needed to be mark-to-market. So it is something that has nothing to do with rental. It has to do with a service that we offer our customers well into the future. And as far as I can see, based on the values, the valuations that we looked at we have done a good job of analyzing this. And I truly don't expect, based on the data that I've looked at that this will be an issue in the future.

Let me just follow up on that. If these are products that are being tested, does that insinuate that new products coming to market will have to be listed at lower prices?

No, not at all.

For instance, if you look at our VPC technology, our VPC 300 and VPC 650, as you realize that recently that's been a new product introduction. We have customers who are looking at utilizing that particular crane for lifts that haven't been thought of in the past. So what we have to do is we have to model that on the computer first. And then we have to demonstrate in the yard, that the crane is capable of doing that.

So that is where you get these value of these cranes that we keep on our books. And when market pricing goes down, the prudent thing to do for a Company that is publicly traded like ours is to mark to market, and that's what we did.

I appreciate that. I will have to think about whether that would impact future new prices. But more fundamentally, for 2017 the markets are extremely challenging. Tower cranes have held up why wouldn't we expect tower cranes to start to roll over next year especially in North America and the Middle East?

If we didn't have the new product portfolio that we have invested in over the course of the last year in our tower crane business, I would be extremely concerned about that rolling over. But, with the new products that we have come up with, the productivity improvements that we were able to supply our customers, as well as the inventory reduction the rental houses in Europe are going to be a get as a result of the introduction of Hup, based on the intelligence that we've got from our customers, while they were at Niela. And certain industry trends that we are seeing we felt very confident that at least the trend that we have exhibited in past fourth quarters for tower cranes will continue well into 2017.

Okay I'll get back in queue and I appreciate it.

You're welcome.

Steven Fisher with UBS.

Thanks good morning.

Good morning.

Wonder if you could just talk a little bit more about the oil areas. And what the pressure they are in the situation are you still seeing cranes coming out of the oil areas? How has the pace of that changed over the last few quarters? Or is it really just bottomed and stable here at a very low level?

I'd like to say that it hit bottom and it hasn't really repeated. However we've seen a substantial number of cranes in the recent past, come out of the oil sands. And that trend, I think, is a one-quarter trend. And I think those cranes are currently being absorbed into the North American market. And I think that is definitely one of the reasons why demand for our RTs particular in North America has been stymied.

Okay that's helpful and makes sense. And can you just discuss the extent of pricing pressures on new cranes? I mean you were just talking about use prices. But how broad is the new pricing pressure from a regional and product line perspective? And are you still finding yourself walking away from opportunities because of the returns?

Absolutely. We will not be in a price game. But I must say, to be honest, with the products that we are currently shipping, and the technology that I think we have been able to offer our customers, we've not seen the pricing pressure that I know has been talked about in the industry. We've been very resolute in our margin expectations of our sales force and we will continue to do so.

Is your pricing year-over-year is it neutral is a positive? At the moment.

Neutral.

Neutral. Okay thank you.

You're welcome.

Mig Dobre with Baird.

Good morning everyone.

Good morning Mig.

I'm just trying to make sense of something here. I understand your comments on use crane values. But there was also an adjustment to inventory reserves. Can we talk about that? And equate that adjustment that you made for to inventory reserves with your comment on stable pricing?

Right. So Mig, on the inventory reserve, obviously one of the things we looked at, that we took a fresh look at where we sit with our reserves relative to the [R end] inventory and with the transfer of the manufacturing from Manitowoc to Shady Grove and the elimination of a lot of what I will say is particular products, we have engineered out a number of items that we've taken the reserve for.

And in addition we've looked at the current market environment. And based upon excess inventories we've taken that as well. So I think it's more just a fresh look at where we stand with our general reserves in inventory, as well as the impact of the, what I'll say is rationalization of the product line and the transfer of the products into Shady Grove. As well as just looking at general market conditions and the inventory. So that really drove the inventory reserve and it really is distinct from the fair value of the cranes that we took that adjustment on.

The two are completely independent, but David you may also want to recognize because I certainly understand some of the tone of the question about the deep dive that we've done, so that we are pretty much ensuring that we don't have this issue quarter to quarter.

So Mig, what Barry's referring to is that we have taken a fresh eyes look at where we stand with the inventory. Getting into what I'll say is particular details. And in the past when we looked at things some things were not as clearly as visible.

We took the time and effort to go and dig under the covers to look at things on a more granular level. And by doing so like anything it came up with some issues. And we wanted to capture those and put them in one bucket in the quarter here.

Okay. I appreciate that. Then maybe sticking with inventory. Can you help us think a little bit as to how this balance sheet account progresses in the fourth quarter? I know that normally, we see the down tick seasonally in the fourth quarter. What cash do you expect to generate here? In a near-term from inventory?

So Mig I think our targeted reduction is about $60 million in the fourth quarter.

Okay. And then maybe can you humor me for one more. I'm trying to understand, given that there's a lot of moving pieces to your margins in the back half of this year. And I recognize that some of this is temporary in nature. Other items might be with us for a while. Can you help us separate these out so that we have at least some basic idea as to how to model margins into next year.

So, Mig, I think the biggest challenge is going to be our absorption right? That's the biggest variable at this point in time. Which is really affecting our overall margin. As Barry had mentioned in his comments, when you look at our mobile, what I'll say is build schedule in the fourth quarter and if you look at it on an earned hours basis in the facility, we are below 50% of what we did in the third quarter, which is going to generate a substantial amount of what I will say absorption issues. And those are not going to be capitalized and we will run through that. We are looking at about $18.5 million of variances that's going to blow out in the third quarter. So that will negatively affect our gross margins in the quarter.

All right thanks.

Seth Weber, with RBC Capital Markets.

Hey good morning everybody.

Good morning.

I just wanted to better understand, it sounds like you are maybe qualifying some of the cost savings a little bit more than what I thought I had heard previously. So I think you are saying now for example the $25 million to $30 million annual savings at a normalized market level. So given what you are seeing for the market, is there any help you can give us for what we should be thinking about as the right savings numbers to be incorporating into our model for next year? Assuming current run rate obviously it's not going to be the 25% to 30%, but is there some number that you would expect that we should be thinking towards?

Yes, I think you should expect the 25% to 30%. With current run rates.

Okay. ABI misunderstood I thought you were saying at a more normal --

Current run rates are at normal run rates when we put the program together. Okay?

Okay. That's helpful.

Maybe that's where the confusion us. Normal run rates are what we consider when we put the program together.

Perfect. Thank you.

I think you can hear or you can really model pretty quickly 1400 employees out by the end of the year. And a substantial portion of that has been related to the Manitowoc crawler manufacturing. So you can get to that number rather easily.

Yes, no doubt. I thought that you were more referencing a more normal market condition relative to where we are today, but just a misunderstanding.

No problem.

And a couple other small questions. On the second-quarter call you had talked about seeing potential for I think another 20% or 25% of the US footprint to potentially come out. Is there any additional progress towards that? Is that something we might hear about next week? Or are you further along in that process?

When we put that 20% out we thought that we would have more opportunity. We didn't think we would be relocating all of the production of Manitowoc. But we have done that. So in North America, quite frankly, when this relocation is complete we will have the Shady Grove facility. And that's it.

Okay right.

So the further reduction in North America is very limited. However if you think about what I said in the prepared remarks we've begun the activity in Europe.

Right.

And will continue.

Okay. And then just one last follow-up. I think in the second quarter, you had talked about after market activity. Aftermarket revenue being up based on the tower rebuilds. Did that continue here in the third quarter?

It maintained, and as I had said, and we are very concentrated on getting the overall aftermarket percentage of this business up into the mid-20%s. We have taken one of our high potential employees here and given them responsibility for the aftermarket globally and I think that's going to show and provide substantial results for us.

Tower rebuilds in Portugal continue at levels that are sold out for the balance of the year. So that continues to be strong. We received a rather substantial order to rebuild ATs in Algeria. So the focus that we are bringing to the aftermarket is in fact alive and well. And reviewed very judiciously here. And I'm extremely pleased with the progress we are making. And I think as time goes on, you will see that percentage get into the mid-20%s.

Terrific thanks very much and see you next week guys.

All right look forward to it.

Jamie Cook with Credit Suisse.

Good morning a couple questions. And sorry to follow up again on Seth's question. But to be clear, if, Barry, if demand stays at current levels that you implied for the back half of the year, do you believe in 2017 that the crane business can actually be profitable?

Yes.

Based on the actions. And is there any way you can help quantify? Because if we go back and look, the comments about the restructuring savings were more again, when demand returns to normalized levels. I just want to be specific. We state the second-half we can be profitable and can you help us understand to what degree? And then my second question is, you talked about just a little more color on you talked about weakening utilization rates. If you can you give a little more color either by geography or product type thanks.

Sure. Let's start off with the restructuring.

They specific restructuring program that we've communicated to you with a $25 million to $30 million savings is going to put $25 million to $30 million in the bottom line next year. Whether we build a single crawler crane are not. Let's just make that very clear.

The other restructuring savings that we have are somewhat variable based on volume. We've taken out a substantial amount of overhead costs in a particular facility that we expect to build 100 units in. If we only built 70 units in there we're certainly not going to be able to realize on a per unit basis the margin improvement that we thought we would get.

However, that structural cost, as you can imagine, from seeing the fact that 1400 people have exited the business this year, is in fact in place for when we return to more normalized levels. And I would tell you that if you annualize our third-quarter order rate, that is certainly not normalized levels for the crane business. That's at trough levels.

So we are taking that into consideration. And then the follow on question that you asked about 2014. We are resolute and very much concentrated on being a profitable Company, annualizing our second half of this year. And I'll let David comment a little bit more on that. But that is something that is our expectation and we are driving this business toward.

Jamie, just to add a little bit of color to Barry's comments. We have obviously been looking at where the business needs to be if we annualize what I'll say the second half of the year. If you look at the fourth quarter independently, in the fourth quarter we have a double whammy. Whereas first we are adjusting our current production rate to current orders, and then we are decreasing production further to get our inventory reduction in Q4.

So there's sort of a double whammy in there. And it kind of skews the numbers a little bit. But notwithstanding, if we look at the market conditions and the order rate we've done some internal modeling here where if we look at what we have in the second half of the year annualize that, that we can become what I'll say breakeven to slightly positive on the operating earnings line.

Okay that's very helpful thank you and just the color on utilization.

In certain areas of the world, particularly in the Middle East, we have seen utilization drop off the charts. Latin America, basically there is one large program in Peru and other than that, cranes are just absolutely idle. So, my comments are really targeted at the Middle East and Latin America.

Okay thanks I'll get back in queue.

Thank you.

Nicole Gibly, with Deutsche Bank

Thanks good morning.

Good morning Nicole.

We've been through a lot of the questions here, so I think I'll just ask one. You see you guys are still looking for double-digit margins by 2020. But it seems like the volume environment has certainly taken a step down here in the past quarter. So I guess what I'm curious is, in order to get to double-digit margins by 2020, what sort of a volume environment have you baked in?

When I put that challenge out to the group and what we were going to do that was somewhere around the $1.7 billion the $1.8 billion range. I'm committed to double-digit operating margins in 2020. If revenue is at the level that we are experiencing currently annualized, we will be at double-digit operating margins. There are plenty of businesses and that size that operate at double-digit operating margins and we should be no exception.

Okay got it thanks I'll pass it on.

Charley Brady with SunTrust Robinson Humphrey.

Thanks. Good morning. Just to go back to Nicole's question and make sure I heard that correctly. You believe you can do double-digit margins at the current production levels?

Once, in 2020 annualizing current business continuing with our restructuring efforts, continuing with our product development efforts, continuing with our Manitowoc way productivity improvements, there's absolutely no reason in this man's world that we should not be there.

Okay.

There are businesses that are $250 million that operate at double-digit operating margins. Yes we have a large cost base. But that is what we are in the process of absolutely fixing. And I think when you study what we're doing and you see the amount of cost that we've taken out in one year, and the amount of cost that we will be announcing that we are taking out next year, it doesn't seem to me to be a long putt.

Okay that's good that's helpful. I did not hear any mention about the crawler market specifically. Can you address what you are seeing in crawlers? And my second follow-up to that would be on the tower market. You commented you're optimistic on towers because you have a number of new products rolling out. And I'm just curious, juxtaposition that with the commentary about what you are seeing declines in the Middle East. Is there a concern that you wind up with excess tower crane capacity globally, particularly in the Middle East that may be offsets some of the growth you might otherwise get from new product intros?

Let's start with the crawler market to start off. The crawler market in the US in particular, which is where our volume is, is really dedicated and dependent upon infrastructure. Infrastructure and wind. The wind portion of the business is doing just fine and we are very pleased with that and that continues to show opportunities.

The infrastructure portion, however, until the FAST Act appropriations start meeting themselves in the purchase orders. And those funds start leaving Washington DC, that portion of the market is going to be somewhat stymied. And that's why I remain extremely hopeful that when the selection finally does get resolved, that both candidates are on the record as saying that one of the things that we need to do very quickly is infrastructure investment to drive jobs and that will be very good for our crawler business.

On the tower side, as I said earlier, I'm very much optimistic about my comments. Because of the new product introductions. The Middle East, the tower market in the Middle East is what it is. But the growth that we are seeing in Western Europe more than offsets that. And with the new products that we've introduced and the productivity improvements that they are able to give not only customers in Europe, but also customers in the Americas starting to look at our Hup product line is extremely encouraging.

Thank you just one for me and I will get off. On your commentary in the release, and referring more to fourth-quarter about the adverse impact about all this relocation and moving production. I am wondering do you think that drag goes beyond Q4 into first quarter 2017 or later? Or is that by the end of by the end of 2016 that drag that you're seeing from operational inefficiencies is largely done?

Will I think David tried to explain a little bit of that. In that we're going to see the earnings impact of the move in the fourth quarter. And we will see some spillover into Q1. But the biggest spillover that you are going to see into next year is the cash impact.

And Charley, sequentially typically Q4 to Q1, our sales go down just because of the year end activities that happen, as well. So from a volume perspective will be a little bit down and that's why typically there's an inventory build in Q1 associated with this business.

Thank you.

You're welcome.

Sameer Rathod with Macquarie.

Hello good morning. My question is on supply rationalization in the industry. Clearly Manitowoc is taking painful steps to do footprint rationalization. But are you seeing this kind of behavior from your peers globally? Or are people still maintaining our footprint in hopes of future cycles or what have you?

I think the industry is very disciplined. There are competitors of ours who have announced that they are taking out capacity similar to us, which I think is going to bode well long-term for the industry. And I think this is a long-term, and even in the short-term is a great business. Because I think some of the more sophisticated competitors are taking actions like we are in order to ensure that there isn't an oversupply and overabundance of capacity when this industry returns.

Okay thank you.

You welcome.

Larry De Maria with William Blair.

Thanks, good morning. Not to beat a dead horse. Hello guys. Normal demand and cost [cust] comment. Can you discuss what capacity utilization will look like next year, based on current run rates given the consolidation you're doing? And secondly what you think normal industry demand is, and what should it look like since this year is a trough? Maybe you can give us some guidepost about what the industry should look like.

I'll try to answer your first question.

The second one I don't know what is normal to be honest with you. Because this industry is quite difficult in some cases to understand, but I'll give that a shot. The first part of your question though is that we are in most of our plants next year we have a plan to operate at one shift. So that's our capacity utilization.

We are sizing our operations that based on our annual plan we want to operate our business on one shift so that when this business does double, as it has in the past very quickly, we will be in a position to handle that demand. And of course that wouldn't be possible in the past without us being able to implement lean principles and take waste out of the system and free up floor space and reduce inventory.

So I think that is a very important part. You asked about normalized levels of demand. I think that if you look at us at $1.8 billion in revenue, that's pretty much a normalized base. And that's when we put all our plans together to say what we're going to do in the future and things. And you look back over the last 20 years and you inflation adjust demand. $1.8 billion is a normalized level for this cranes business.

Okay thank you. And then if I can follow up. You said you were optimistic on share gains and I think in the release and you mention significant gaines coming. But you're not going to compete on price. Just curious how do you get there? Is it really about the new product cycle? Sounds like towers obviously. But is it really about the product cycle that takes significant share without price at this point?

That comment was really not even targeted at towers. I've got to get share in mobile and I have to get share in mobile by, number one, fixing our quality, which I think we've done a very good job of. And our customers are recognizing that. And I've got to be able to take share by having a better mouse trap.

And I have talked about the GRT8100 introduction and what that is doing in the market. I have talked about the new crane that will be exhibited at CONEXPO. And I am 100% certain that each and every one of you that come to this plant next week and see what we're doing as an organization will have a new found interest in what this business' capabilities are.

It is very difficult for us when we're chasing the falling hatchet the way we are with regards to revenue for you to see the wonderful things that this Company is accomplishing. But I am certain that as of next week, when you see what I can see, you will all look at this business in a different light.

Okay, thanks. We will see you next week.

Look forward to it.

Cliff Ransom, Ransom Research.

Whew that's a long sigh of relief.

Yes.

Guys I missed buying a D9 Caterpillar in Australia last year for $25,000. Would you recommend that I go out and buy a couple of crawler cranes or a couple of tower cranes?

I would recommend you buy them all.

Okay. Looking at when you ran through the credit line. What are your expectations about usage of the line? Are you going to be able to pull out enough inventory from -- once you get over the burden of plant relocations. Which usually requires some excess inventory. But between now and the end of the year, maybe through the first quarter. Because that's a seasonal time. Are you going to be able to get through that inventory without drying down that line materially?

Yes. That is our intention and our hope, Cliff. Because, quite frankly when you're turning working capital twice a year, that's not very efficient. And when you look at what our working capital is and you look at where we're at, that's about the turns that we have. So you'll see a substantial ramp down in this fourth quarter.

And we're going to keep it there. Because we do have flow lines. One piece flow. And all of our major production facilities are in that transition and we're going to match our level of through put to that. And working capital is going to be a substantial source of cash for us.

David, I don't know if you would like to add any color to that or not.

Yes. Cliff, I think generally speaking we are acutely aware of what our availability is. And we do have sufficient availability on our line for the foreseeable future. Understanding that in February we have a large interest payment and of course, getting through the fourth quarter. Which is one of the reasons why we reduced our build schedule to not put cash into inventory but to free up the inventory. So, we do have a good focus on working capital and we believe that by paying a little bit more attention to working capital we can mitigate to the greatest extent the requirements in the first quarter of our cash needs.

And then as a quick follow up if I may. I'm sorry. Bear with me three seconds. Well four. When you talk about 10 by 20, Barry, are you assuming that it's 10 by 20. You told us what you thought about 2017. What your commitment is. But is a 10% going to be mostly brought by volume recovery? Or by internal changes? At --.

Zero. Okay. I almost choked on that. But zero of that is from volume. Zero. It's all from internal activities.

Got it. And when you look at it, as cranes are a new business to you, but you're surrounded by crane people that cranes in their blood. Has anybody ever remembered a period of time when cranes stayed down for six years in a row?

No. 2002 2003 and 2004 we sat at the trough. But we're a couple of three or four quarters into that already. Back in the 1980's you can look at prolonged period of time in the early 1980's. But in the last 25 years of keeping records of this business and analyzing it, we have not seen the four-year, five-year trough.

Thank you very much gentlemen.

You're welcome.

Thank you. And with no additional questions in the queue I would like to turn the floor back over to Mr. Ion Warner for any additional or closing remarks.

Thank you Catherine.

Before we conclude today's call please note that a replay of our third quarter conference call will be available later this morning by accessing the investor relations section of our website at Manitowac.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. Have a good day everyone.