Manitowoc Company Inc (MTW) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to The Manitowoc First Quarter 2018 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, sir.

Thank you, and good morning, everyone, and welcome to the Manitowoc conference call to review the company's first quarter 2018 performance as outlined in last evening's press release. Conducting the call will be Barry Pennypacker, President and Chief Executive Officer; and David Antoniuk, Senior Vice President and Chief Financial Officer.

Today's webcast includes a slide presentation, which can be found in the Investor Relations section of our website. We will reference these slides throughout the prepared remarks. We will be sure to reserve time for questions-and-answers after our remarks. (Operator Instructions)

Please turn to Slide 2. 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 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 that we delivered another quarter of solid financial performance. Our results demonstrate that we are continuing to make significant progress with the implementation of The Manitowoc Way to assist us in increasing our profitability, developing new products and growing our market share. In the first quarter, orders increased 10% year-over-year against the strong first quarter of 2017 that included the effects of the ConExpo trade show and a large order from India that was eventually canceled later in the year.

Our net sales grew 26% in the quarter, and our adjusted EBITDA margin improved by over 400 basis points. This marked the fourth consecutive quarter of year-over-year improvement in financial performance. We are extremely proud of this milestone in delivering real value to our stakeholders, and I congratulate the Manitowoc team for their commitment and support.

We are seeing signs of a gradual recovery in the crane market with strength in commercial construction and energy end markets and with higher year-over-year demand in the Americas and European regions. We continue to see our investment in new products paying dividends with over 40% of our revenue being generated from new and innovative products since we became a stand-alone crane company. Rental utilization continued to be encouraging with fleet assets showing the cranes are working in the field, particularly towers, all-terrains and recently, crawlers. However, rental rates continue to be under competitive pressure, and used crane values overall have stabilized but are not reflecting meaningful improvement in values. This is particularly evident in the rough terrain market in the United States. When our customers look at the current rental rates and analyze today's market pricing, the return on investment model that they employ doesn't work. Thus, they are not pulling the trigger on rough terrain purchases.

There are still puts and takes in the general crane market. But overall, our confidence is growing. We are clearly off the bottom, although we remain cautiously optimistic at the rate at which the market will rebound. 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. First quarter orders totaled $536 million, an increase of 10% compared to $488 million of orders in the first quarter of 2017. Our year-over-year increase was driven by improvements in the commercial construction end markets in both Europe and the U.S. Orders were also favorably impacted by approximately 5% due to changes in foreign currency exchange rates. Our March 31 backlog of $757 million was also up substantially over the prior year, and over 90% of the current backlog is scheduled to ship by the end of 2018.

Net sales in the first quarter of $386 million increased $80 million or 26% from a year ago. The year-over-year net sales increase was primarily driven by increased shipments to Western European and U.S. customers. Net sales were also favorably impacted by approximately $26 million due to changes in foreign currency exchange rates.

Gross profit of $68 million improved by $16 million over the prior year, primarily due to higher volume, lower costs and improved plant performance. As a percentage of sales, gross profit improved by 70 basis points.

SG&A costs in the first quarter of 2018 were $60 million, which were $1 million lower than the prior year. The year-over-year decrease is primarily due to the triennial ConExpo trade show held in 2017, partially offset by unfavorable foreign currency exchange rates.

During the first quarter, we incurred $6 million of restructuring expenses related to severance costs in the U.S. and Europe and additional training of skilled labor as a result of the relocation of crawler manufacturing to Shady Grove.

On a non-GAAP adjusted EBITDA for the first quarter of -- was $17 million compared to $1 million in the first quarter of 2017, driven by improved gross profit. In addition, as a result of the weakening of the U.S. dollar in 2018 as compared to the first quarter of 2017, the sale of our European manufactured products into the U.S. negatively impacted our operating margins in Q1 2018 by approximately 100 basis points.

In spite of the headwinds we have encountered and as Barry mentioned earlier, this marks Manitowoc's fourth consecutive quarter of year-over-year improvement since becoming a stand-alone crane company.

Our net loss was $10 million for the first quarter of 2018 or $0.28 per diluted share. Excluding restructuring charges, our adjusted net loss for the quarter was $4 million or $0.12 per diluted share.

With regard to our liquidity, as of March 31, total availability under our asset base revolver was $118 million, net of $14 million in outstanding letters of credit. Cash on hand at the end of the quarter was $95 million, resulting in total liquidity as of March 31 of $213 million as compared to $192 million as at March 31, 2017.

Effective in 2018, the company adopted the new FASB accounting standard relating to the presentation of cash receipts and payments under our accounts receivable securitization program. As a result, proceeds received from the sale of trade receivables are included in cash flows from operating activities, whereas cash collections related to the deferred purchase price of accounts receivable sold are classified as cash flows from investing activities. This accounting standard required us to reclassify $149 million of cash receipts as cash flows from investing activities, whereas in the past, these receipts would have been classified as cash flows from operating activities.

Cash flows used by operating activities on a GAAP basis were $173 million in the first quarter 2018. On a non-GAAP basis, our cash flows used by operating activities were $24 million, a 25% improvement from the comparable period when adjusted for the accounts receivable securitization program. Total cash used in the quarter was primarily driven by short-term incentive payments earned in 2017, the semiannual interest payment on our long-term debt and legacy supplemental executive retirement plan payments.

Turning to Slide 5. We are updating our 2018 full year guidance to reflect the changing macroeconomic environment and our work to analyze the impact of the recently enacted U.S. tax law changes. Our updated 2018 full year guidance is as follows: revenue of approximately USD 1.775 billion to USD 1.85 billion; non-GAAP adjusted EBITDA of approximately $100 million to $120 million; depreciation of approximately $39 million; restructuring expenses of approximately $13 million to $15 million; capital expenditures of approximately $25 million to $30 million; and income tax expense of approximately $14 million to $20 million.

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

Thanks, David. Moving to Slide 6. We began 2018 with a good start. The overall global crane market has begun to turn. However, like many capital goods companies, we are seeing headwind. Our supply chain has started to tighten. We are beginning to see material cost inflation, and changing foreign exchange rates are all putting pressures on our margins, particularly on European-produced cranes that we sell in the U.S. We are actively managing these challenges and aggressively taking pricing actions. I reiterate, we are aggressively taking pricing actions. These efforts will ensure we deliver our commitment of full year EBITDA between $100 million and $120 million. This will require us to actively manage our costs as well as deal with the negative impact of mix.

The current business environment is extremely dynamic. We continue to leverage the Manitowoc Way to balance the increases in productions with the external challenges such as steel and exchange rates that we cannot control. We remain focused on executing our 4 key strategic priorities to differentiate Manitowoc from our competitors. Those are margin expansion, growth, innovation and velocity.

Starting with margin expansion. Make no mistake, we are not immune to supply chain constraints and input costs such as steel. Also, the supply of skilled labor is tightening to meet the strengthening demand. There are 4 major actions that we are undertaking to manage these issues. First, we are aggressively using price increases across most of the product portfolio to offset these increased costs. Second, we have intensified our low-cost sourcing efforts. Third, we've accelerated our investments in technology to improve our productivity. And last, we have 12 distinct projects in our European operations to optimize our manufacturing facilities. In some instances, we move fabrications to underutilized Manitowoc plant. And in other instances, we have simply outsourced noncore fabrications.

I'd like to highlight one shop floor transformation project that took place in our Zhangjiagang factory in China. By setting up dedicated cells in our fabrication department, we are were able to free up 48,000 square feet of space, improve productivity by 10% and reduce travel distance by 1.6 miles. This space will allow us to invest in insourcing previously outsourced components, thus increasing our overall competitiveness, a great victory for the Manitowoc Way. All of these efforts are key to help us manage our profitability as revenue grows and the input costs rise.

Our next strategic priority is growth. Last quarter, I spoke about the need to manage our organizational shift to pursue growth through a systemic approach. Working with a well-known firm to explore organic growth for our rough-terrain crane business, last week, we announced the new standard 2-year warranty program. In addition, due to the significant quality and reliability improvements we have made in our new GRT product line, we've also introduced an attractive extended warranty for up to 5 years. This enhancement offer significant value for our customers and will differentiate us in the market in one of our key product lines. Furthermore, we appointed Peter Ruck as Senior Vice President of Business Development to lead the execution of these processes to deliver growth results that count as well as evaluate other opportunities for growth that are both accretive to Manitowoc and complementary to the crane business.

Our third strategic priority is innovation. Last month, I attended the Intermat show in Europe to celebrate the 90th anniversary of Potain, our tower crane business. Customer reception to our new winch technology with market-leading increasing hoisting speeds was very positive. Our new operator lift feature, designed to comply with French regulations going into effect in January of 2019, was outstanding. We call this new product, Cab-IN. This has been a very difficult product to develop due to the wide variety of voice of customer that we have received. This is perpetuated by the new regulations, but I think we got it as we have already received orders from one of our largest French customers. But honestly, our big announcements on innovation have to wait until the week of June 4, when we will host over 750 customers at our Shady Grove facility for Crane Days. I'm very excited to showcase the true power of The Manitowoc Way as it continues to influence our new product development cycle.

Our fourth strategic priority is velocity. The Indian tower business is a relatively small business for us, but I wanted to recognize what our team has done there to really embrace The Manitowoc Way. Last year, we kicked off a project to relocate our manufacturing facility in the Pune area to a new facility some 25 miles away. It's been a challenging mission for our employees with an aggressive time line and many operational hurdles. During the first quarter, we have significantly ramped up our production and already are exceeding our quarterly targets for this business. This, again, underscores the power of The Manitowoc Way, whose LEAN principles have embedded from the very start of the production and embraced by the team in India.

In closing, I'm very pleased with our performance in the first quarter. It's been a good start to the year, but it won't be without its challenges. We are making no excuses for these headwinds, and we remain resolute in our quest to meet our previously stated financial objectives. We have lots of work to do in managing our supply chain and labor pool as well as ensuring our price increases are realized. Increasing price is never easy, but it's unavoidable in the current market environment. As reflected in our updated guidance, including meeting our commitment of 150 basis points of margin improvement year-over-year despite the headwinds, we are encouraged by the improvements we have made and are well-positioned to capitalize on the impending crane recovery.

With that, we'll turn the call back over to Ion for questions.

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

(Operator Instructions) We'll go first to Jerry Revich of Goldman Sachs.

This is Ben Burud on for Jerry. Just wanted to start on Slide 3 and was hoping you could give us some more color as to why rental rates are still under pressure given what seems to be pretty -- or growing tailwinds across the business.

There are growing tailwinds, but as I can tell you, it is a very competitive rate environment. We do channel checks on this weekly as recent as yesterday. And with -- even with the higher utilization of equipment that continues to perpetuate itself in the U.S., rates up until this point have not followed.

And then I guess turning to supply chain quickly. Are you guys seeing -- I'm assuming you're seeing tightness across your supply chain or at least in spots. Can you give some color as to where specifically you're seeing tightness, and how you can manage that over the balance of the year?

Our primary constrictor to the current supply chain has to do with fabrications. And as I mentioned in my prepared remarks, we're dealing with that by taking some of our underutilized assets throughout the entire product portfolio and utilizing them to help us in this tightness that we're seeing in fabrications. Few electronics issues, but I think we've overcome those. So I'm proud to say that even with this tightening that we've had in the supply chain, we missed 0 orders in the first quarter as a result of tightness.

And we'll take our next question from Mike Shlisky of Seaport Global.

So just looking at the guidance here. It looks like you expect better margins in the rest of the year than you've seen here in the first quarter. Could you just give a little bit more color on the cadence here? Is it possible that you'll see margins improve gradually throughout the year? Or is there any seasonality that could happen in the fourth quarter that might be down from the previous quarter?

Yes. Mike, I'd say, generally speaking, we're -- the best way to model would be to look at it pretty evenly throughout the rest of the year at this point in time.

Okay. And then secondly, I wanted to ask about some of the, let's say, ladder crane category, the towers, the boom trucks, et cetera. Can you just give us a sense as to how far out you're booked on those? At this point, are you already booking orders for 2019 for those categories? And is it possible, given that there's a high demand environment for those products, that you're getting some kind of pricing beyond just the cost of steel here?

Excellent question, Mike. Yes. In fact, with regards to towers, I think with the global demand being where it's at and the backlog that the top 2 of us really have, I think there's an opportunity for pricing to actually help with margin expansion in the tower business. With regards to boom trucks, it's bouncing along. It's up a little bit year-over-year. We're starting to see some activity in some of the shale plays and people putting assets in place in order to take advantage of that. So overall, I think I've said it 100 times before, we're going to use price as a strategic weapon to offset costs. But also, in particular areas where the return on investment for us isn't as quite as high as it should be for the amount of engineering effort that we have to put in to develop the product, we need to raise price in those areas also.

And we'll take our next question from Jamie Cook of Credit Suisse.

This is actually Themis on for Jamie. Just going back to the supply chain challenges back for a second. Could you maybe discuss how this impacted your profitability in the quarter and in terms of your full year outlook?

No impact at all. Our full year impact is that we have supply chain challenges, but that's what good operational companies that are led by the principles of The Manitowoc Way do to offset them. And that's why in my prepared remarks, I said we have over 14 programs that we're working on in our European manufacturing operations just to ensure that we have the capacity necessary to satisfy our customers through the uptick in demand.

Got it. And then you also mentioned taking aggressive pricing actions. So how are your customers responding to that? And how far out are prices locked for your current backlog?

Our backlog, our prices are probably locked for about 6 months. However, beyond that is where we're starting to have the discussions. As I said, it's always a difficult discussion. However, when you look at the increases that all of us are seeing in the capital goods markets from a raw material input cost increases, it makes the discussion a tad bit easier, but it's never easy. But rest assured, we are going to be resolute in getting the types of returns for the products that we need to get in order to continue to invest, in order to be the innovation leader in the crane industry globally.

And we'll take our next question from Steve Volkmann of Jefferies.

So sort of actually -- sort of a similar question there. I guess I'm trying to think about the sort of the timing issues here. So if your prices are locked for 6 months or so, I'm guessing the costs will sort of continue to cheat up on you a little bit. So maybe that means that things are tough for the next quarter or 2 and then they get better as we get more toward the end of the year. Is that the right way to think about it just in terms of the price cost balance?

Yes, I think that's the right way to think about it. However, we shouldn't be too concerned because we do a pretty [doggone] good job of our steel purchases. And I think David will -- can elaborate a little bit more on that, but we employ a team that really does nothing but monitor this on a daily basis. Because I mean, let's face it, when you look at a crane, there's an awful lot of steel. So that is our #1, by far, input cost, and we have to control that to the best way that we possibly can. And I think with some of the things that David and his team have done, we've managed to mitigate, at least in the short term, and the short term meaning the balance of this year, the overall effect of those steel price increases. David, would you like to elaborate a little more?

Yes. Steve, I think inherent in our guidance has the assumption of where pricing is from the customer's point of view and where input costs are as well. I mean, really, the dynamic is twofold. We have, what I'll say, is the steel, the raw steel that you buy and from the components that we buy, as component integrated into the crane, how that's going to be affected as well. So we kind of look at it and bifurcate it in that method. I generally say that when you look at our backlog, you can see that our backlog is kind of out 6 months, which is coincidental with where we look at our purchasing at this point in time. So we do like to keep that married to an extent. So we have that understanding. But I think generally speaking, our guidance includes where we anticipate being with all the costs.

Okay, great. That's helpful. And then, longer term, Barry, is there anything you can do about the issue of importing stuff from Europe? Is that just going to be kind of the way it is? Or is there a way to sort of balance that somehow going forward?

It's an interesting question, one we struggle with all the time. The primary product is our ATs, and ATs in the U.S. are absolutely on fire right now. And we'll have to evaluate longer term whether or not we should consider doing more types of knockdown units coming from Germany, whether we should source some of the components locally. But overall, rest assured that we are struggling with this on a daily basis. And over the course of the next 6 months, we will have a strategy to mitigate that because it's been around for a while. And for all of us to sit here and just think that it's going to change is absurd. So it's been a headwind now for -- ever since I've been with the company, and we have to make sure that we are cost competitive in order to give the types of returns that we need to give to our shareholders and increase our overall margins by 150 basis points a year.

Okay, good. And then just order of magnitude, if you could, on the types of price increases that you're working on?

I prefer not to say that at this point. Each one of them will be a competitive discussion. Each product line will be a different type of price increase. But rest assured, we are going to be resolute, and we are being resolute about the pricing as a strategy for us in the here and now.

And we'll go next to Ann Duignan of JPMorgan.

I just wanted to follow up on that question. Can you clarify, you have not implemented price increases as of this point yet? It's just you're...

No, that's not correct.

Contemplating aggressive price increases?

That is not correct. We have, in fact, implemented some price increases, but we will implement further.

And the price increases you have implemented, can you just expand on that a little bit? When do they take effect? What product lines, what regions? I just wanted to get a sense of how to model.

Well, what I would tell you would not help you model because we don't give out that type of clarity in the backlog. But just rest assured that where we have inflationary activities that have taken place in our backlog currently, we have passed on, in some cases 2%, in some cases up to 4%, price increases to help us offset those headwinds.

Okay. And just for clarity, those are price increases, not surcharges?

Absolutely, price increases.

Okay. And then just switching gears a little bit. The extended warranty that you're providing on the new products, is that just a different form of price discount, here I'm raising the price, but I'll give it back to in a different format?

Absolutely not. There is no pricing increase that you can get in RTs right now, and that's the product line that we're talking about. I mean, I think I tried to explain a little bit more detail in my prepared remarks about the competitiveness that currently exists in the RT market. I mean, the RT market in the U.S. with regards to rental rates is just as competitive as any market has ever been since a number of my contacts have been keeping track of these types of things. So it is very difficult. This is the way to differentiate ourselves. We've been talking about innovation being one of our key strategic thrusts. We knew, historically, that we've had some issues with reliability. And if, in fact, we believe that our innovation cycle is working as well as we think it is, we should be able to put our money where our mouth is, and that's exactly what we decided to do. With our new GRT product line, the amount of innovation and ability for us to increase overall reliability and experience for our customers, we believe, is superior. And we believe that this will give us a substantial leg up on our competition.

Great. And then I just wanted to touch real quickly on -- you made a comment about the market being extremely dynamic. I'd just be curious, Barry, where have you seen the biggest change year-to-date? And what's gotten more dynamic? Is it FX? Is it trade tariffs? Just be interested in your perspective on that.

Really, the tariffs haven't really had an effect on us, and I don't think they will have an effect on us. Our biggest issue that we're facing is, in fact, ForEx. I mean, it is a huge headwind. I mean, I think you could hear David say it was worth 1 basis point in margin this year. That's tough to overcome when you're only increasing by 150 basis points a year, and you think you're going to be able to do it in a way that is progressive and you reach the types of challenges we have, it becomes difficult. The other, quite frankly, I think, call it, nuance in the market that's difficult to understand is still the -- with the high level of utilization that is happening with crawlers in the U.S., still could not see that translate into orders is a dynamic that's a little bit troubling. Those discussions are starting to pick up. We are seeing lots of potential projects, and we are seeing a lot of quoting activity. So I'm hoping that, that dynamic, Ann, will change dramatically in the second half of this year.

And we'll go next to Mig Dobre of RW Baird.

Just looking to maybe clarify some of the assumptions that are baked into the updated guidance. So at the midpoint, as I see it, you're essentially guiding for 15% incremental margins for the year. You've done about 20% in Q1. If I look at seasonality, typically Q2 and Q4 are, generally speaking, your best revenue quarters. So if you've done a lot of your -- a lot of forward buying on materials, I remember you saying that you have a good portion of '18 already kind of figured out. I would presume that with the sequential uptick in revenues seasonally, Q2 margin and incrementals ought to be pretty good. Is it fair to say that that's what's going on here and then we should be preparing ourselves for maybe lower incrementals as the year progresses?

No, Mig. I don't think so. I think generally speaking, we're looking at -- because of the headwinds we face and the lack of, what I'll say, price increases that have occurred with everything, I would say that, generally speaking, we're looking at more or less flat for the next couple of quarters.

You're talking incrementals, too, not just the margin itself, the EBITDA margin?

Yes.

Okay. And any color as to how you're thinking about revenue this year based on what you have in the backlog already?

I think that's why we kind of pointed out to where we're going to be. I mean, if you look at where we are with the revenue, I mean, over the last 6 months, we've had $1.15 billion of revenue. Trailing 12 months is just a little bit higher than where we are. I think the dynamic still is out there as to where Q2, Q3 are going to end up with. So we think the midpoint is a good gauge as to where we're going to be in the year, but we do see upside potential from that at this point in time as well as a little bit of downside. But I'd say that my side would be probably a little bit more on the upside than there is on the downside.

Okay, understood. But I mean, seasonally, is it fair to still think that Q2 and Q4 are normally your highest revenue quarters for the year?

In the past, they've been, but that dynamic shifts from time to time.

Okay. Then last question from me is on FX. There's kind of a few moving pieces here. I guess my first question would be, can you maybe give us a sense for what a 5% or 10% or however you want to describe it, move in the dollar, what is the impact on margin? How that flows through on the European product that you're importing into the U.S.? And then also related to this, as the dollar's starting to move higher, we'll see how sustainable that is, what do you think that does for your ability to increase pricing given your Japanese and European competitors?

Well, I'll take the first part of that, Mig, as far as the FX goes. So I think the color you're looking for, we don't give out that type of granularity because it varies by product, right? The 2 main products that we import into the U.S. are towers and ATs. And when you look at it in total, when you look at how that impacted us, our costs, our total U.S. dollar costs related to those products impacted operating income by 100 basis points net of where we are, and that's because the transaction for foreign exchange exceeds the translation of foreign exchange. So I just generally say if you want to model something out relative to kind of where we are in the first quarter, that would hold true from where exchange rates were last year to this year. With regard to pricing...

Second half of that question, I'd say this, Mig. This is my 32nd quarterly conference call with Wall Street. And I think I said price more in this 1 conference call than I have in the prior 31. So that should give you an indication.

(Operator Instructions) We'll take our next question from Charley Brady of SunTrust Humphrey.

Since no one has a question on pricing, I guess I'll ask one. You've got a competitor out there, privately held, who's not always rational when material costs go up. And I'm just wondering, from a competitor standpoint, are you seeing any pushback? Or are you seeing rational behavior in that or any signs of that at all? Or is it too early to see?

Rational behavior in the U.S., irrational behavior in Europe.

Got it. And just kind of a specific question. On the engineering, selling and administrative expense, last quarter, you gave kind of expectations, $245 million to $250 million, Q1 EBITDA, this pension accounting standard, which looks like maybe it impacted, reduced the cost by about $2 million or so. I'm just wondering, can you update what your expectation is for engineering, selling and admin expense and what the impact on that pension accounting was specifically in Q1 on the operating margin?

Yes. So I think -- it was only, I think, a couple of million, Charley, from pension accounting, I think $2 million. But again, we compare that to a restated 2017 as well, and that will all be identified in our Q filing that we do later today. So you'll be able to see that. I think generally speaking, we said somewhere around $250 million was going to be our estimate for 2018 spending. It's probably somewhere between $245 million, $247 million is right now our current estimate.

Great. And just one more, on the quarterly -- on the restructuring, on the remaining restructuring costs, how should we think about that falling across the next 3 quarters?

It's -- a lot of it relates to severance costs, and so it's a little bit difficult. But I'd say that the best way to do it is look at -- towards the latter end of the year more than the second quarter.

And that concludes today's question-and-answer session. I would like to turn it back to Ion Warner for any additional or closing remarks.

Thank you. Before we conclude today's call, please note that a replay of our first quarter 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 today and for your continuing interest in The Manitowoc Company. We look forward to speaking with you again during our second quarter 2018 conference call. Have a good day, everyone.

This concludes today's call. Thank you for your participation. You may now disconnect.