Manitowoc Company Inc (MTW) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to The Manitowoc Company Q4 2017 Earnings Conference Call. Today's call is being recorded. 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. Good morning, everyone, and welcome to the Manitowoc conference call to review the company's fourth quarter 2017 performance and our 2018 full-year business outlook, as outlined in last evening's press release. Conducting the call will be Barry Pennypacker, President and Chief Executive Officer; and Dave 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, among others, described in the company's latest SEC filings. The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statements, whether the result of new information, future events or other circumstances.

And with that, I'll now turn the call over to you Barry.

Thanks, Ion, and welcome, everyone. Before I proceed, I'd like to take a moment to talk about the tragic accident that occurred last Friday, involving an MLC300 crawler crane at our test yard in Shady Grove, Pennsylvania. This tragic accident took the lives of our 2 of our Manitowoc family members and injured 3 others. All of us share the profound shock and sadness this action -- this accident has caused, and our hearts go out to the employees and their families who have been affected by this heartbreaking event.

The crane involved was a prototype MLC300 crawler crane, with a test configuration that has not been released to the field. We are performing a comprehensive internal investigation into the accident, and are actively cooperating with all government officials. As the investigation has not yet been finalized, we cannot comment on the cause at this time. However, make no mistake that Manitowoc takes safety very seriously, and we will get to the bottom of the cause of this accident as soon as possible.

Due to the fact that the configuration in question was a prototype, and one that has yet to be released to the market, we are convinced that our entire fleet of MLC300 cranes remain safe to operate in the field, with the approved equipment and configurations.

Now please turn to Slide 3. I'd like to discuss our fourth quarter performance. I'm very proud of our fourth quarter results, which showed significant year-over-year improvement across the board. Our results demonstrate that we are continuing to make progress in becoming the type of crane company that our global customers admire and trust.

For the full year, despite a 2% decline in revenue, we delivered a significant improvement in adjusted EBITDA with a 313 basis point improvement. Operating cash flow was also a success story with improvement of over $200 million. This was driven in part due to our ability to be agile and sell nearly all the cranes destined for India that were canceled, as we mentioned during our third quarter call. I extend my appreciation to our colleagues at Manitowoc. They have demonstrated excellent operational improvements through the continued implementation of the Manitowoc way.

We've seen improving conditions in some end markets, reflecting increasing confidence. However, we also see challenges in some of our other key markets. We continue to execute our market growth strategy, as we secured significant customer wins, contributing to the fourth quarter orders of 620 million. I will give you more color on our growth strategy later in the prepared remarks.

Positive market segment sentiment was most pronounced in the Americas, with solid growth but from low comps. The distribution channel showed increased market confidence with the ramp up of orders, spread out primarily in the first half 2018 in anticipation of increased demand. Rental utilization continued to stabilize, while rental rates continue to be under pressure, reflecting an intensified competitive environment.

With regards to used crane values, the latter half of the fourth quarter provided indications that values may be firming, but we need a few more data points to be indicative of an upward trend. Demand in Europe continues to be a bright spot, with another quarter of increasing end market demand, as customers continue to modernize their respective fleets to take advantage of the features and benefits of our new products.

The winter campaign in our tower business resulted in stronger than anticipated order intake levels, positioning us very well for the upcoming construction season, beginning this spring in Western Europe.

While we see signs in the U.S. and Europe, we continued to see challenges in many of our other international markets: a pullback in investment in the Middle East, due to ongoing structural changes, further delays and eventual recovery in this once dynamic region.

In Australia, we see a rebound in mining, along with large infrastructure, residential and commercial projects, driving increased crane demand, albeit far below peak levels. We believe the market continues to transform itself off the bottom, as evidenced by our orders in the quarter and the sentiment of our customer base. We remained cautious on our outlook for a broad-based recovery in the crane market, as it is yet to be seen if this inflection is sustainable over the upcoming period.

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 fourth quarter adjusted EBITDA was in line with our expectation and consistent with our 2017 full year guidance. Fourth quarter orders totaled $620 million, an increase of 78% compared to $340 million of orders in the fourth quarter of 2016. Our year-over-year increase was driven by significant improvements in tower, all-terrain and crawler crane orders.

Within the U.S. and Europe, a significant amount of our orders represented stocking orders for our dealers. Accordingly, this may impact our order volume in 2018. Moreover, orders were also favorably impacted by approximately 3% due to changes in foreign currency exchange rates.

Our December 31 backlog of 607 million was also up substantially over the prior year. Currently, over 80% of our year-end backlog is scheduled to be shipped in the first half of 2018.

For the full year, orders totaled nearly 1.9 billion, an increase of 32% compared to 2016. The year-over-year increase was primarily driven by higher all-terrain and tower crane orders, and was favorably impacted by approximately 1% due to changes in foreign currency exchange rates. And as I previously noted, a significant portion of our fourth quarter orders represented stocking orders for our U.S. and European dealers, which may impact our 2018 order levels.

Net sales in the fourth quarter of $482 million increased 103 million or 27% from a year ago. The year-over-year net sales increase was primarily driven by increased shipments to European and U.S. customers. The improvements in Europe were primarily due to increased tower and all-terrain crane shipments.

With regard to the U.S., the improvement was broad-based across most products. The increase in net sales was also favorably impacted by approximately 5% from changes in foreign currency exchange rates.

Full year net sales of approximately $1.6 billion decreased $32 million or 2% from 2016. The year-over-year net sales decrease was primarily driven by lower shipments of crawler crane units in the U.S., partially offset by increased shipments of tower cranes in Western Europe, along with increased shipments of truck-mounted cranes, particularly our newly introduced TMS 9000-2 and boom truck shipments both in the U.S.

Full-year net sales were favorably impacted by approximately 1% from changes in foreign currency exchange rates. SG&A cost in the fourth quarter were $68 million, which were $6 million higher than the prior year. The year-over-year increase is primarily due to higher short-term incentive compensation cost earned in the fourth quarter and unfavorable foreign currency translation.

Adjusting for these items, SG&A cost for the fourth quarter of 2017 were approximately $58 million or $10 million lower than the prior year when taking into account a $5 million net benefit recorded in the fourth quarter of 2016 for incentive compensation cost. The adjusted year-over-year reduction was primarily due to lower employee-related cost from headcount reductions during the year, reductions in professional and consulting fees and discretionary cost oversight.

Full year SG&A costs totaled $253 million, although above our expectation, this was $28 million lower than the previous year. In 2017, we encourage short-term incentive compensation cost, which were not incurred in 2016. In addition, SG&A cost were unfavorably impacted by approximately 1% due to changes in foreign currency exchange rates. Adjusting for the short-term incentive compensation cost and FX rates, year-over-year full year SG&A costs were approximately 17% lower, primarily due to lower headcount and cost controls.

During the fourth quarter, we incurred $6 million of restructuring expenses, of which $3 million was related to the Americas region for our plant relocation to Shady Grove, Pennsylvania and severance cost. Another $3 million was primarily related to foreign severance.

Restructuring costs for the full year were $27 million, which were primarily related to the closures of Manitowoc, Wisconsin and Passo Fundo, Brazil facilities, as well as severance cost globally.

Our non-GAAP adjusted EBITDA for the fourth quarter was $22 million compared to a loss of $6 million in the fourth quarter of 2016. This marks Manitowoc's third consecutive quarter of positive adjusted EBITDA since becoming a standalone crane company. Full year 2017 non-GAAP adjusted EBITDA was $67 million or 4.3% of sales, an increase of $49 million and 313 basis points over 2016, respectively.

Our net income from continuing operations was $36 million for the fourth quarter 2017 or $0.98 per diluted share. The fourth quarter results included discrete tax benefits of approximately $47 million. Excluding restructuring charges and discrete tax items, our adjusted net loss from continuing operations for the quarter was $5 million or $0.15 per diluted share.

Tax expense in the fourth quarter, net of the aforementioned discrete items, totaled $7 million. Although our tax expense for the fourth quarter was higher than anticipated and negatively impacted by fourth quarter -- negatively impacted fourth quarter diluted earnings per share by $0.10, our full year tax expense was well below our expectations and guidance.

Full-year net income from continuing operations was $10 million or $0.28 per diluted share. Excluding restructuring charges and certain discrete tax items, our adjusted net loss from continuing operations for the year was $10 million or $0.26 per diluted share.

As I previously mentioned, in the fourth quarter, we reported discrete tax benefits of $47 million. This benefit was comprised of 2 significant items, an approximate $40 million tax benefit related to the reversal of the valuation allowance on our net operating losses in France and a $7 million tax benefit related to U.S. tax reform, primarily the reduction of the corporate tax rate.

We completed a provisional estimate of the transition tax due under the U.S. income tax reform legislation, and believe the deemed repatriation provisions will require us to record a taxable income inclusion of approximately $185 million. However, because we have sufficient net operating losses to fully offset this transition tax income inclusion, we do not anticipate incurring a related cash tax expense.

Additionally, since we are under a full valuation allowance in the U.S. and no transition tax expenses anticipated, there is no current year income tax expense related to the U.S. tax reform legislation.

Due to the significant complexity regarding -- related to U.S. tax reform, we are currently evaluating the impact to our 2018 financial statements, and we'll provide full year 2018 income tax expense guidance during our first quarter earnings call in May.

With regard to our liquidity, as of December 31, total availability under our asset base revolver was $104 million net of $14 million in outstanding letters of credit. Cash on hand at year end 2017 was $119 million, resulting in total liquidity as of December 31 of $223 million, as compared to $214 million at the end of 2016.

Our total ABL availability is approximately $40 million lower from previous quarters and last year, mainly due to the conversion of inventory due to the -- during the fourth quarter, which lowered our asset base on which the availability is calculated. While we believe the availability on our revolver is adequate, we will see an increase in our availability as we build inventory to match our seasonal demand.

Cash flows from operating activities of continuing operations were $112 million in the fourth quarter of 2017, nearly double the cash flows of the fourth quarter 2016. Total cash provided in the quarter was primarily driven by a $90 million benefit from the reduction in net inventory.

Full year cash flows from operating activities of continuing operations were $79 million or $201 million better than 2016. On a currency neutral basis, working capital decreased 17% year-over-year, and accounted for $69 million of the cash generation. Of the total working capital reduction, our team's continued efforts to effectively manage inventory led to a currency neutral $56 million reduction year-over-year.

Turning to Slide 5. We are providing our 2018 full-year guidance to reflect the changing macroeconomic environment, along with the operational improvements we've achieved over the last 21 months.

Our 2018 full year guidance is as follows. Non-GAAP adjusted EBITDA of approximately $96 million to $116 million; depreciation of approximately $39 million; and capital expenditures of approximately $25 million to $30 million.

With that, I will now turn the call back to Barry.

Thanks, David. Moving to Slide 6. 2017 has proven to be a year of transition at Manitowoc. We are continuing to make solid, steady financial improvements by focusing on the things that we can control. Our restructuring efforts in the U.S. are on track, but we're not able to unlock all the full benefits of our actions until we see a broad-based, sustainable recovery in end markets that utilize crawler and rough-terrain cranes. While we have significantly reduced our fixed costs to align with the current end market demand, it is still not enough to take full advantage of the leverage we thought we would get when we did our restructuring model in the U.S.

Simply put, we are not going to produce at full capacity and flood the market. In addition, we are maintaining our price discipline and unwilling to commoditize our products. We are confident that the market will fully rebound. But until it does, we will not fully reap the benefits of our restructuring efforts in the U.S. Additionally, a tightening supply chain with steel price increases are realities that we have to actively manage. Despite these challenges, we are focused on executing our 4 key strategic priorities to differentiate Manitowoc from our competitors: margin expansion, growth, innovation and velocity.

As you know by now, The Manitowoc Way is the engine that drives our continuous improvement, and is the foundation of our strategic initiatives. It encompasses the core values and growth strategies that add value for our key stakeholders, those being our customers, shareholders and employees.

Starting with margin expansion. As we continue our journey to double-digit operating margins, we are making progress in executing our cost reduction initiatives, streamlining our structure, and investing in innovation to take full advantage of the eventual market recovery. In the Americas, we are encouraged by the growth trend, which if it continues, will allow us to fully leverage our manufacturing capacity in Shady Grove and realize all the benefits of the crawler crane relocation. In Europe, we continue to drive improvements to maximize our manufacturing capacity. As I spoke about last quarter, we are realigning our factories in Europe by reallocating capacity among the plants to increase velocity and quickly meet the evolution of our customers' demand.

At our German facility, the team has done a great job of simplifying our boom manufacturing. They have combined multiple machining operations, improved flow of our fabrication area and have started to implement robotic welding. All these actions are reducing lead times, enabling us to meet increasing demand for all-terrain cranes.

Our next strategy is growth. As you know, The Manitowoc Way is all about creating good process and execution of these processes to deliver operational excellence. We continue to make great progress on the operational front. We now need to transition the organization through establishing process to pursue strategic growth.

Recently, we engaged a well-known firm to work with us to find new ways to organically grow in our key products. We must manage the organizational shift to growth through a systemic approach. We know the investment community places a premium on those companies that can predictably and sustainably grow above the market. We are currently focused on 2 key market opportunities, and translating these into tangible growth concepts. This is the beginning of what I referred to as embedding a standardized process to operationalize growth at Manitowoc. I will continue to update you on this strategic priority, as this is a key part of our margin expansion targets that we have previously communicated. I'm excited about the potential of these initiatives in aiding us in the continued transformation of Manitowoc.

Our third key strategic priority is innovation. One of the key missions at Manitowoc is voice of customer and our new product development process, our investment in new products continued to be well received by our customers, with over 40% of the revenue in the fourth quarter coming from new products introduced since we became a standalone crane company.

For example, we will introduce an upgraded 300-ton all-terrain crane later this quarter. Using The Manitowoc Way tools, we have been able to make significant modifications to our design, to maintain our position with the highest performing crane in the 300-ton class. Our customers and dealers will witness firsthand the results of our continued investment in innovation at our Crane Days event in Shady Grove this June, as we plan to continue to introduce new products that are sure to delight our customer base.

Our fourth strategic priority is velocity. The culture of LEAN operating approach is the best way to continue to have the heartbeat of The Manitowoc Way, providing these types of results that our investors need. Often, we find that improving the organizational structure to be more cross-functional and local in nature goes a long way to increase our velocity. First, this change has more effectively allows us to implement priority deployment as a management tool.

Second, it allows us to implement The Manitowoc Way to the entire team rather just to independent functions. Roughly 6 months ago, we did exactly this in our operations in India and China. In both locations, we have implemented 5S, TPM, creative flow and manufacturing and improved our safety, all of which has created capacity, allowing us to move more manufacturing to these locations, such as the fabrication of fixing angles to India and the localization of more fabrications in China for the Asian market.

In closing, our successful execution of our strategy has resulted in dramatically improved financial performance. We have made significant progress in making Manitowoc leaner and more agile. Through the downturn, we kept our eye on the future, focused on long-term results. We are now well positioned to capture growth as market conditions continue to improve. While the market is in its early stages of recovery, we continue to be focused on the things that we can control by bringing to market great new products that our customers desire, a flexible manufacturing capacity and a flattened customer-focused organizational structure. We are set up very nicely for a good start in 2018.

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

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

(Operator Instructions) We'll go first to Jamie Cook with Credit Suisse.

This is actually Themis, on for Jamie. Just a question on orders. I mean we saw very strong order numbers in your results. So can you talk to order trends maybe throughout the quarter and in January? And then on the stocking actions that you mentioned in the Americas, how much of that was driven by sentiments? Maybe due to tax reform versus real underlying end user demand, and how much of a pullback in order should we expect to see in subsequent quarters on a sequential basis?

Well, I only have a little bit of time for that question, but boy, it would take me an hour just to answer the whole thing. But let me try to take a shot at it. We'll break it apart into pieces. With regards to the Americas, sentiment in our distribution basis is definitely improving. They're starting to see that utilization is steady and improving. They're starting to see that used crane prices are coming off the bottom. They're starting to see and hear continuous talk in Washington about an infrastructure bill. All of those things provide positive sentiment for our dealer network. And I can tell you that when we look at the United States, in particular, and the increase in orders that we received in the quarter, it's not just 1 section of the country either. It's pretty broad-based. And it's given us the ability to see that there is a time now coming where our strategic advantages that we have built into our innovation cycle are providing the types of productivity improvements that are driving demand for our products even in a flat market. So if I look at the tempo throughout the quarter, I would say that it was pretty even. Throughout the quarter, there was not a hockey stick in December, where everyone put their orders in, in order to get in line. It was a pretty broad brush throughout the quarter. And I would say that our orders, thus far, in '18, are trending where we thought they were going to be. So all good signs.

Great. Good to know. And then just my follow-up on profitability, it looks like you guys chose not to provide any top line guidance this time. But can you help us in terms of your profitability assumptions in any way? I'm just trying to figure out what sort of incremental margins are implied based on your guide? And how we should think about the year-over-year expansion in operating margins?

Right. So I think if we look at our guidance, we're from $96 million to $216 million. I think you should take the midpoint and model the midpoint versus where we ended up with this year at $67 million. So that would give you a good indication of our basic improvement that we're committed to.

But are we looking for single digit or maybe double-digit increase in the top line?

At this point, I -- there's a reason why we didn't give revenue guidance. And the reason we didn't is I want to make sure that we deliver what we say. I know for a fact we can deliver with revenue of whatever it may be, the midpoint of our guidance, I know that. If our revenue is lower than what we originally expect, we're still going to deliver that midpoint of that guidance. If our revenue happens to be higher, which quite frankly, we don't know as of yet. If it's higher, then that guidance will be higher. But we have -- we just came off of a quarter where the orders were a little above $600 million. But if you go back in history and you look at fourth quarter orders of this company and tried to get a trend for the following years revenue, there's 0 correlation. So for me, at this point, to say that our revenue is going to be in this range, I just don't know where it's going to be right now. But when I do, I will certainly be in a position to tell you guys.

We'll go next to Steve Volkman with Jefferies.

Maybe just a quick clarification because you mentioned a couple of times in your commentary, order of magnitude, how much of the fourth quarter orders were dealer stocking, and what would be normal for that?

Well, the exact percentage, I'm not going to give, but I would tell you that it's not the lion's share. There -- we had some large orders that will definitely be retailed. But we also had very, very good orders in our tower business, as I mentioned. Those are not for stock, they go directly to our customers and end users. So it's very difficult to guess the exact number because, quite frankly, it's changed from when the customers have placed their order. Some of them have been retailed and some of them haven't. So -- but I would tell you that I'm encouraged by those orders. They're -- as I said, they're not in one particular category. They're pretty much broad-based. So that shows me that some of these guys who have been in this crane business, as many years as I am old, have confidence that this thing is turning.

Okay, all right. Fair enough. And then just to push one more time on the margin question. Barry, you mentioned at the outset that you haven't really been able to get kind of the benefits of volume yet, and so you haven't shown -- I think you said you haven't seen quite as much margin expansion as you would have hoped for or that you think you can do eventually. And I'm trying to just get a sense of how you're thinking about 2018 relative to margin expansion? Will we see margin expansion? Is there an order of magnitude to think about for that?

You will see margin expansion much in line in the increasing above what our prior guidance has been, with 150 basis points of margin improvement a year. We will definitely exceed that this year. But as I said in the prepared remarks, we truly need crawler and RT volume in the U.S. to come back, not even to -- I don't even need them to come back to historical highs, but if they come back to 50% of historical highs, which is still a very broad brush recovery for those 2 particular segments for us in the U.S. Then we will really see a substantial, substantial increase in our overall operating margins.

We'll go next to Ann Duignan with J.P. Morgan.

Barry, could you just -- or one of you, could you just walk us through maybe the seasonality of your profitability? Would you expect to be profitable in each of the 4 quarters? Or should we consider, just given your comments that a lot of the backlog for spring delivery may be -- seasonality will be a little bit skewed to the front half of this year rather than back half?

I don't think it's going to be skewed. I think it's going to be pretty consistent with what we have exhibited in the past, where we come off a very low first quarter, and have substantial increases as the year goes on. Historically, the first quarter (inaudible)

(inaudible)

I'm sorry, Ann. You broke up just a bit.

Sorry. I was just going to ask you to clarify, do you expect to deliver a profit in Q1? Or should we take normal seasonality, and maybe a loss in Q1 and then strong solid performance, thereafter?

We're trying to get that to the point where we can understand exactly what the seasonality issues are. But based on what I've seen in the past, I don't expect the seasonality for 2018 to be any different than 2017.

Okay, that's helpful. I appreciate that. And then just a follow-up, on the Q3 call, you talked about steel cost inflation, you talked about very competitive pricing, and I think you talked about supply chain constraints. I think you alluded to some of the supply chain constraints again this quarter in your opening remarks. Could you expand on each of those 3 risks as we go through '18?

Yes, I mean, if you're in the business of banging steel, you know exactly what's happening. Steel prices are increasing. But as I look at it, all of our competition has the exact same situation going on. So I would expect that they'll have the same amount of discipline that we have, and fully expecting to offset these inflationary activities with price. With regards to supply chain, when I talked about it in the third quarter, it was primarily on things like hydraulics. Unfortunately, for us, as we entered this year, it's shifting itself into heavier, higher labor content fabrications. I think as the broad-based recovery happens in some of the large construction equipment, the large fabrications are becoming tighter. So we're evaluating those, and we're moving production, as I alluded to, in the prepared remarks from one plant to another, where we can take advantage of some of our automation that we've implemented over the last 2 years. So large fabrications are becoming a supply constraint. But we've got a system in place that we utilize with The Manitowoc Way that we don't want to make excuses for that, and that we've got to go in and help our supply base with the same tools that we use in our factories in order to free up some of their capacity.

Okay. And pricing?

Yes, pricing in the U.S. is okay. I mean we continue to see pocketed opportunities. I would say that Europe hasn't changed very much. Europe is still very competitive, particularly, in Germany, where all 4 of us, who are competitors, manufacture all-terrain cranes. I think that's a competitive area. But in the Middle East, it's nonexistent from a pricing perspective. So we've got to continue to utilize the principles in our innovation strategy to continue to introduce products that completely change the model on return on invested capital for our customers, and as we do that, we'll continue to grow through the cycle.

We'll go next to the Mike Shlisky with Seaport Global.

I just -- so I just want to ask about your comments on the U.S. business during the fourth quarter. It sound like Dave just said that it was pretty good across most categories. So I guess that would include some of the heavier crane categories. So could you maybe give us some color on the gross margins of your most recent heavy crane shipments versus ones you've had maybe over the last couple of years. Just kind of give us like some kind of quantification as to how well The Manitowoc Way has been implemented so far from your older shipments.

Yes, Mike, I mean I would generally say that when I look at the year-over-year change, really, it's not in the larger cranes that we're talking about. It's more the, what I'll say, the boom trucks and the industrial trucks. And in addition to that, we continue to push our aftermarket with our margins going up as well. So I think it's really not the larger models that we're talking about. It's more the other items that are generating the volume in the U.S.

The larger models, as you're referring to, Mike, are primarily crawlers. And I think I beat that to death by saying that's a market that we really need some help from infrastructure spending to make that come back to where we can really fully utilize the efforts that we put in, in restructuring that business.

Okay. And then secondly, I just want to ask about that whole India saga that started last quarter. It sounds like most of those cranes were is in fact remarketed. But is that customer going to come back to the market anytime soon? I guess the issues they had in the last quarter, I mean, is that kind of resolved by now? I mean, are there any sales that you might look at for 2018 there?

No, they're not resolved as of yet. I think you know that anything that needs to have legislation change in India takes time. We know for a fact that our customer wants these cranes. We know that our customer needs these cranes, and we also know that there's a substantial amount of effort to try and get this resolved by the end of the second quarter.

We'll go next to Seth Weber with RBC Capital Markets.

So I think, first, I just wanted to clarify what I think I heard earlier, Barry. Did you say operating margins in 2018 up at least 150 basis points year-to-year? Is that right?

That's correct. That is correct.

Great. There's been a lot of restructuring, a lot of plant moves and things like that. Can you give us some idea where you're at from a capacity utilization at this point, maybe by region if that's possible?

I mean, we know -- I mean, you can probably imply from my comments that it's still extremely low in the U.S. even though we closed that 550,000 square-foot facility, extremely low in the U.S. And as we go to Europe, I mean our plants are doing exactly what we envision them to do, and they're absorbing in big ways that are making us extremely happy.

Okay. So would you say the U.S. is below 50% still at this point?

Yes.

Okay. And then maybe, I don't know I might have missed this, sorry, Barry, the commentary around sort of this next growth initiative, I know you've talked about the aftermarket history over the last year or 2. What else should we be thinking about as part of this kind of growth move that you're kind of alluding to? Is it peripheral markets? Is it just more product? I'm just trying to think about how you're envisioning this process.

When you look at what we've talked about for the last 21 months since I've been here, I mean, we've talked an awful lot about The Manitowoc Way, and all the tools and processes that we implement in order to ensure that we're going to get the type of results that we are communicating externally. So with regards to our operational excellence program in this company, we have a very, very highly structured process-oriented approach. With regards to growth, we're not nearly as structured. And when you're as operationally focused as this company is, I said it in prepared remarks. And what I mean is we're trying to take a growth process and operationalize it, if you will, into something that all of our salespeople can utilize in order to get strategic growth. I mentioned we're starting out targeting 2 particular market segments that we are currently not exhibiting the type of growth rates that I had originally thought. And we are implementing a process that shows us how to approach these markets in different ways to grow substantially, and I just am absolutely astounded by what we found just in the last 2 months of effort. So I'm very, very encouraged by this. As you know, we're very process-oriented people, and I just felt that in order for us to continue our success, once we operationalize this company the best way we can, we need to have process around strategic growth.

Sorry. So what are these -- sorry if I missed it, what are the 2 areas that you're focused on?

Give me -- give us a few more months, then I'll tell you.

Okay, but it's separate from the aftermarket initiative you talked about?

Absolutely. The aftermarket initiative is alive and well. It's one of our strategic priorities, and it continues on. This is in addition to all.

And will this require capital investment? Or is it just using...

No.

No?

No, no. It's just using new tools and process.

We'll go next to Steven Fisher with UBS.

Wondering if I could just gauge your confidence, Barry, in the message around 10% margins by 2020. I know it probably will still depend on some of the shape of the recovery in the crane markets. But how are you thinking about that target? And the base case path for getting there, I know you just said at least 150 basis points in 2018, but that still leave a nice gap to get up to 10%, so if you could just talk about that, that will be helpful.

Yes, I mean we're 100% committed to that still. As I've mentioned to you, and I've said a number of times during this question-and-answer session, as well as prepared remarks, when we're operating at the capacity levels that we are in the U.S., it's going to be extremely difficult in order to get to that target. However, I do know that by studying this market that we're not going to be at these historical lows in those 2 major product lines forever. And as positive sentiment comes back, and those 2 particular areas of our business continuing to rebound, it's going to be the proverbial hockey stick in that area. We continue to see nice improvement in all of our base businesses that are growing with 150 basis points of margin expansion. But when you have such a large portion of your revenue base when -- remember, when we put the target together, it was based on '15's revenue. And when you look at what our key volume was and our crawler crane volume was back in '15, we're a long way away from that. Now we're supplementing it with other areas, and we're growing in other areas which is helping. But we're going to need some market recovery in those areas, because quite frankly, that was part of the original assumption.

Got it, that's clear. And then just to come back to the question about the stocking and the orders in the next couple of quarters, because obviously, you'll have ConExpo in the comps as well. So if you could just maybe frame directionally in the first quarter, are you thinking that orders could be down?

Down from fourth quarter...

Like year-over-year? Or either (inaudible) both?

Yes, I mean down -- I mean, I expect them to definitely be down from the fourth quarter. But I think we have a shot at being pretty close to what we did in the first quarter without ConExpo.

Without ConExpo, sorry, was that you're adjusting the number or on the absolute number?

No, no, no. That's absolute number without ConExpo.

Without ConExpo this year, got it, got it.

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

Barry, can you maybe just remind us at kind of what volume level -- you're, obviously, in the capacity utilization, it's not where it needs to be because of the volumes. Can you tell us where you're at, at capacity utilization at Shady Grove and kind of what does it need to be to kind of get up to the margin levels that you're aiming for?

Well, all I said, Charlie, is that it's under 50%, and it needs to get north of that. I mean, the exact number, I don't think we have calculated. I mean, we can work on that and try to get you an answer. But I just know that it has to go well above where it is today.

Okay, fair enough.

But even well above -- but let me just clarify that, if you will, well above where it is today, it's still not near, not near peak levels.

Yes (inaudible)

We've exhibited (inaudible)

Great. So just a little follow-up here, I want to come back on the revenue question for '18 and the guidance or the lack thereof. And I mean, I understand visibility is challenged sometimes, particularly in the market. But it surprise me that you've provided guidance for the following year in the past. The market sounds though it's getting better coming off the bottom. There's more interest from the dealer level. And I'm just trying to square up, is it a function of, you had a large influx of orders in Q4, and then maybe pulled some stuff forward and you've got a tough comp with the ConExpo stuff and some other things in the year-ago? I'm just trying to understand the visibility or either lack of visibility in not being able to give some sort of sense of where you think 2018 is going to shake out even in a range format for 2018?

Well, I could have given you a range, Charlie, but it wouldn't have been worth the paper it was written on or words that was said. I mean, when you look at what we booked in the fourth quarter, and you annualize that, which I know is one of the things that you guys have a tendency to do, that's well above what my revenue expectations are for 2018. Because let's face it, I mean, you've heard me say that in Europe, there's been some change and there's been some utilization increases and modest growth. But by no sense of the imagination have I said or anyone has said that the broad-based recovery in the crane market in the U.S. is imminent. So until I see signs that, that is a broad-based recovery, I'm going to just have to know what I have to do from a cost perspective and from a revenue perspective in order to meet our midpoint. And as I said, our midpoint isn't going to go down. Our midpoint isn't going to go down. But if revenue goes up above our expectations, and this thing recovers faster than I think it was, then we'll update you. And you're asking me to give you something that I don't have, and you know we're very transparent. It's not like we're trying to hide anything. We want to give you numbers that we know are good.

Yes, I know I mean, I appreciate that, and I think we all do. I mean, that's what's -- I don't want -- no one wants bogus numbers out there that then get cutback. I'm just trying to get a sense from a customer standpoint, the visibility, it sounds like, I mean, it's maybe different than it has been historically, and that's all. I'm just trying to really understand. Are you (inaudible)

Yes, yes. No, I think that's absolutely correct. I think that's absolutely correct, absolutely correct.

Does your guidance that you have given imply revenues up year-on-year?

Yes, Charlie. So our guidance is twofold. Number one, we have, what I'll say, is we put together, what we have is what we considered a best case scenario. But we've always said that we're going to have, at minimum, of 150 basis points to 200 basis points improvement on a year-over-year basis, and we're going to live by that. It's just on the revenue side. What we don't know -- or in the orders side and revenue side, what we don't know is how many of those orders are going to go to the latter half of the year that are already in the stream. So we're not quite sure how it's going to play out with all of the dynamics within the U.S. market, whether or not these orders are going to then be flooding the market into the second half of the year or if they're truly a first half of the year. And that visibility has yet to be determined by us, so -- which is why we're a little cautious as to how we see the products that we're putting in the dealer's channels turning into, what I'll say, sales and rentals within the user group.

We'll go next to Mircea Dobre with Baird.

I am going to beat the order horse some more. I understand the comments on stocking but -- and seasonally and all of that. But if I look at this quarter, you've had the best order quarter in 3 years. So what I'm trying to understand is why is the stocking dynamic happening? There has to be a reason behind it. Is it that there's too little inventory in the channel? Is it that the end markets are truly getting better? Is it that you've gotten new products? Because all these things matter in the way we're thinking about 2018. That's why I'm asking.

I think it's all of the above. It's all of the above.

Our customers are having higher sentiment that they think that there's going to be some pent-up demand as a result of the stymied investment that's happened over the course of the last 2 years. I think there are some pockets of market that are fundamentally improving, but haven't had the inflection point that everyone would like to see, and so I think it's -- it is that. I think it is anticipation that this thing is going to turn, and people want to be in the queue for making sure that when it is required for the end market, they're going to have supply. I mean a dealer network without supply is deafening when there is a recovery.

Okay, fair enough. Well, then here's the way I'm kind of thinking about revenue. And Barry, if I'm off-mark, help me out. But you said that less than half of your orders are meant for stocking, which would be less than $300 million in the fourth quarter. You've done $1.86 billion of orders in 2017. So let's knock that down by, call it, $200 million, $300 million, but your backlog is up $282 million. So on a net basis, it looks to me like without any improvement in your business, you should be able to do at least $1.8 billion of revenue by converting backlog into 2018. Why am I wrong?

I'm not saying you are wrong.

We'll go next to Nicole DeBlase with Deutsche Bank.

So I'm not going to try to beat the order horse again. I feel like we've kind of explored that as much as possible. So just a couple like nitpicky ones, thinking about SG&A, cognizant that you guys helped us with backing out some of the one-time or 2017 specific items, how should we think about SG&A on a year-on-year basis in 2018?

Yes, I think we'll be somewhere in the $245 million to $250 million range.

Okay, thanks, Barry. That's helpful. And then I guess like on oil and gas, that's one thing that we didn't talk about a whole lot. The crude prices continues to move higher. Have you guys started to see increased oil -- order activity from that end market at all? Or it's still pretty low?

Still pretty low, pretty flat. And one of the things that is a dynamic is, as you're well aware, particularly in the U.S, the wells today are substantially more productive than they've been in the past. So there is a need for less equipment in some cases. So we're evaluating that. We continue to make sure that the products that we're putting into the market are performing well above our competition. And I believe that, particularly, when it comes to RTs, which is the #1 crane that is utilized in the oil and gas business, we're getting to the point where we have, what I would call, world-class performance. And as that continues to -- that capacity continues to be utilized, I think we're sitting very well with our product portfolio. With regards to the Middle East though, I can tell you, there's still very, very muted investment. And as I said in my prepared remarks, that was once a very, very good region for The Manitowoc Company.

We'll go next to Larry De Maria with William Blair.

If I recall, you're putting through some price increases in January. Just curious if that happened and if it went in across the board if everything's just deal by deal? And if that contributed to any of the order shares before -- obviously, in the fourth quarter before the new year. And secondly, was steel price inflation are you using? I'm not sure if you said it, so I apologize if you do. But what inflation for steel or steel price are using for '18?

Well, with regards to the pricing, we didn't get much pricing put in, in the fourth quarter. But we are and have put pricing in place in the new year. And I can say that our orders are trending where we thought they should. Now with regards to the steel inflation, David can...

Larry, I would generally go back to what our philosophy is, and that is to offset what I'll say input cost with price. So we actively look at our steel requirements where we are, and what we need to do relative to pricing. So where we think it's going to be is probably not as relevant as how we address the changes within the marketplace.

Okay. But obviously, you're assuming it's higher than '17, I guess?

Absolutely. Yes. That is correct.

And secondly, obviously, you've talked about crawlers and RTs, you need them to come back. Just curious if you're seeing any quoting or anything like that in those categories? Or it's really on the comment you need infrastructure to -- the rubber to hit the ground, so to speak, with the infrastructure for those markets to come back? Or if there's any movement on quoting, given the broad-based recovery you're seeing in cranes in North America?

Yes, I will say that I'm glad someone finally asked that question because we are seeing increases in quoting activity in both of those product lines. So that is very positive, but it hasn't translated itself into orders in our backlog yet. But with the activity with RTs and crawlers, in particular, are improving and sentiment is coming back, which is a big plus for us in the future.

We'll go next to Stanley Elliott with Stifel.

Quick question. Just back on the 150 basis points on the margin opportunity, are you really -- are you baking much in, in terms of the RTs or the crawlers going back? And I apologize if you said that already.

I did not. And no I'm not.

Perfect. And then just secondly, how do we think about -- you guys have done a really nice on improving the working capital of the business. With markets looking like they're firming up a little bit, what sort of level of working capital improvement should we think about in the coming year?

Go ahead, Dave.

Yes, I would say, Stanley, that we've always prided ourselves and looking at improving our inventory turns by 0.5 turn the year. That's been a stated objective of ours and a stated goal. So in that regard, we're doing that. And we also have different programs underway to monetize our receivables on a quicker basis as well. So I'd say those are the 2 key things. And obviously, we work very closely with the vendors in looking at how we can partner with them for a long-term valued relationship versus just a buy and sell relationship.

And we'll go to Steve Volkmann with Jefferies for a follow-up.

Dave, I just wanted to ask you, what cash looks like in 2018? So I think you just started to do that, but maybe just flesh that out?

Steve, I would say it's a little premature for that. But, obviously, this year, in 2017, we looked at breakeven in cash, and we ended up doing a lot better. So we probably did better than we anticipated. So it's probably taken a little bit away from '18 perhaps, and I'd say it just depends on the volume and the working capital commitment relative to that. So I think that's the biggest wildcard, which we're trying to get our hands around, but make no mistake about it, cash is our #1 priority. Monetizing anything that we can within our inventory to generate cash is going to be paramount because as you know, our 260 million in notes comes due or is callable in February of '19, and we want to be in the best position to allow us to get the best type of syndicate rate that we can in -- when we refinance those. So long and short, I'd say that I don't see us being negative. I'm anticipating that we're going to be positive. But to the degree of positive, I can't say at this point in time yet.

Yes, great. I was thinking about those notes too. So that's it.

And that includes our question-and-answer session. I would like to turn the conference back over to Mr. Ion Warner for any closing remarks.

Thank you. Before we conclude today's call, please note that a replay of our fourth quarter 2017 conference call will be available later this morning by accessing the Investor Relations section of our website at www.manitowoc.com. Thank you, everyone, for joining us for today and for your continuing interest in the Manitowoc Company. We look forward to speaking with you again during our first quarter 2018 conference call. Have a good day, everyone.

And that concludes today's conference. We thank you for your participation. You may now disconnect.