Manitowoc Company Inc (MTW) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to this Manitowoc Company Third Quarter 2017 Earnings Call. Today's call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the call over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead.

Thank you, Greg. Good morning, everyone, and welcome to the Manitowoc conference call to review the company's third quarter 2017 performance, as outlined in last evening's release. We are holding today's call from our Wilhelmshaven, Germany manufacturing facility. 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 the 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 statements, whether as a result of new information, future events or other circumstances.

And with that, please refer to Slide 3, and I will now turn the call over to you, Barry.

Thanks, Ion, and welcome everyone. I'm very pleased to report that we delivered $0.09 of adjusted diluted earnings per share during the third quarter, along with improved adjusted EBITDA and cash flow from operations year-over-year with limited borrowing on our ABL, which was made possible by our operating this business effectively each and every day utilizing the principles of The Manitowoc Way.

We were encouraged to see third quarter orders of $376 million, which increased our backlog 32% compared with the third quarter of 2016, but keep in mind, this was off a very low base. Our orders were driven by improvements in the U.S., partially offset by continued softness in key international markets, such as the Middle East and Asia Pac. To note, we had an $18 million of order cancellation in the quarter from India due to uncertainty surrounding new regulations. However, our customers remain committed to purchasing these particular cranes once the regulatory uncertainty is resolved. However, a number of these cranes have already been produced, and our team is prudently managing the sale of these cranes in the fourth quarter to effectively manage our cash flow.

Looking at the U.S. in a little more detail, it's a story of 2 tales. On the positive, orders were driven by emerging momentum in demand to support energy and commercial construction end markets. On the other hand, we continue to see low activity for large infrastructure projects. While rental rates continue to be under pressure, overall utilization show signs of improving. Although dealer inventories are down in North America, we believe that based upon the current stocking levels and open purchase orders, they are adequately positioned for future growth, as we work very closely with them together to strike a healthier balance of equipment availability with working capital management.

Please also keep in mind that as we continue to apply the principles of The Manitowoc Way to our factories, our abilities to deliver product with increased velocity is improving dramatically. Nowhere is this more evident than here at our Wilhelmshaven facility, where we design and manufacture our all-terrain product line. Project fluss, as it has been dubbed in the facility, which in German means flow, is showing great productivity potential, as we continue The Manitowoc Way journey. I look forward to this project completion and fully realizing the benefits we expected at the outset of this important program.

Demand in Europe overall continues to meet our expectations with growth in resi and commercial construction markets. Make no mistake, these results are hard-earned. This market growth in Europe does come at a very competitive market. As you are aware, we have spent a substantial amount of time and effort in evolving our product portfolio to one of a market leading product offering. We have seen some deals, where the competition doesn't have the same features and benefits to offer as we do make up for their shortfall in very creative ways, including aggressive pricing. We continue to see weak demand in a number of our other key international markets, with the one exception being Australia. For example, the Middle East remains a challenge for both internal and external reasons. In South Korea, we've seen a marked slowdown for the kneading cranes and commercial construction project work.

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. Our third quarter financial performance was in line with our expectations, and consistent with our 2017 full year guidance. Third quarter orders totaled $376.1 million, an increase of 21% compared to $309.9 million of orders in the third quarter of 2016. Our year-over-year orders increase was driven by continued demand for our new products, and was also favorably impacted by approximately 3% due to changes in foreign currency exchange rates.

Third quarter backlog of $467.9 million was also up substantially over the prior year, coming in 32% stronger than the comparable period. Backlog was also favorably impacted by approximately 3% due to changes in foreign currency exchange rates.

Net sales in the third quarter of $399.4 million increased $49.6 million or 14% from a year ago. The year-over-year revenue increase was primarily driven by higher crane shipments to U.S. customers, partially offset by lower shipments to our Asia-Pacific customers. The increase in net sales was also favorably impacted by approximately $9 million from changes in foreign currency exchange rates.

SG&A cost in the third quarter 2017 were $60.9 million, which were $12.1 million lower than the prior year. Third quarter 2016 SG&A cost were negatively impacted by approximately $7 million of charges related to the decline in the fair market value of used cranes. The balance of the year-over-year reduction is primarily due to lower employee-related costs, reductions in professional and consulting fees and discretionary cost oversight, partly offset by higher incentive compensation cost, and approximately $1 million from changes in foreign currency exchange rates.

During the third quarter, we incurred $3.7 million of restructuring expenses, which were primarily related to severance costs associated with headcount reductions in the U.S. and the closure of our manufacturing operations in Manitowoc, Wisconsin and Passo Fundo, Brazil.

Our non-GAAP adjusted EBITDA for the third quarter was $20.8 million compared to a loss of $20.9 million in the third quarter of 2016. As we noted last year, third quarter 2016 non-GAAP adjusted EBITDA included approximately $30 million of noncash charges related to inventory reserves, losses from declines in used crane values and product improvement initiatives. Removing these items, the third quarter 2017 non-GAAP adjusted EBITDA was approximately $12 million and 260 basis points higher year-over-year.

Our net income from continuing operations was $9.7 million for the third quarter or $0.07 per diluted share. Adjusted net income from continuing operations for the third quarter was $13.5 million or $0.09 per diluted share. For the third quarter, we recorded a discrete tax benefit of $13.7 million or $0.09 per diluted share, primarily due to a resolution with the Internal Revenue Service related to prior years.

We continue to maintain ample liquidity through the seasonal demand cycle. At September 30, total availability under our ABL was $136.7 million net of $10 million in borrowings and $14.4 million in outstanding letters of credit. Cash on hand at September 30 is $29.3 million, resulting in total liquidity as of September 30 of $166 million.

Cash flows from operating activities were $10.6 million in the third quarter 2017 compared to a use of $1.4 million in the third quarter of 2016. Total cash provided in the quarter was driven by increased earnings and improved operating working capital management. As of September 2017, working capital as a percent of sales improved to 27.3% from 34.2% in September 2016. Our team did a great job managing inventory, which declined by $54 million year-over-year, as adjusted for changes in foreign currency exchange rates, while increasing third quarter revenue by $50 million on a year-over-year basis.

Please turn to Slide 5, where we have reaffirmed our 2017 full year guidance. With that, I will now turn the call back to Barry for some further remarks. Barry?

Thanks, David. Before moving to Slide 6, I would like to add some comments to David's remarks. We have confirmed our full year guidance. However, let me remind you, like we saw last year, we normally see lower gross margins as a percentage of sales in the fourth quarter. I would also add that we had $18 million of Indian cancellations during the third quarter that was slated for shipment. As mentioned earlier, the team is working aggressively to manage these finished goods off of our balance sheet. Accordingly, cash management remains our #1 priority.

Now moving on to Slide 6. The Manitowoc Way is a journey of continuous improvement that requires the commitment and dedication from every employee to try to do a little bit better each and every day. We continue to execute on all 4 of our strategic priorities: margin expansion, growth, innovation and velocity.

Starting with margin expansion. Our facility in Shady Grove is now capable of producing large crawlers, encompassing all manufacturing processes. This project is complete, ahead of plan, and well within budget. We anxiously await the return of large crawler demand in our home market. In Portugal, frankly speaking, our approach has evolved, as demand for top slewing cranes has continued to grow. Initially, we saw the best return simply by consolidating two factories into one. After a recent visit to these facilities, I see a bigger opportunity in our overall European tower manufacturing strategy. This will expand the scope of the Portugal project to include the investment in technology that will allow us to improve our overall tower manufacturing productivity and flexibility. This will change the scope of our initial restructuring project. We believe this is a much better approach that will allow us to more effectively meet customer demand in the short term, while better positioning our manufacturing strategy longer term. Rest assured, as we continue to evolve this strategy, it will be incremental to our previous business case and better support our long-term targets of 150 basis points of margin expansion per year.

Our next strategic priority is growth. Our military crane business is making excellent progress as we've done the final stage of the U.S. Army's testing requirements, including a rail impact crash and ballistic testing with the expected completion by year-end. The program continues as planned, with increasing shipments of units in 2018.

Another key growth enabler is our strong distribution network. Last month, we hosted more than 200 of our Potain tower crane dealers from across Europe and Africa in Barcelona, Spain. Led by Aaron Ravenscroft, EVP of Cranes, this meeting was one of the largest dealer summits in our history, which addressed a wide array of topics, including sharing best practices, market updates and improvement areas for all of our products. We also launched a concept for Europe and Africa tower crane dealer to have a council forum, which will increase communication among Manitowoc and our dealers, improve partnerships and provide new business solutions.

Lastly, in terms of growth, we began implementing key account management on a global basis during the year, which has begun to bear fruit. For instance, I had the distinct pleasure of thanking a large crane operator from Poland yesterday for the recent order. Believe it or not, the last time we received an order from this customer was in 2008. In our conversation, they confirmed that our recent new product launches and efforts to improve quality over the last 18 months are definitely helping to rebuild the image of the Grove brand. They're anxiously awaiting their cranes to be delivered in the fourth quarter.

Our third strategic priority is innovation. For example, we began increased production and deliveries of the new TMS 9000-2 truck-mounted crane, with many units being put to work in the field in the quarter. This crane continues to delight customers and build market momentum, as evidenced by our significant market share growth in the quarter. Our new product pipeline continues to be robust, with approximately 40% of our third quarter revenue coming from new products introduced since we became a standalone crane company. Our enduring commitment to innovation is evident, as we plan to introduce another 4 new exciting mobile products at our Crane Days in June of 2018.

As many of you saw at ConExpo, in our towers business, we have further developed our crane control system to include something we refer to as Diag, a remote diagnostic tool. The team continues to build a suite of applications from this project, which I have personally viewed last week, while I was in our Dardilly, France location. I watched the demonstration that literally went from the point of an end user having a technical issue to calling our technical center to identify the root cause of the problem to the point at which the faulty switch was replaced by -- on the crane by our field technician. This business model for this product is in its early phases, but it brings value to everyone. From the end user, it helps improve uptime. For our dealers, it optimizes how their field technicians are deployed.

Our fourth strategic priority is velocity. Just over a year ago, we embarked on our LEAN journey to [seat] our manufacturing operations using The Manitowoc Way. The goal was to train and empower our employees to create continuous improvement cultures throughout the company. This July, we launched the Lessons Learned contest that ran for 4 months, where operations teams were encouraged to implement and document their improvement ideas. Successful examples of lessons learned are documented on a single form, and communicated using a web portal to share these ideas, so that we can leverage them across all of Manitowoc. This introduced healthy competition among our employees and increased enthusiasm, as teams competed for awards for the top improvement ideas. We received hundreds of entries that demonstrated the implementation of The Manitowoc Way. I reviewed the top entries and the winners will be announced later this month.

In terms of specific activities, I would like to highlight our Niella, Italy factory. Last week, I visited the team and was extremely impressed and pleased with the progress that the team has made to improve productivity throughout the year. As I've spoken about over the last several conference calls, we've [launched] several new self-erecting tower cranes that we referred to as Hup. Since we initiated the production of these units in the first quarter, we have increased our daily production by over 30%. To achieve this, the team has worked hard to utilize the tools of The Manitowoc Way, including divest, planning, material flow and presentation and developing of new standard work.

In conclusion, we continued to deliver our improved financial performance as a direct result of implementing our strategic priorities on the path to building a stronger Manitowoc. As we look forward to the fourth quarter and 2018, we see both challenges as well as positive signs. On the one hand, there are significant headwinds that we must overcome. Like many of our peers and competitors, we are experiencing increased material costs particularly in steel as well as constraints in the supply chain. Changing end markets and geographic mixes, along with very competitive pricing challenges us in certain markets. On the other hand, we see modest recovery in the U.S. Based on current market conditions, we are feeling more confident than ever that the market bottom has finally formed. We are focused on the things that we can control, such as the progress of our LEAN journey, introducing great new products, rationalizing our manufacturing footprint and flattening our organizational structure, all of these activities that will enable us to achieve our long-term goal of 10% operating income by 2020.

With that, I will turn the call back over to Ion to begin the question-and-answer session.

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

(Operator Instructions) And our first question comes from Mig Dobre with Baird.

I guess maybe a little more color on your guidance would be helpful. The range is still pretty wide, with only a couple on EBITDA, with only a couple of months left in the year. So can you maybe help us think through the puts and takes as to what's either at the high end or the low end of that guidance? I mean, just looking at revenue, it seems like revenue should be stable to up sequentially. You talked gross margin down, but maybe any color here will be helpful.

This is Dave. So I think generally speaking, when you look at -- our guidance implication would indicate a low of about $400 million in revenue to a high of about $433 million in revenue with, well, I'll say, adjusted EBITDA, somewhere between 14 and 24, with a number of factors associated with our fourth quarter, particularly what Barry highlighted in the call was that our margins are typically put under a bit of pressure in the fourth quarter, and we're not going to realize the same type of margins that we had in the prior year. So we feel pretty comfortable with the guidance that we put out there as of right now and confident in that -- in our ability to achieve that guidance.

Can you help us understand what the pressures are that you're referring to specifically?

Well, I mean, there's a number of factors. One is mix. We have a significant mix issue in the fourth quarter which has been historical. We do have, for the first time, you hear me talking about headwinds in steel, not in steel that we have typically hedged over the years, but in things like large castings that we use for our large AT cranes, and the third factor that I will tell you is that you know that with our large presence in Europe from a manufacturing standpoint, we have a substantial -- we have substantially less production hours in the fourth quarter than we do on the balance of the year.

Okay. Then my follow-up is on free cash flow, maybe a view as to how you're thinking about it for this year. And as we look into 2018, if there are any drags that should be going away or anything incremental on the working capital side that you were going to do?

So I'll go reverse. Regarding 2018, we're not in a position yet to give any guidance with regards to 2018. We'll do so at a later date. But we've always said that our goal is to provide, what I'll say, no use of cash in the -- in 2017. So fourth quarter typically for us is a cash generator, and we anticipate it to be so-so. We're counting on it being close to 0 for the year.

As our business continues to improve, Mig, we're not going to invest in working capital that will affect our overall ability to generate cash. I mean, that's not what LEAN companies do, and that's not what we're going to do.

Moving on from RBC Capital Markets, we have Seth Weber.

This is Brendan, on for Seth. I was wondering if you could provide some more color on what you're seeing in terms of any strengths or weaknesses by product line.

Yes. I can tell you that I mentioned a little bit in my prepared remarks. But from a truck-mounted standpoint in the U.S., I mean, we're basically out of the market. I mean, our overall product offering was multiple years old, very old technology and really not very suited -- well-suited for our distribution network to sell. The TMS 9000-2, which is the result of Project Wildcat that you've heard me talk about, has been an extreme success story in the U.S. that has really returned us to market-leading share in that particular model that we are in a position to take advantage of. We have done and have continued to do great things with our RTs in the U.S. Our 80-ton and 100-ton offering, I think, is becoming the standard. We see increases in our overall market share in the U.S., in particular, in these particular RTs. And I think as we continue to evolve this company into the innovation leader, we won't be talking so much about price. But we will be talking about innovation and how we can improve the overall experience for the end user.

Okay, great. Thanks. And then for my follow up, I was wondering if you could give -- talk about your aftermarket business and improvements there.

Yes. Our aftermarket business improved year-over-year, and that's coming off of a pretty tough base because we have a very large order for Algeria in the third quarter of last year. However, we continue to organize around it. We continue to evaluate different alternatives. We continue to invest in technology that enables us to capture that aftermarket more effectively. As I mentioned, Diag in towers, that particular opportunity will give us, as I said, the opportunity to sell a part that, traditionally, we would not have sold. So we continue to increase our percentage of revenue. In the particular quarter, we were up 5% from last year. And we just continue to invest in it, organize around it and insist that aftermarket gets the amount of attention that I think is necessary for a company like ours, going forward.

Our next question comes from Jamie Cook with Crédit Suisse.

A couple of questions. One, last quarter, when you gave your -- last earnings quarter, you sort of talked big picture with regards to '18. I think you said you expected broadly the U.S. to be flat, Europe up and then maybe tower cranes up in the Middle East. I guess is that still a good way to think about the market? And given your orders have been very good this year, in particular, driven by new products, do you think that's sustainable into '18? And then my follow-up question, I mean, you did mention in your prepared remarks about supply chain issues. If you could just provide a little more color on that, where the supply-chain bottlenecks are and if that's hurting sales at all?

Yes, let me start with the supply-chain issue. I mean, we have, here in Wilhelmshaven, for instance, all 4 manufacturers of ATs in the world are located here in Germany. And I mean, sometimes, it's unfortunate that we share the same supply base. However, what we have done is we've taken 5 of our key people out of the organization. We've located them in the plants of these suppliers that are having these supply-chain issues, and they are fighting adequately to get us the products we need in order to satisfy our customer. So yes, while there are constraints, I can look out here at the production facility and I cannot see a single crane that's sitting here waiting for a part from an external supplier. So we are, in fact, making very good progress because we are out there fighting for ourselves, and not just letting the supplier decide who he's going to ship it to. So that's the one thing, getting back to the market on a global basis. I think, broad-brush, I think what we said in the second quarter, going into '18, I think it still remains positive. I'm a little concerned about the Middle East, particularly what's happened in the last few days. Saudi Arabia typically for us is a very, very large market for our RTs, in particular. And with the unrest that's happening there, I'm a little concerned about whether there'll be a substantial pullback with regards to investment. Asia Pac, as I mentioned, we saw -- we're seeing going into '18 in South Korea, where we have enjoyed very, very good market share, industry-leading, and tower cranes is slowing a little. So that concerns me a bit. But what we have slowing down, we're going to see green shoots coming from other areas, particularly in the Americas. So we're not in a position yet to tell you exactly what we think about '18, but that's ever evolving. And rest assured, we're spending a lot of time in making sure that we have hit the bottom, and we're going to try our best to predict where we believe our growth will come from next year.

Our next question comes from Ann Duignan with JPMorgan.

This is Tom Simonitsch on behalf of Ann. Last quarter, you mentioned lower production hours at Shady Grove were muting some of the potential benefits of the relocation. Can you tell us how much production hours you need to improve in order to achieve target annual run rate savings of $25 million to $30 million?

I -- we don't typically talk about the total amount of hours that we produce. But I'd say that when we looked at our production hours in the current year versus the last year, even though we have one plant, we're still down on the number of hours. As we talked about, our lattice boom crawler crane manufacturing has significantly slowed, which is causing the, really, slowdown in the number of earned hours at the plant for this facility. So unfortunately, we don't say how many hours we work at a plant or how much they're down, but they are still are down significantly on a year-over-year basis. And at that point in time, that's why you see the muted amount not coming through as a benefit in the P&L.

Yes. It's kind of a double whammy when you look at it, right? I mean, we have the issue, where there is no volume in our large crawler market as of this point in time. But we've also become so much more productive in this facility that we don't need as many hours as we did in the past to satisfy the demand, and we're pretty confident that we've solidified the bottom. And we certainly look forward to incremental revenue providing us the incremental returns that we think we've structurally put in place in order to lead us to 150 basis points of margin expansion every year.

I appreciate that. And just going back to pricing. You mentioned very competitive pricing in certain markets. Can you give just some more color on the pricing environment across each region?

I'd say in Europe, in particular, where you have 4 manufacturers fighting for decreased demand, it's been extremely competitive. However, I have instructed our group here that if we truly believe that we have the most competitive, most technologically advanced crane offering in the industry, we have to be patient, and we have to be diligent in trying to maximize our margins. We can't sit back and say that we're not going to take any crane orders where there is some craziness in the market from a competition standpoint, but we can minimize the impact of that. And so I would say the toughest market that I see right now is in Europe. The Americas, I think we're doing fine in the Americas. I think there's a lot more discipline, and I think there's a lot less manufacturers, and I think that the Americas is doing fine. The Middle East is -- I mean, in the Middle East, it's very, very competitive. I mean, I just don't know how else to say it. It's very, very competitive, and we're putting our thinking caps on and figuring out ways that we can compete. And I think as these calls continue to evolve next year, you'll become more familiar with the strategy that we're implementing internally to take better advantage of a growing market in the Middle East. I hope that provides the color that you were looking for.

Moving on. From Seaport Global, we'll hear from Mike Shlisky.

So in the past, you've said that if we have oil at like $50, that would go a long way towards kind of getting oil and gas CapEx really back on track. And here we are with West Texas [somewhat at] $50 and Brent is above $60. I think you said there was a slight improvement in the oil and gas sector. But kind of is there a timeframe as to how long you think we need to see this kind of oil price levels? [Are you feeling kind of] very confident that there's going to be a real cycle change upward in that particular end market?

I mean, we saw the spike in the first quarter, which we reported very openly about with the -- with our boom trucks, in particular, driving demand. As you know, we have a large distributor that's also a publicly traded company that said that on their call, that utilization in the fleets is picking up. So I think it's got to take a little while longer. And I think the $60 number that has been thrown out and we're seeing in crude in Saudi, that needs to be sustained for a period of time in order to really spike and see dramatic increase in our demand. The one issue that remains a level of uncertainty for us is the level of geopolitical activities that are happening, and we see that. We see what's happened in the Middle East in the last 4 days, and we're watching that, trying to understand that. But as I said, all we can do is make sure that we're in a position from a competitive standpoint to take advantage of that when the market does return.

Okay. Got it. And just my quick follow up here is kind of a model question. Your SG&A costs has kind of flattened out at $50 million for a couple of quarters now. Is that the right runway to expect going forward? Or are there any big inflationary issues in 2018 we should be aware of?

Mike, I don't see any big things other than depending on our -- what we tend to do on our prototypes, due to engine changes like Tier IV engines that may come about, which may cause that to spike a little bit, but we're -- it's a little bit too early to call that. I'd say that's probably the biggest on other thing, upside. And then the other one that we can't control is FX, right? Depending on what happens to exchange rates, that has -- that will have an implication due to the amount of foreign operations that we have, and it's predominantly what I'll say the euro-dollar FX issue that we have.

And our next question will come from Charley Brady with SunTrust Robinson Humphrey.

I just want to go, Barry, back to a comment on your opening remarks when I thought I heard you say that you thought the dealer inventories were at appropriate levels to support growth. And if I'm correct in hearing that, what are we to infer in terms of an outlook for order growth? And I know you're not giving guidance. But are you trying to convey that the dealer inventories are in pretty good shape and they don't really need as much? Or am I just reading too much into that?

No. I think you're absolutely reading the message that I was trying to communicate here. The one thing we are not doing is stuffing the channel. We are making sure that our dealers are taking product that they have orders for. That has not always been the practice of this company, but it is the practice today. We are not stuffing the channel. We're making sure that we increase the velocity in our manufacturing plant, so that our dealers can have better working capital management and keep fewer machines in their inventory, so that because of the fact that we're able to increase our velocity through our plants. So it's a partnership, right? I mean, and we are -- as we are trying to manage our working capital, we want to be cognizant of how we can manage their working capital too.

Fair enough.

It's a delicate balance, but it's one I think -- it's a delicate balance but I think it's one, that if you talk to our dealers across the U.S. in particular, they'd say we're evolving in a very positive way.

And as we look to the cancellation order that you had from India that's going to be in Q4, can you try and frame that as to what the margin impact on that might be? I mean, are those -- and how much of that $18 million was produced, and how much I guess wasn't?

Well, a good portion of it was produced. And as I said in my prepared remarks, our customers remain committed to accepting those machines. However, I'm not going to remain committed to keeping them in our inventory for an extended period of time. So we're being very opportunistic in trying to find homes for those machines. And when our customers in India are ready for them, we'll make new ones.

Moving on. From Goldman Sachs, we'll hear from Jerry Revich.

This is Ben Burud on for Jerry. So you guys called out a slight improvement in U.S. energy and commercial markets, and you already gave some color on energy. But can you at least give some additional detail on what you're seeing in the commercial markets? And over the -- through the balance of the year as well as maybe first half '18?

Well, yes. I mean, one of the things, of course, that would change our whole outlook is infrastructure. But what we have seen is an uptick in our overall demand in California, for instance, where we have a state who had put together its own infrastructure bill, and are truly investing in their roads and bridges. We are -- we definitely have seen a substantial uptick. And if we can get that type of infrastructure spending across the entire country, it will certainly be very, very good for the types of products and services that we offer. But as we're talking about, we have some new tower products that we are demonstrating to customers that will change the way that they build their overall products. For instance, a 3-story apartment building would typically have a number of gas-powered vehicles there to move product around the job site, and making sure that the workers have the appropriate raw materials they need to build the site. In Europe, it doesn't work that way. And in a few nice pockets of success, we've had in the U.S. where we have convinced these track builders to use what we call our Hup tower cranes. They're quiet. They are very reliable. They don't require fuel. They don't require a set up in a site where tires are tearing up the overall infrastructure around the building. So -- and they're extremely safe. And we're looking at how we can change the paradigm of the U.S. building industry to use these tower cranes as opposed to other types of typical building types of equipment that have been used in the past.

All right. And then can you just spend a moment touching on cost inflation, maybe what you're expecting to see over the next 6, 9 months, and maybe touch on steel in particular?

Yes. I guess that's really, I guess, anybody's guess as far as input prices at this point in time. I mean, I think what we've seen in the year is we've seen that they've increased -- when you look at the steel input, they've increased, which we thought -- we think that steel is going to continue to go up a bit. How much? We're not quite sure of yet, and we're still analyzing that as we go through. So I think the input cost will be the key thing. And then I think general inflationary factors will cover the other side of the cost.

Our next question comes from Rob Wertheimer with Melius Research.

Just wanted to ask a quick follow up on the rental rates versus utilization. I believe if I understood correctly, you said utilizations were trending up looking good. Rental rates were a little bit softer. What's the cause of the gap? Is it utilization is actually inflecting upwards and the rental rates haven't caught up? Was that more different regions? I don't know if you can give color around that.

I think it is that the rental rates has not caught yet the utilization improvement. There's lots of competition, particularly in local markets. But I think that as we trend into next year, and as utilization continues to improve ever so slightly, there's plenty of history behind this that says that rental rates will follow. So I think we just need to be patient.

Perfect. And I mean, I know utilization data is not always perfect. But are you able to get a sense of the utilization levels? And whether we're really getting to the point where people start to feel across the channel nervous about availability? Or is it -- are there 5 or 10 points to go? I mean, just maybe give us a sense of that.

Yes. We track our dealers, particularly on our RT product line that we have that data at our fingertips continuously.

And so does it look like it's starting to get (inaudible)?

It's not a matter of us taking external feedback and trying to put that into a model and guess. We actually see what the utilization of our assets in the field are through the CCS technology that we have implemented in the field.

How many years back do you get that data?

We go back as far as 8 to 10 years when we first input the type of ability to track it.

Yes, perfect. And then so would you say that's showing tightness, showing normal levels? Showing -- I mean I was just trying to get a sense of whether there's inflection ahead.

I mean, it's improving, right? I mean, inflection to me means hockey stick. But I would say that we are bouncing off of the bottom and slowly improving.

And our next question comes from Nicole DeBlase with Deutsche Bank.

So when you talked about 2018, I think you mentioned Middle East, South Korea and the Americas, but you didn't really say a whole lot about your expectations for Europe, and the tower crane market has been actually pretty strong or decent for the past few years. So if could you talk a little bit about your thoughts on Europe into next year?

If you're asking my opinion right now, I'm kind of flattish.

Okay, okay. That's helpful. Fair enough. And then I guess kind of a higher level question, I mean, we've seen 3 quarters of sustained order strength now. Is it possible that we're entering the beginning of a crane recovery?

I mean, it's -- the best way that I could answer that, Nicole, is to say I certainly hope so because we've invested so much in effort to be able to demonstrate that this is -- this industry and this business, in particular, of Manitowoc has the ability to be a high margin business, and I just hope that, that is the case. There certainly are some green shoots that are indicating that. But again, I've been in this business 18 months, and I've talked to people who have been in this business for 50 years. And they continue to tell me, just be patient, Pennypacker. Be patient. You're going to trail the dirt guys by 9 to 12 months when they started their inflection. And if we go back, and we look at the earthmoving guys which we so eloquently called the dirt moving guys, the dirt guys in our business, they were second quarter of last year and first quarter. So if history repeats itself, it very well could be around the quarter. The one thing that I think does impact us though is in -- I'm as concerned about this as I am with anything else, is the geopolitical temperament around the world, particularly with things that have happened here in the Middle East in the last few days. I mean, that is good for pricing, but I don't know how good it's going to be for investment.

Next from Stifel, we'll hear from the line of Stanley Elliott.

Quick question. On the 40% of the new products from -- as a standalone company, is it fair to assume that the backlogs and the order rates are tracking at least that high, if not, even higher?

Absolutely.

And just maybe to serve as a kind of a quick refresher, I mean, you've done some things with the truck cranes and then the Hup cranes. How much of your portfolio, Barry, since you've come on board, have you been able to kind of reconfigure with the voice of customer and kind of changed the portfolio for a go-forward basis? And the reason I was asking is just trying to get a feel for some of the new cranes that you've got coming out into next year.

Yes. I mean, I would say, if I had to -- and I'm thinking on the fly here across the entire product portfolio. But I think a good number is 15% to 20% that we've touched in our new way. We have to become extremely good at doing more of this type of effort in '18 in particular, particularly for this business here that I'm at now, this all-terrain business. Because quite frankly, we have to go from Tier IV final regulations here in Europe to Tier V, and we don't have a whole lot of time to do that. So we've got to learn, and we are learning how we can touch more with less. But I'm very, very pleased at the innovation efforts that have happened in this company and continue to happen on a daily basis.

Our next question will come from Larry De Maria with William Blair.

I want to follow up on the diagnostics tools you mentioned. Just to understand a little bit better, is this a potential profit center? Or is this more likely to help you capture more aftermarket parts? And curious what your capture rates are now, your thinking maybe where they can go: in other words, what's the opportunity there?

I mean, I think it's both. I mean, I think it's a service that we can sell. But as we sell the service at the time we put the crane into operation, we should be able to ensure that our Potain brand parts are in fact installed in the crane as opposed to a competitor.

And do you think you guys have high aftermarket capture rates as it is now or can they move materially higher?

No, I mean, it can move. It has to move materially higher. I mean, my stated goal was to try and get this business to 25% to 30% aftermarket, and we're a bit away from that today.

Okay. And then secondly, on the crane cancellation, can you just update us, what's the current policy regarding deposits and progress payments? I'm curious what -- specifically, with the Indian cranes, what happened there?

Yes, so Larry, I think generally speaking is each negotiation is separate in this particular case. It wasn't the full order cancellation. So there was a delivery in the orders. So it was just a partial -- it was a significant cancellation from customers. But nonetheless, it was not a full cancellation. It was a partial cancellation. So the shipments that we received, we received payment for, and these are the residual balance on the purchase order from the customer.

So really, what you want to -- if you're specifically inquiring about the reason for the cancellation, I mean, the Indian government overnight put a regulation in that said that the left-handed driven vehicles in our particular crane segment could not be imported into the country. I think that policy has been very ill-received, and our intelligence tells us that there are -- regulations that are going to be changed, but as our particular experience in India goes, once a policy is made, it takes a good time for it to get changed again.

And next we'll move back to Charley Brady with SunTrust Robinson Humphrey.

Just a quick follow up on the gross margin, not to beat it up too much here, but I just want to make sure I understood your commentary. In Q4, clearly, you're communicating it's going to be obviously a little bit weaker as it normally would be in seasonally. But on a year-over-year basis, are you still expecting gross margin would be up or at least offsets with mix and price competitors and things like that, not going to make that happen?

Yes -- no...

One word answer: absolutely.

Absolutely up year-over-year?

Up year-over-year, we anticipate there being -- yes, you anticipate our actual margins to be up year-over-year. What we're saying, Charlie, is that when you look at it, what I'll say is, sequentially, the fourth quarter you can't marry up to other quarters. But year-over-year, we do see an increase in our overall margin.

Okay, good. Good clarification. I'm just -- I'm curious when you talked about holding the meeting with all the Potain dealers. When you're hearing from those dealers, that large number of dealers, what are you hearing from them in terms of their market expectations, both positive and kind of concerns that they have within their respective market for towers?

Overall, I would say for the Europe businesses that were represented there, it was a very positive response to their potential in the market over the next couple of years. They are absolutely flattered by our new product introductions. They're absolutely very complimentary about our ability to deliver in this increased demand environment, and I think I've demonstrated some of that in my prepared remarks, particularly around Hup, because we haven't always been able to deliver new products on time to customer expectations. But this one has been a blowout success for us, and I think the sentiment in Europe, in particular, remains extremely strong.

And at this time, it looks like we have no further questions from the audience. I'd like to turn the floor back to Ion Warner for any additional or closing remarks.

Thank you, Greg. Before we conclude today's call, please note that a replay of our third quarter conference call will be available later this morning or this afternoon our time 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 hearing -- speaking with you again during our fourth quarter 2017 conference call. Have a good day, everyone.

Ladies and gentlemen, that does conclude today's conference call. We thank you for joining us. You may now disconnect.