Manitowoc Company Inc (MTW) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to this Manitowoc Company Q2 2017 Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would look turn the call over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead.

Thank you, Melinda. Good morning, everyone and welcome to the Manitowoc conference call from our Shady Grove, Pennsylvania facility to review the company's second quarter 2017 performance, as outlined in last evening's release. Conducting the call will be Barry Pennypacker, President and Chief Executive Officer; and David Antoniuk, Senior Vice President and Chief Financial Officer.

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 the prepared remarks. We will be sure to reserve time for questions and answers after our remarks. (Operator Instructions)

Please turn to Slide 2. Before we begin, please note our safe harbor statement in the material provided for this call. During today's call, forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, are made 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 most recent annual report on its Form 10-K filing with the Securities and Exchange Commission. The Manitowoc Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether the result of new information, future events or other circumstances.

And with that, please refer to Slide 3. And I'll turn the call over to you, Barry.

Thanks, Ion, and good morning, and welcome, everyone. I'm very pleased to report that we delivered $0.05 of adjusted diluted earnings per share during the period quarter, and our adjusted EBITDA of $25 million was flat year-over-year despite a revenue decline of $63 million. As a result of our performance in the first half of 2017 and expectations of revenue growth for the second half of the year, we are updating our full year guidance, which David will review with you later in the call.

Our results mark another quarter of improving financial performance in a very challenging market environment and is proof of the power of The Manitowoc Way. Our commitment to continuous improvement and focus on our customers are key facets of The Manitowoc Way and critical to our current and future success. I want to take this opportunity to thank the Manitowoc team around the globe for their dedication to the new operating culture we have implemented here called The Manitowoc Way and for delivering positive financial results for the first time since the fourth quarter of 2014, with 40% or $270 million less in revenue.

We saw year-over-year increase in orders and backlog. The fundamentals of the markets we serve have not materially changed as compared to this time last year. Global Crane demand remains muted due to low global growth and energy CapEx. However, we believe the long-term outlook for the markets we serve remains positive. And rest assured, our management team and associates are preparing for this inevitable market recovery. And we will deliver better-than-market results to our key stakeholders.

Coming back to the $63 million year-over-year decrease in revenue. This was primarily driven by the significant drop in crawler crane shipments in the second quarter of this year. As we explained in the first quarter call, at the beginning of 2016, the company had substantially higher backlog of large crawler cranes and shipped a significant volume of these in the first half of 2016.

During the quarter, we achieved measurable improvements in working capital as our year-over-year improvement exceeded $100 million, with the primary driver being inventory reductions across all product lines. This is a remarkable achievement in that we have finally broken through the paradigm that we must increase inventory in the first half of the year in order to meet increased demand in the second half of the year.

We continue to focus on our growth strategy, which included receiving the first orders of approximately $11 million for the production of the U.S. Army contract. As previously indicated, the first 2 units of this contract will be shipped in 2017. This demonstrates the U.S. Army's commitment to beginning to take delivery of cranes as part of this $192 million contract.

We observed that the overall global market sentiment for lattice boom crawlers and rough-terrain cranes remains soft in the quarter. Continued weak rental and used equipment prices in the Americas and Middle-East reflect the simple fact that there is frankly too much iron out in the field right now. We have seen pockets of growth in specific markets within North America, such as the Permian and Eagle Ford basins but have yet to see broad, sweeping improvement globally. European markets continue to show modest growth, underscored by residential and nonresidential project activity. We continue to drive new programs in our aftermarket business, which was approximately 20% of revenue in the second quarter, with our long-term aspiration to continue to grow this important part of our business.

And with that, I'll turn the call over to David to walk us through the quarter's financial results.

Thanks, Barry, and good morning, everyone. Let's move to Slide 4. Orders in the second quarter totaled $380 million compared to $345 million in the second quarter of 2016, an increase of 9%. This was primarily driven by new product introductions, partly offset by lower bookings of lattice boom crawler cranes. In addition, the year-over-year improvement in orders more than offset the impact of the bauma trade show, which occurred in April 2016.

Backlog at the end of the second quarter was $491 million, an increase of 25% over the prior year despite a significant reduction in crawler crane backlog. Net sales in the second quarter of $395 million decreased $63 million or 14% from a year ago. As Barry previously mentioned, the year-over-year revenue decrease was primarily driven by a pronounced reduction in crawler crane shipments and lower volumes in rough-terrain cranes.

SG&A costs in the second quarter 2017 were $60 million, which was $13 million lower than the prior year, primarily due to lower employee-related cost, reductions in professional and consulting fees, and overall cost discipline. Restructuring charges in the second quarter were $6 million, which were primarily related to the consolidation of crawler crane manufacturing activities into Shady Grove, of which we have incurred $30.8 million since the announcement of the project. The timing of these costs was in line with our expectations, and we anticipate the overall cash outlays for this project to be within the range of $32 million to $34 million, compared with our original expectation of $35 million to $50 million.

Our non-GAAP adjusted EBITDA for the second quarter was $25 million, and as Barry has mentioned, flat compared to the previous year despite our revenue being down $63 million in the comparable period. Our adjusted EBITDA rate in the second quarter of 2017 improved by approximately 90 basis points over 2016's comparable period, to 6.4%.

Net income from continuing operations was $700,000 for the second quarter or break-even per diluted share. Adjusted net income from continuing operations for the quarter was $6.5 million or $0.05 per diluted share, which was a result of decisive actions we have taken to lean our manufacturing footprint, reduce headcount and implement cost discipline throughout the organization over the past year.

Our total liquidity was $170 million at June 30, which is inclusive of the $26 million of cash on hand, less the $10 million outstanding on our asset-based loan revolver, and the $14 million for outstanding letters of credit. Cash flows from operating activities were a use of approximately $12 million in the second quarter 2017 compared to a use of approximately $15 million in the second quarter of 2016. Total cash used in the quarter was driven by an increase in accounts receivable, resulting from sequentially higher sales volume, partially offset by cash provided by other working capital changes.

With regard to our full year financial guidance, please turn to Slide 5. Based on our first half performance and our updated forecast for the second half, we are revising our full year 2017 financial guidance as follows: Revenue, down approximately 5% to 7% year-over-year; previous guidance was down between 8% to 10%. Adjusted EBITDA, approximately $59 million to $69 million; previous guidance was between $41 million and $59 million. Depreciation, approximately $40 million; previous guidance was approximately $40 million to $45 million. Capital expenditure, approximately $30 million, which remains unchanged. And income tax expense, approximately $7 million to $10 million, unchanged from our previous guidance.

I will now turn the call back to Barry for some further remarks. Barry?

Thanks, David. Moving to Slide 6. Living each day by the principles of The Manitowoc Way has enabled us to make progress in becoming a better crane company, while at the same time, delivering improved financial results. As we outlined in the past, we have 4 key strategic priorities: margin expansion, growth, innovation and velocity.

The first key element of our strategy is margin expansion. First, I am very pleased to announce that the relocation of the crawler crane manufacturing from Manitowoc to Shady Grove is complete, on time and under budget. In addition, all of the equipment not transferred to Shady Grove has been sold. At Shady Grove, we are now capable of fabricating, machining, painting, assembling and testing of large crawler cranes. Investment in employee training has been extensive, with over 21,000 hours completed in 8 months to deliver excellent product quality and knowledge transfer. This project is a remarkable accomplishment, requiring meticulous planning and project management to successfully complete in just under a year, and the team deserves a lot of credit for a job well done. Additionally, the Portuguese tower crane consolidation remains on schedule and on budget with a planned completion by year-end.

Our next strategic priority is growth. Our new product pipeline remains focused on integrating the voice of customer and grow stronger each quarter. I am pleased that nearly half of our orders in the second quarter, similar to the first quarter, were from products introduced since we became a stand-alone crane company. And we continue to make investments in innovation to meet the needs and demands of our customers. Our key account management program is producing meaningful results where we have recently earned business from key customers that have not considered Manitowoc in the recent past for a variety of reasons. These wins are hard-earned and a testament to customers recognizing we are operating differently as a stand-alone crane company, with a laser focus on meeting customer, shareholders' and employees' ever-evolving needs.

Our third key strategic priority is innovation, which is the engine that drives growth. As you recall from prior calls, we developed to grow TMS 9000-2 truck-mounted crane from the ground up in 6 months. From this conference room, I can see the market-leading cranes ready for shipment later this month. In fact, the first customer of this crane completed an in-depth inspection last Thursday with nothing but praise for the new product. This is a major achievement for the team as this is the first crane being delivered to this customer since 2008.

In support of our commitment to be the world leader in lifting technology, we continue our investment in lattice boom crawler cranes despite current market conditions. An example of this is the enhancement to the MLC650 and its VP Max (sic) [VPC-MAX] configuration of a newly designed 3.5-meter wide boom insert. This enables customers to complete jobs that require more reach from the standard product footprint, particularly in the ever-evolving wind industry.

Our fourth key strategic priority is velocity. We've talked a lot about how we use lean principles of The Manitowoc Way on the shop floor, but it's more than that. It's a paradigm shift in our culture in how we engage our customers and organize our employees. Let me highlight an example of how we applied these tools to grow our boom truck business, which is a highly customized crane with a variety of commercial truck configurations. Recently, we organized a cross-functional team around our boom truck value stream, co-locating the team in Shady Grove to improve the velocity of the entire quote-to-delivery process. The initial results are promising with a 60% improvement in the quoting process, representing a 2-week total improvement in quote-to-order lead time. The next step in this continued evolution is to focus on the order-to-delivery process.

Another excellent example of implementing velocity is Niella Tanaro, Italy where we produce our self-erecting tower cranes. As our volume increased over the last year, we made large investments in automatic material movement for jib welding and a new powder coating line in which resulted in an increased capacity in these 2 areas of the shop. As a result of these investments, the assembly area quickly became a new bottleneck to achieving our attack time. Using the tools of The Manitowoc Way, our kaizen team went to work and identified the non-value-added work in the assembly process, then created action plans to quickly eliminate the waste. After only 1 week, the assembly team started to achieve the increased flow and improved the daily volume 25%, thus achieving the required attack time.

As we conclude, our improving financial results is a direct result of implementing our strategic priorities on the path to building a stronger, more valuable, more sustainable Manitowoc. We are committed to delivering shareholder return by achieving our goal of double-digit operating margins by 2020.

As announced last evening via our press release, Larry Weyers will be leaving the company at the end of August. The board and I thank Larry for his strong leadership over the many years with Manitowoc. We are particularly appreciative of Larry's service to the company, where he's been instrumental in building the company, and will remain as a good friend to Manitowoc. With Larry's departure, Aaron Ravenscroft will become our newly appointed Executive Vice President of Cranes and will be located in Dardilly, France.

As a result of this change, we continue to take actions to flatten our organizational structure, streamline our processes, and reduce our cost base in order to further improve our competitive position in the short and long term. The actions to be identified and communicated will better utilize our ability to achieve lower SG&A costs as we continue to march toward our goal of 10% operating margins by 2020.

With that, we'll turn the call back to Ion to begin the question-and-answer session.

All right. Thank you, Barry and David. Operator, please provide instructions.

(Operator Instructions) And we'll go to Mig Dobre, Baird.

Barry, I don't know if you're willing to comment on this or not. But you mentioned bauma is a tough comp from last year. If I heard this correctly, the Army contributed $11 million to orders. So excluding that, orders are up something like 6%. But I'm trying to understand, if we're excluding the Army order, if we're maybe adjusting for what happened with bauma the year prior, what's kind of the organic, the core growth rate that you're seeing in orders? And what is your level of comfort with the fact that this would be sustainable going forward based on what you're hearing from customers?

Well, thanks, Mig, for the question. I think it's the question that's on everyone's mind. We don't believe that the -- as we've said in our prepared remarks, that we've said in the last couple of quarters, that the fundamental market of -- globally, have changed dramatically. As I mentioned, we do have some pockets of strength, particularly in the oil and gas basins in the Southern part of the United States that we've talked about. I believe that our current orders are more than substantial enough to meet our increased guidance that we've provided during this call and the press release last evening. I continue to see an uptick in our orders through the month of July. So I'm absolutely 100% convinced that the market that we -- that the market shares that we're trying to gain, the targeted markets that we're going after with our new innovative products are paying the dividends that we need in order for this to grow. David, I don't know if you have anything additional that you'd like to add.

No, Mig, just in general, I mean, we gave the data points for -- more for just comparative purposes. So the orders are inclusive of the $11 million that we called out for the Army contract. And just to remind everyone that in the prior year we did have the bauma show, which gave an uptick. But we don't particularly talk about the uptick that comes in those shows at this time. So it was more for comparative reasons.

Okay. I guess my follow up, I'll ask a question on gross margin. A lot of moving pieces here. Obviously, we know your raw material input costs are probably coming up, yet you managed to expand gross margins. So maybe a view on how you're modeling this for the rest of the year, how you're thinking about it for the rest of the year. And on any incremental volume or revenue, if you would, going forward, how do you think about incremental gross margins?

Well, the one thing I want to comment on in particular is steel. Because I know there's been a lot of discussion about steel input costs and how they were going to negatively potentially affect us for the second half of the year. I mean, I'm very pleased with the actions that our commodity teams have taken globally. And I'm proud to say that, based on our forecast and the contracts that we have let, we don't see steel as a headwind for us in the second half of the year. In fact, potentially a little bit help as we continue to progress. For more color on the gross margin, I'll turn it back to David.

Yes. So Mig, just a little clarity. So we were expecting steel costs, as many were, to rise. And if you look at the prices, they've kind of steadied out, albeit at a higher level. So in our modeling and what we looked at, we didn't anticipate -- we did anticipate a higher input cost regarding steel. I think in general, when you look at our margins, we still have the issue of lower volumes, particularly in our Shady Grove facility. But we've been able to mitigate that with much lower cost in the facility and better throughput that's absorbing some of the hours. But needless to say, we are concentrating on growing our margins in spite of the tough environment at this time, and that's why we did a little bit better.

But David, on incremental gross margins.

So on incremental gross margins, when we look at what's happening there, in the second half of the year, we have our European shutdown. So when we have a European shutdown, there are variances in the facility generating a little bit higher cost because there is less absorption in there. And to be honest with you, when we look at our product line portfolio, we do -- we have included in there some products that we anticipate at selling at a little bit lower gross margins just because of the cost of those products in our inventory.

And we'll next go to Seth Weber, RBC Capital Markets.

So David, I just wanted to actually follow up on Mig's question on the margin. I'm trying to -- I'm trying to think about how much incremental save you're going to have 3Q and 4Q versus 2Q with the relocation completed. Because it looks like you're basically guiding to revenue kind of flattish here sequentially, right, through the back half of the year. But it seems like you're suggesting margins should kind of come down a little bit from the 4%, the really surprisingly strong 4% that you did. So I'm trying to reconcile, the relocation is complete, which I would guess gives you some extra cost saves going forward. But sort of the cadence seems to suggest the margins are coming down. I know traditionally there's some seasonality to the business, but it seems like the revenue's going to be a little bit more consistent than what we've seen historically. So that's kind of a long question, if that makes sense.

Yes. No, Seth. I mean, overall, when we look at it, we're anticipating -- we had 3.5% adjusted EBITDA margins in the first half of the year. In the second half of the year, based upon our guidance using the midpoint, we anticipate being somewhere around 4.9% margins. So overall, we anticipate our margins growing on a sequential basis, first half to second half. I will say that the headwinds in that, as I mentioned, we have some inventory items that we believe are going to be sold at lower-than-historical margin levels. And in addition to that, we do have the plant shutdowns that are impacting our European facilities in Germany and France, where we do have a prolonged shutdown due to the holiday schedule over there. So those 2 kind of mute a little bit the gains that we would have in the first quarter. But generally speaking, we're pleased with where we think our second half's coming out, given the market dynamics and circumstances.

No, I understand. But I was really talking second quarter margin versus second half. So I understand first quarter was light. But yes, I mean, so is there any -- is there a number that we can think about as far as the incremental save from the relocation...

I think our savings are really out there. We indicated there'd be $25 million to $30 million. I will say that, generally speaking, those savings are being muted by the fact that the production hours that we have in our Shady Grove facility are way down versus historical levels, or even levels we had in 2016, mainly as a result of the reduced volumes that we have in large crawler cranes which absorb a lot of hours. So I think what you're seeing is the impact of lower production levels in the aggregate between the combined plants versus just one plant. And that's taking a lot of the gains that we had built into the consolidation away. And it's, -- frankly, what's happening is that it's allowing us to maintain the margins we're maintaining with these cost reductions, in spite of the fact that we have lower production volumes in Shady Grove.

Okay, that's helpful. And then just as a follow-up, you called out within the backlog, that lattice boom crawlers are lower. Can you give us any color on what you're seeing in the tower crane market? I think previously, in previous calls, you talked about it being strong. One of your peers kind of talked about strength in that market. And I believe that's a relatively higher-margin product for you guys. It sounds like there's some puts and takes with maybe some of the newer products, maybe not as robust. But can you talk about the tower crane market specifically and any other components of the backlog?

Yes, sure. I mean, the tower crane market continues to grow in -- particularly in Europe -- some pockets of strength in the U.S. as we complete some very large projects in the balance of this year in the U.S. But I will say that when I look at our incoming order rate for towers, and as we continue to be #1 in the world as far as market share is concerned, we're very -- we remain very strong in Europe. The Middle-East, of course, we're seeing what everyone else is seeing. I mean, there's not a lot of investment activity happening there. And some of the larger tower projects that we thought were going to come through in the second half of the year have been delayed into next year. Australia, as I mentioned in the first quarter call, continues to be very good. And as I said, we have -- we've seen some pockets of strength in the U.S. that will only continue as we continue to introduce to our customers here in the U.S. the advantages of some of the new products that we came out, particularly with self-erecting tower cranes, going after and taking share from rough-terrain forklifts in these large-track building operations that are happening in the U.S.

And we'll next go to Jamie Cook, Crédit Suisse.

Can you hear me?

Yes, we can, Jamie.

Just a couple of questions. One, can you just -- I don't think you've really answered Mig's longer-term questions. Like, let's assume the markets are up 10% or so in 2018, and this is more than just sort of new product introduction. If the markets are up, how are you thinking about the incremental margins sort of the first year coming out of the cycle? And then second, I think last quarter, you talked about trading conversations that were happening. I'm wondering -- which was a positive sign. I'm wondering if that continued. And then last, how to think about free cash flow for the year?

I'll let David take the free cash flow. If you could repeat the middle part of your question, I didn't quite get that. But...

I think that last -- sorry. Last quarter you said, you were starting to hear discussions about trade-ins that didn't exist the year before, and perhaps that was a precursor for new equipment demand. You made some comment last quarter.

Okay, great. Now I understand. The second part of your question, with regards to trade-ins, yes, we are seeing that, and that continues. And we're actively bringing in cranes that has not been the norm for the company. But if we want to be a global player and want to continue to gain share, we must be in that game, and we must learn how to do it effectively. You heard David mention that some of our margin compression in the second half has to do with this particular dynamic. We need to bring -- we need to be competitive in bringing cranes in that are used. But we also need to figure out ways to move them effectively into the markets that will, in fact, help us redeem inventory and make us more competitive in the ability to do more of those deals as we continue to see the market recovery.

As far as the standard margin and what our contribution margin is going forward, I think a good modeling point at this point is the standard 25% fall through on the incremental dollars.

And Jamie, just to add to what Barry said ...

Why is it better than that coming out of the cycle? I mean, I would think that's where you normalize to versus the first year out.

We are, as you probably are aware, we are a very conservative management team.

So Jamie, as you know, we committed to a minimum of 150 basis points improvement. We see no reason that we're going to go away from that philosophy in order to achieve 10 by 20, where we are today versus where we're going to go there. So we see our results in the bottom line improving by a minimum of that basis going forward.

And your last question, with regard to free cash flow. We stated in the beginning our goal, and it's still our goal, to have free cash flow equal to capital spending. So that net-net, we end up with a 0 impact on a year basis, and that is still our goal for the year.

And we'll go to Jerry Revich, Goldman Sachs.

This is Ben Burud on for Jerry. To start, I was just wondering if you guys could give us more color on how you're seeing quoting activity trend. And can you kind of go over that by region, if you will?

Yes, quoting activity continues to be strong. And I would say, particularly in the U.S. where our dealers are out there looking for every opportunity to identify a green shoot. We're seeing -- as I mentioned in the first quarter, we still see a great activity in California, particularly due to the infrastructure spending bill that they passed at the local level there. And I think it's -- it continues on. In Europe, particularly with our all-terrain cranes and the new products that we've introduced, quoting activity is very good. The Middle East, there's not much change year-over-year. There is some, but it's very much at a muted level. And I would say that when you go around Asia Pac, with the exception of Australia, it still remains at a very low level.

Got it. And I know earlier in the call, you mentioned that about 50% of your orders in the quarter were from your newer products, from the last -- the past few years. Can you get a little more granular on that? And can you kind of help us think about how that's going to evolve over the near term?

Well, as you know, we introduced a very large number of cranes at the ConExpo show, that I think are starting to be accepted by the market. And the advantage of those are, in fact, being realized by the customers who take that. Next year, where there's not a large trade show in early June, we will have what we've coined as crane days here at Shady Grove, where we will have a new introduction of at least 4 cranes that will continue the product portfolio evolution that I think will gain extremely good market presence as our current introductions. And keep in mind that one of the differentiating factors about our new products is that they're going from our facility to our customers and going to work. They're not going out there and have the same type of reliability issues that we've had in the past because we are focusing on those, and we are building quality into our product development process. And the acceptance rate in our new products has been absolutely phenomenal. And we plan to continue that as we continue to evolve the company.

We'll go next to Charley Brady, SunTrust Robinson Humphrey.

I just want to go back, Barry, on your question about the trends that you'd seen coming out of Q2 into Q3 to July. You saw -- so you're seeing continued order uptick. I'm just trying to square that up. Historically, Q3 is down sequentially in sales and orders from Q2, just -- it's a seasonality thing. Given where we are in the crane market and dynamics going on, kind of what you're seeing, would you expect that dynamic to be different this year? Or it's just a function of we're coming off a pretty low base from last year? So does that naturally going to be some growth there?

Well, I think there was actually some leakage from the second quarter into the third quarter, quite frankly, just due to timing and quoting activity. I mean, there is a normal seasonality, as you had mentioned. But I think the third quarter will be where the third quarter usually is and down a bit. But I fully expect that coming out of September, our run rate should be where we need it to be to continue to meet the expectations of our internal guidance. David, do you have any more color to add to that?

Yes, Charley, this -- as we have talked about, we're building inventory as demand goes there. So we're in a good position to beat our Q3 of last year on the top line, based on where our overall revenue outlook is. So we feel, in spite of the shutdowns in Europe which have pretty much led to a reduction in Q3 sales, we're going to be better than what we have in the past by flattening out our sales throughout the year.

Do you guys have much guidance into Q4? Because that's obviously the big quarter for shipping, for orders. And if you just kind of look at the seasonal pattern of the first half and kind of making an expectation of Q3, it implies typically a pretty strong lift in the fourth quarter, particularly to meet the guidance. It's probably a 14% or 15% kind of growth number in Q4. Do you have that kind of visibility now?

Yes, I think we do.

And I will say that I fully expect that our Q3 orders of this year will be much stronger than our Q3 orders of last year. I said that we've got July numbers in. We know what we're currently booking, and I fully expect that we have the backlog and the pipeline to deliver the results that we've guided to. And you have to recognize the fact that, as I mentioned earlier and I'll continue to mention, that we are a very conservative management team.

Yes. No, fair enough. Just one more on the military or the Army order, the $11 million that came in this quarter. What's the cadence of orders? And I guess most of that comes in through probably '18. But is it going to be big, chunky orders? Or do you get the majority of the remaining, was it $180 million left, on the initial order? Or how will that flow?

Yes, so Charley, what they do -- so the contract is, in total, we've said $192 million. And what they do is they have call-offs from that. So the call -- the original call, the initial call-off was $11 million, of which about $2 million is going to be in 2017, which leaves about $9 million for next year. Our anticipated volume in 2018 for the full military order will be about $20 million.

Ann Duignan, JPMorgan.

It's Ann Duignan. When we talked -- your outlook for end markets says we kind of think about 2018. If you look at North American nonresidential construction, we're above last cycle's peak. If we look at Europe, we're above last cycle's peak. Australia, you mentioned has been strong for a while. I mean, is there any application or any region where you can conceive of 2018 being better, from a fundamental standpoint, than 2017?

Not in particular. We have not modeled that. Again, as we said that we're taking a very conservative look. I think that we kind of expect the U.S. to be flattish next year. I think we will still continue to see nice growth in Europe. And hopefully, with some of the things that are being talked about, as I mentioned earlier with particularly with towers in the Middle East, I expect the Middle East to grow next year for sure.

Okay. So let me switch gears a little bit and focus on the balance sheet. Your days payables are 106 days this quarter versus 97 a year ago. I mean, that's quite a long duration to pay suppliers. Can you talk about your policy there on supplier payments? And is that how you anticipate getting to free cash flow neutral?

No, Ann. I'd say that generally speaking, all of our -- we've taken an approach that all of our suppliers will be paid within terms. I think in general, when you look at some of the items, they're 106 days, it includes more than just what I'll say is some of the vendor payments in there. But I will say that our policy moving forward is to -- is not to hold payments to make cash flow. It's to pay everybody within the terms of that. And really, to ensure that we're looking at our receivables side and our inventory side and making sure we're getting the best benefit over in those areas as well. And that means helping streamline -- or flatlining our sales so that we don't have spikes at the quarter end as well. But to answer your question, the answer is no, we're not looking at holding payables to meet our cash flow.

When you look at our volume and you look at our payables year-over-year, I mean, there really hasn't been that much of a dramatic change. I mean, where there's been a dramatic change in our working capital has been inventory.

And quite honestly, Ann, our DPO is probably 61 days when you look at it in general. If you just spiked it out, that's where we're looking at.

Okay, that's great. And then just one quick follow-up on steel. What's the duration of the contacts that you now have in place? I mean, as we look into '18, is it inevitable that you will incur higher steel costs in '18 versus '17, if steel prices stay where they are at?

No, I don't think it's necessary for us to think that we're going to pay more for steel at '18. I think we need to continue to utilize the value engineering activities that we have underway in all of our plants to make sure that we offset any steel price increases. And I'm very pleased that without a centralized, expensive, sourcing organization, that our guys are able to get the types of results that we need.

So nowhere from corporate, we're here to help?

No, not at all. That is the one thing that this organization, as long as I'm leading it, will never have.

(Operator Instructions) And we'll go to Mike Shlisky, Seaport Global.

I hopped on a tad bit late, so if I ask a question that's already been answered, just feel free to tell me to go back to your transcript later. First off, in your boom truck business, you had mentioned in your slides that it had gone through some sort of reorg. I always thought that was kind of one of your better, more well-run operations, and certainly, I'd imagine that you have some good backlog growth in that particular business. So can you just give more color as to why and how you did that little reorg there? And kind of what's the outlook for the back half of the year for your boom trucks?

Yes, the boom trucks, we have a very positive outlook on. But it was kind of like the red-headed stepchild here at the Shady Grove facility. It was a business that got some attention. But from an organizational standpoint, truly understanding what the strategic importance is for growth in a boom truck business was something that I felt got lost. So the guys got together and decided that if we really want to do a great job and be a world-class supplier of boom trucks, we have to understand the overall market. We have to understand how we approach it. We have to understand how we can reduce our lead times in order to increase our market share. And we've decided the best way to do that was to co-locate all functions that affect that value stream in a building, which I can actually see outside of this conference room, where they, together, every single day, only do one thing, and that is to eat and sleep and dream about boom trucks. And that's why we're able to get the type of improvements that I've talked about from -- particularly on the quoting process. We've reduced the quote lead time by 25%. That is huge from an overall lead-time perspective. And now, as we continue to look at and give this team the empowerment to run their own manufacturing operations, I'm absolutely convinced that we'll get a minimum of another 25% lead-time reduction from the reorganization of the manufacturing operations. So organizing around value streams, empowering people to do their own thing and make sure that they're only focused on one thing, and that is to satisfy the customer the best way they can. It's our first attempt at it, and I am absolutely 100% tickled by the results that we're getting in that first value stream organization.

And there are no additional questions at this time. I will now turn the call back over to Ion Warner for closing remarks.

Thank you, Melinda. Before we conclude today's call, please note that a replay of our second quarter conference call will be available later this morning by accessing the Investor Relations section of our website at 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 third quarter 2017 conference call. Have a good day, everyone.

And that does conclude today's conference call. We thank you all for joining us.