Manitowoc Company Inc (MTW) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to this Manitowoc Second Quarter 2018 Earnings Call. As a reminder, today's conference 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, sir.

Thank you, and good morning, everyone. And welcome to the Manitowoc conference call to review the company's second 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. 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 filing.

The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or other circumstances.

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

Thanks, Ion, and good morning, everyone. I'm very pleased that we've delivered another quarter of solid financial performance with our adjusted EBITDA of $38 million, up 38% over Q2 of 2017. This marks the fifth consecutive quarter of year-over-year improvement, which is especially impressive considering some of the adverse headwinds we faced and continue to face.

Orders were solid this quarter, increasing 14% year-over-year, driven by a continued steady organic recovery in the Crane business, particularly in North America. The continued increase in orders is proof that our revolution is real, as evidenced by the excellent reception at our new product introductions from the Crane Days customer event at our Shady Grove facility.

As much as we are pleased with the increase in orders, we are looking forward to further improving our backlog by continuing to introduce new products to the market that aid our customers in increasing their return on invested capital. Our net sales grew by 26% this quarter. The recovery of the crane market is gaining traction, driven by encouraging signs of growth in many of our key geographic markets.

Customer sentiment is turning more positive as they see the opportunity for market growth with more project work in the pipeline. We continue to see growth in the U.S., particularly in commercial construction and energy end markets, and are beginning to see a healthy demand profile to serve the Gulf Coast region for upstream and downstream oil and gas.

In Western and Central Europe, commercial industrial end markets are driving higher year-over-year demand. Asia-Pacific growth was driven by stable growth in South Korea, Australia and China, partially offset by weaker demand in Southeast Asia.

Rental utilization is a bright spot, reflecting relatively high levels of existing assets deployed in project work. In particular, despite the absence of a comprehensive U.S. infrastructure bill, we're encouraged to see modest improvements in the rough-terrain crane utilization rates, which have translated into improved orders, however, well below historic levels.

While we continue to see modest increase in rental rates in select end markets, we have yet to see a broad-based recovery in rates as competitive challenges persist in the market. Despite $10 million of incremental input costs in the second half of the year, primarily related to steel and tariffs, we are holding our midpoint guidance for adjusted EBITDA for the year.

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 second quarter orders totaled $431 million, an increase of 14% compared to $380 million of orders in the second quarter of 2017. Our year-over-year increase was driven by new product launches, several of which were introduced at our Crane Days event, and improvements in the commercial construction and petrochemical end markets in the United States.

Orders were also favorably impacted by approximately $11 million due to changes in foreign currency exchange rates. Our June 30 backlog of $692 million was up $200 million or 41% over the prior year, providing us with improved visibility over the remainder of the year. Backlog was also favorably impacted by approximately $5 million due to changes in foreign currency exchange rates.

Second quarter net sales of $495 million increased $100 million or 26% from a year ago. The year-over-year net sales increase was driven by increased shipments to customers across all regions and all products. Net sales were also favorably impacted by approximately $16 million due to changes in foreign currency exchange rates.

SG&A cost in the quarter were $62 million, which were $4 million higher than the prior year. The year-over-year increase is impacted by approximately $2 million due to changes in foreign currency exchange rates.

The balance of the increase is primarily due to costs incurred for our Crane Days customer event in Shady Grove and Intermat trade show in France, both of which did not occur last year. During the second quarter we incurred approximately $4 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 from Manitowoc.

In the very challenging market environment, the team delivered GAAP operating income of $24 million in the quarter, an increase of 103% from the prior year. On an adjusted basis, operating income and margin improved by $11 million and 120 basis points to $28 million and 5.7%, respectively.

Our non-GAAP adjusted EBITDA for the second quarter was $38 million compared to $27 million in the second quarter of 2017. As Barry mentioned, this marks the fifth consecutive quarter of year-over-year growth in adjusted EBITDA percentage, driven by improved volumes, plant efficiencies and cost control management.

Other expense net was unfavorably impacted by changes in foreign currency exchange rates. We reported an FX loss of approximately $6 million in the quarter compared to a gain of approximately $3 million in the prior year, a $9 million unfavorable swing.

Our income tax benefit in the quarter was $1 million. In the second quarter 2018, we reported a discrete tax benefit of $5 million related to the closure of the statute of limitations on prior year's tax return. The benefit was mostly offset by tax expense in foreign jurisdictions.

Our income from continuing operations was $10 million for the second quarter of 2018 or $0.27 per diluted share. Excluding special items, as outlined in last night's press release, our adjusted income from continuing operations for the quarter was $14 million or $0.40 per diluted share, more than doubling the second quarter 2017's results.

With regard to our liquidity. As of June 30, total availability under our asset base revolver was $115 million, net of $14 million in outstanding letters of credit. Cash on hand at the end of the quarter was $83 million, resulting in total liquidity as of June 30 of $198 million as compared to $170 million as of June 30, 2017. There were no borrowings against the ABL revolver at the end of the second quarter 2018 compared to $10 million in the comparable period in 2017.

Cash flows used by operating activities on a GAAP basis were $108 million for the quarter. On a non-GAAP basis, our cash flows used by operating activities were $6 million, a 52% improvement from the comparable period when adjusting for the accounts receivable securitization program.

Our focus on improving working capital using the tools of The Manitowoc Way is generating measurable results. As our plants ramp up for higher production volumes, we have been able to decrease working capital as a percent of sales by 645 basis points to 20.2%. This has mitigated what has historically been a large use of cash as volumes have increased.

Turning to Slide 5. We are updating our 2018 full year guidance as follows: revenues of approximately $1.775 billion to $1.85 billion; non-GAAP adjusted EBITDA of approximately $105 million to $115 million; depreciation of approximately $36 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, excluding discrete items.

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

Thanks, David, and moving on to Slide 6. We continue to see measurable improvements in demand, reflected by the sizable orders during the quarter. We remain encouraged by end market growth and optimistic that we will see some level of infrastructure investments in the near future.

The crane market has been in a deep trough for quite some time, and it's refreshing to see customer demand returning. We continue to focus on delivering value to our shareholders, utilizing the tools of The Manitowoc Way. And we remain steadfast in our commitment to provide improving shareholder returns using our 4 key strategic priorities. Those are margin expansion, growth, innovation and velocity.

Starting with margin expansion, as we continue to deliver improvement despite the headwinds. As I said last quarter, we are addressing these challenges through price increases, low-cost sourcing efforts and optimization of our manufacturing footprint. There are no quick, easy fixes to these challenges, but I am confident we are doing everything in our power to effectively manage them.

On price/cost, we've continued to execute our strategy to cover cost deflation through pricing actions. Pricing increases are delicate and never an easy discussion with customers. At the same time, they recognize that we are providing more value by delivering innovations through innovative solutions to their problems, allowing us to give them an excellent return on their invested capital.

We are taking aggressive steps to support our supply chain partners to ensure timely delivery of our components, combined with alternative sourcing strategies. In some cases, we've even provided our own in-house labor to fabricate or weld the finished components to keep our production lines flowing. I remain convinced that our supply chain partners are continuing to provide us the support and service needed to accomplish our financial goals.

Our next strategic priority is growth. One of the foundations for Manitowoc is to grow -- is to get closer to our customers by listening to their needs. Last quarter, I talked about how The Manitowoc Way is all about creating world-class processes and delivering operational excellence using these processes to pursue strategic growth.

For example, we saw an opportunity to drive our rough-terrain business in the European and Middle East markets, with the introduction of a larger 100-ton class crane at a competitive price with faster delivery time. Last December, a cross-functional team was formed to build this crane based on local Voice of the Customer and regulations in our Niella, Italy factory. This process involved collaboration on technical knowledge transfer, supply chain and logistics, planning, manufacturing, feasibility and testing so as to ensure we deliver this crane with excellent quality and reliability our customers expect.

In June, we shipped the first GRT8100 to a customer in the Middle East, and customer feedback has been extremely positive. We have additional orders scheduled for delivery and look forward to many more. This project reflects our can-do culture to best serve our customers by leveraging our global manufacturing capacity while taking advantage of the dynamic changes in currency rates and tariffs.

The operating principles of The Manitowoc Way apply way beyond the shop floor. To better serve our customers, we developed [The Manitowoc University] Sales performance program. This is a process-based approach to sales, which gives our team a consistent playbook to increase product knowledge and increase revenue. The level of engagement has been very high, both internally and externally. We will continue to evolve this program to ultimately result in measurable improvements in sales and share gains.

Our third strategic priority is innovation. The pulse of Manitowoc is without a doubt, our new product development process that continues to delight our customer base. In June, we hosted almost 800 customers, dealers and investors at our Crane Days event in Shady Grove. We showcased our new LEAN transformation initiatives in our manufacturing operations and highlighted the introduction of 5 new cranes.

Crane Days had an enormous positive response from the attendees, which included orders on all cranes we launched during that week. I congratulate the entire Manitowoc team on an outstanding job in delivering a wonderful customer experience.

One of new cranes launched was the MLC100, the only American-made 100-ton class crawler in the industry. This crane was developed with simplified operator usage and versatility in mind. One of the buyers of this great crane is Robert Harms of George Harms Construction, who purchased the first crane within 10 minutes of its unveiling.

The MLC100 will be produced in Shady Grove in the first quarter of 2019, and we look forward to delivering this new crane to Robert and other valued customers who also placed orders at this event. This is a testament for the true power of The Manitowoc Way.

Our fourth strategic priority is velocity. In China, this past quarter, we previewed the new MCT 565 tower crane to more than 40 customers from Asia-Pac. The MCT 565 was developed locally and in record time, using local Voice of the Customer feedback. One of the main features of this crane is its compact design that enables easy transport. The base crane can be shipped in 9 containers, which means 4 fewer than similar-sized cranes in the industry, a significant cost savings and value for our customers.

Customers also toured our manufacturing facility in Zhangjiagang, which has undergone significant LEAN transformation, where it's very obvious how The Manitowoc Way has increased velocity. They also witnessed the inauguration of our Product Verification Center to help reinforce our commitment to quality and reliability customers expect, as we continue to develop market-specific products in the regions where they are needed. Customers' feedback was outstanding, and we look forward to growing our market share in the region when we start deliveries of this new product in the first quarter of '19.

In closing, I was very pleased with our performance in the second quarter. It's been a good first half of the year despite significant headwinds. We are approaching the point of sustainable growth in the crane cycle. With this growth comes additional challenges. Rest assured we are executing our playbook to manage these challenges, which will position us well to continue to deliver increasing returns to our shareholders.

With that, operator, please open up the line for questions.

(Operator Instructions) And first from Crédit Suisse, we have Jamie Cook.

I guess a couple of questions. One, on the supply chain issues. Can you speak to whether or not they've improved since last quarter and if they weighed at all on the profitability in the quarter -- I mean, your expectations for the back half of the year? So if you could start there. And then my second question, just if you could talk to demand by product line and where our lead times are? You sound a little better on the rough terrain side relative to last year. And whether you're concerned your crane customer date to any -- to what degree that could have pulled forward demand?

Well, let's start with the second question first. Did it pull forward any demand? I think the answer is absolutely not. I think the products that we've introduced at Crane Days are products that our customers have been asking for, for many years, and we have finally been able to deliver them. Ever since I came on the job, the very first week I met with one of our largest customers, he said, "Barry, you are so far behind the 8-ball with not having a 3-axle, 150-ton RT. That you're just getting your lunch handed to you. It's one of the largest value cranes that we cannot sell in our distribution network, and we really, really need it." Well, we had a lot of other things that we had to fix prior to getting to that. But we did, in fact, as you saw, or those who were there saw, that we actually had that prototype there operating and working. And so as far as, I would say, the demand that we got out of Crane Days is because it's needed by the industry because we listen to them. And we went ahead and we did put forth exactly what they need in order to increase their returns. With regard to the supply chain, it is one of those issues that I think you just have to manage. Personally, I would say that we had challenges. And I don't think there's a single manufacturing guy in the world or whoever who'll tell you that he has a perfect supply chain. But our supply chain really stepped up. I am proud to say that we've missed 0 deliveries in the quarter as a result of our supply chain. And I believe that we can honestly say that we did not miss any issues with regards to absorption and/or variances as a result of the supply chain.

Okay. And then, sorry, just color on product demand by -- demand by product type. You sounded a little better on rough terrains. I know at the customer day, you talked about hiring for crawlers. So just any color you could provide.

Sure. Crawler cranes in the U.S. are in fact picking up. I think there's an increase in utilization and there is an increase in our backlog as a result of that and a substantial amount of discussions going forward. The MLC100 that I talked about is a crawler crane. It's really going to help our ability to absorb in Shady Grove. This is a crane that's going to absorb a substantial amount of hours due to its volume, and it's one that we're extremely bullish on. Boom trucks in the U.S. are extremely good, continue to rise. And I think that's a direct result of some of the things that are happening, as I mentioned earlier, in the oil and gas business. RTs, as you mentioned, are -- we are encouraged. But again, we're well off of anywhere close to being in a historical high. But I believe that we've invested enough in the product right now. We have our extended warranty program. And I believe that with the performance that we have in the marketplace, I think when the ultimate demand comes back, we'll very rapidly approach historical-high levels. With regards to ATs, ATs globally continue to be strong. In Europe, there's a little lag in the second quarter, quite frankly. And I think that's just due to the fact that we're sold out on ATs until 2019, so that's a little bit about the lag there. But overall, in towers, I think we're extremely still very bullish about the opportunities for towers, the new products that we're introducing. You haven't heard us talk at all about the potential for us to have a play in China's tower market. But I believe that with this MCT 565 that we've developed in the local market for local production and local usage, we are going to start gaining some share in the tower market in China. But I believe that's much the portfolio.

Next question will come from Ann Duignan with Manitowoc (sic) [JPMorgan].

This is Thomas Simonitsch on for Ann, and yes, from JPMorgan. So just last quarter, you called out 100 basis points of operating margin headwind from FX, particularly around the sale of European-produced towers and ATs in the U.S. But given the subsequent euro depreciation, can you update us on the currency assumptions in your full year EBITDA guide?

Yes. So I mean, the -- that's a great question. The FX rates that were inherent in our budget in -- for 2018, with the decline of the euro to more rates in the teens, so the higher teens, they're in line with that, so that headwind no longer exists. We do have a couple of hedges that go out that we did hedge at the little higher numbers. But on average, it's not going to result in that much of a headwind in the second half of the year.

Okay, that's helpful. And also at Shady Grove in June, you highlighted labor as a major constraint in ramping production. Can you just talk about what actions you had taken to mitigate the labor-related risks into 2019?

Absolutely. Excellent question. We have changed our overall philosophy in our hiring practices. We were using almost exclusively agencies to hire people for us and bring them in as temporary workers. And then if they panned out, we could hire them. And if they didn't, they just went by the wayside. But by them going, if they -- by them not working out and going by the wayside, we've already invested 3 months of effort into their overall potential to work for us. So what we've done is we've taken that and we've in-sourced that, and we're doing that ourselves. We're allowed to get -- we're getting a much more intimate relationship with our employees. They understand our culture better. They are getting into apprentice programs. They see the opportunity for future growth. So I'm very pleased that we've looked at our turnover rates in Shady Grove, in particular. And since we have done this in the quarter, we've seen a substantial reduction in the overall turnover. So I think, as I said, being more focused on what our employees' potentials are for the future has really driven a substantial reduction in the turnover rate.

And next from Melius Research, we have Rob Wertheimer.

A quick question. You were pretty clear on improving demand. But can you give us any indication on what you can see of utilization in your customer base, whether it's through parts or through your own surveys or contacts? I mean, are people getting tight, such that there is a growing tightness to support future orders or maybe just how it's going?

I think there's a number of factors that we had to look at into that question. I mean, utilization in the early part of '18, based on our customer data, has improved slightly. It was already at a pretty high level but it continues to improve. The major issue with that, though, that really has to change in order for us to see a substantial change in the slope of our order line is the rental rates themselves. They, in fact, have remained very competitive. And until that dynamic changes, which it will, it does every cycle, that's when we start seeing a substantial increase in our order rate. The thing I will say also is that we saw some trends toward the end of '17 with stabilizing of used crane prices. And I'm pleased to say that in '18, that stayed about the same and up maybe just a tick. So fundamentally, I think utilization is improving. Crane values are improving. We just need the third element of that, which is rental rates, to improve, and then we'll see substantial demand increase.

Very helpful. Maybe, could -- can I ask you just a little bit of a bigger question? All the innovation you've talked about and that you've done and that wasn't adequately done in prior years and prior management, are you able to say, is that primarily for the actual sales benefit it brings? Because you guys offer a lot of products, right? I don't know how material that is to your sales or whether it's reviving your brand and your customer and it's sort of dragging the rest of it up, if you see what I mean, because you're a company that's keeping up again. I mean, is the stuff you've done enough to actually make a material impact? Or is it more on the margins and then dragging the brand up?

Yes. I mean, we've definitely made what I would say is a material impact. But we're not done yet. I mean, we've got -- we inherited a portfolio that was old and tired. We also inherited a cycle that was at the bottom. So we couldn't be all things to all people. Our cash flow is improving. I mean, I think David highlighted our increase -- our substantial decrease in working capital as we continue to ramp up production. So we are starting to get to the point where we are able to take cash and reinvest it in the business and we continue to reinvigorate this product portfolio.

And Rob, I'll just add one thing on to that. When we started the new product introductions, we talked about, the percentage of our orders that came from new product development, and then we subsequently turned that into the sales. And those numbers were fairly significant to the 40% to the 50% range. So I would say yes, they have a very significant impact in the company.

Moving on from SunTrust Robinson Humphrey, we have Charley Brady.

Barry, just on your question on the Chinese tower crane. I mean, I find that interesting that given that that's a market, as everyone does, dominated by the Chinese domestic producers. It doesn't sound like with all the tariff talk and trade war stuff going on that you guys are kind of moving full steam ahead on that product. And I'm just curious, you're not getting any kind of pushback or feedback from that. And I'm wondering, is it strictly limited to the tower market for you, guys? Or do you see that expanding may be into truck cranes over time or anything else there?

Well, over time, Charley, I think we have to evaluate our long-term strategies. I said in our prepared remarks, we're fortunate that we have a global footprint. We are able to take advantage of that capability. The China market, and just to expand on that a little bit. If you look at the China market, 80% of the China market for tower cranes is rental and 20% is for construction companies who want to in-source the ability to have high-performing cranes. This MCT 565 that we introduced is targeted at that 20%. We're not going to be in a situation where we're ever going to be able to be competitive due to our overall quality and reliability standards in that 80%. But that 20% of that market is still bigger than most of the markets combined and throughout the rest of the world. So it's time that we really start investing in that and taking advantage of that. I think it's a good example of the GRT8100 that I mentioned. We are producing that in Europe, in euro-denominated currency, and we are able to now be competitive in the Middle East, where before, we're producing a crane in Shady Grove, Pennsylvania in dollars and trying to compete with euro-based and yen-based currencies, which was just virtually impossible. So taking advantage of our global footprint and utilizing it to our advantage is definitely part of our strategy and one that we will continue to update you on as time goes on.

And just one more from me on the change in the EBITDA range or the tightening of that range. You guys also took down the D&A assumption by about $3 million. So I'm just kind of -- can you kind of weave that together, what was driving that?

Yes, I'd say that our current run rate of capital purchases is not replacing the assets that are going to fall off, Charley, more than anything in a couple of asset disposals that we've done. So that took care of that. As far as the narrowing of the range, it's the visibility and the size of the backlog that generated that narrowing of the range.

And the next question comes from Larry De Maria with William Blair.

Obviously, you guys had nice orders. Curious if you could help delineate the orders from the end market demand and the Crane Days in terms of the timing? Do you think we pulled forward any orders? Or is it strictly a result of end market demand? So any color you can give on the impact on the Crane Days versus your overall market would be helpful.

Well, I think the Crane Days orders that we received are reflective of the market because our dealers aren't going to invest tens of millions of dollars in inventory that they don't see moving through their channel very quickly. So I think there's a better understanding by our dealerships around North America, in particular, as to what the future is going to bring in '19. So some of the cranes that we booked for -- as a result of Crane Days are going to go into '19. But I would say that the lion's share of the increase in orders is because of market.

Okay. So the timing didn't really affect things, you don't think? In other words, maybe since the quarter closed, until now, order patterns are relatively normal. So we wouldn't think that there'd be a softness just based on the pull forward into Crane Days?

That's correct.

Okay. And then just 2 quick housekeeping questions. I think you said Intermat and Crane Days are roughly $2 million. Will that come back at all next year on a comp basis? And you said that $10 million are more your input cost you're absorbing, I think in the second half you said. Is that all price? Or is that -- help us understand between price and, I don't know, maybe efficiencies or however you get in there to get that $10 million?

Right. So Larry, to answer your first question with regard to the trade show expenses. Next year, we'll be hosting a -- there'll be the bauma freight trade show in Germany which would be a significant expense, which is a tri-annual show, so that will be a replacement. This year happened to be an off-year and those are the 2 trade shows that are between bauma and CONEXPO, if you would. With regards to your second question -- with regard to the second question, that's really input cost, right? The $10 million, as we view it today, is based upon what we anticipate additional costs associated with steel and tariffs that will affect our input cost and material cost for the year.

Okay. So that's not getting offset or is partially offset with price? I'm very -- just confused.

Yes, that would be partly offset with price. But like anything, our pricing actions -- we just didn't -- due to some pricing actions recently, which take effect in the middle of the month. But from a backlog standpoint and where we are, that will -- that we really haven't repriced anything in the backlog. So it's related to a lot of the things that we're -- we'll be producing in Q3 and Q4.

Yes. We have pretty good backlog coverage for the year coming into the quarter and then the new increase in cost came through. We really don't have the ability to go back to our customers and reprice that backlog. So that true $10 million of incremental cost that we highlighted, we have to offset that internally.

Next question will come from Seth Weber with RBC Capital Markets.

Sorry, I just wanted to follow-up on Larry's question. So is the right way to think about it that you are on the kind of neutral price cost in the first half and then it's going to be a negative or a headwind in the second half? Is that kind of the right way to characterize that because you can't...

That's fair. Yes, that's a fair statement, Seth.

And then Dave, the other kind of related question to that, which I think I may now understand, is I think on the last call you talked about margins being pretty similar for 2Q through 4Q. I mean, I guess was 2Q may be a little better than you thought? And if so, why? And so does -- but your guidance kind of implies that margins come off here in the back half of the year relative to the second quarter. So is that just purely a function of this higher cost environment that you are not able to offset or -- which surprised you, I guess?

That is correct. I'd say a couple of things. I would say that the team really performed well in the second quarter, probably you can say exceptionally given that strong headwinds that we faced in Q2. But the main driver of what I'll say is the reduced margins relative to the Q2, in Q3 and Q4 aren't being driven by the increased input cost that we have to incur.

Okay. So -- but presumably, if you're putting price increases through now, next year should be a more normalized kind of incremental margin, way to think about assuming costs don't continue to rise and things like that. You should be able to put up better incremental margins in 2019. Is that a fair characterization?

Yes, that is correct. Our goal is to offset -- in these conditions, you need to offset your increased costs through price because the increases are very significant.

Right. Okay. And then I was intrigued by your comments, Barry, about kind of working with the supply chain and things like that. Are you actually making capital investments in the supply chain? Or you're just kind of lending workers and things like that?

No, no, no. What we are doing is we're utilizing the principles that we use internally with our supply chain. One of the things that we have a tendency to do is that as long as we negotiate a price of a part with our supplier, it meets our expectations and it shows up on our dock on-time, we're okay. Everything's fine. Everything is peaceful. When that starts to degrade, then we have to start looking at whether or not we have the ability to help our supply chain through using the principles of The Manitowoc Way. I can give you numerous examples, one of which in Germany for instance. We had a supplier who was trying to -- going crazy trying to give us this one particular hydraulic valve. We sent our team of 3 LEAN experts in there, worked with them for a period of 3 days, redid their entire production line and were able to double their productivity in 3 days. There are other ways that we're able to continue to work with our supply chain, invest in them and continue to support them. One of the things that we did when we came on board, it's very easy when the market drops off substantially like it did back in '16 -- it's very easy, the first thing you do is in-source. In-source, in-source, in-source. But when you get to a situation where the market starts to come back, if you've in-sourced all of that work that you had at your supply base, where is your supplier going to come up with all those people? So we've made a conscious decision, which is why we did so much restructuring, to take out that cost, to take out that people so that we don't have to absorb it, so that we continue to be able to work with our supply chain and make them strategic partners that I do believe they are.

Right. Okay, no, I just wanted to clarify that you weren't investing capital in the supply chain.

Absolutely not, we're investing Manitowoc Way resources.

Moving on, from UBS, we have Steven Fisher.

I'm wondering if you could talk about your free cash flow expectations for the year on an adjusted and unadjusted basis. I know your working capital is improving and you did give us the EBITDA and CapEx. But I'm just kind of wondering if you are expecting free cash flow to be positive here in 2018, adjusted and unadjusted?

Yes. So I would say that from an unadjusted basis, so I'll start from there from a GAAP standpoint. We are not expecting to be -- after capital spendings, we are not expecting to be cash flow positive. We expect to be looking at a breakeven in the cash flow from operating activities and then capital spending. So that would equate to, let's say, a negative $25 million on a net-net basis. Obviously, we're -- we've had a couple of asset sales, particularly the corp -- company headquarters in there. So that will offset it, mute it a little bit in that regard. So I would say that we're still not going to be in the positive, but I'd say at the high end, $25 million and at the low end $10 million is a reasonable number. But we continue to look at ways to mitigate our working capital increases and work with our vendors. And also from an Accounts Receivable standpoint, bring that down, Steve. So that's kind of where I think we'll end up the year.

David, while you were talking about working capital, you may want to mention a little bit about the headwind we're going to have in the fourth quarter with the emissions change and Tier V in Germany.

Yes. So one of the challenges, Steve, that we have that Barry just mentioned is that coming into next year, we have a Tier V requirement engine in Europe and that's going to require a little bit of pre-buy of Tier IV type engines for our German factory. So that's going to have a headwind effect on our working capital. And it's fairly sizable when you come down to it. So I'm not going to give any specific numbers. But it is a sizable amount that we're going to have to invest as we change over from Tier IV to Tier V engines in our all-terrain cranes.

Okay, that's helpful. And then maybe can you just talk about production at Shady Grove. What was your utilization in Q2? How many shifts you're running? And how do you see that playing out in the second half?

So I'd say, it varies depending on where we are, I think depending on the product line and where we are in the process. But on average, 2 shifts and sub 3 in some areas as well is probably a good gauge of where we are today. But we are still well below what I'll say is historical production levels when you consider how many hours we operated at the Manitowoc facility and the Shady Grove facility which is just one facility now. So we still have a ways to go to get to the hours that we had in the past.

Next question will come from Jerry Revich with Goldman Sachs.

This is Brandon on for Jerry. Just wanted to start with orders. Can you just kind of give us a thought on how you're seeing orders evolve over the balance of the year and maybe into early 2019?

I mean, we expect orders to continue to perform at the levels that they have in the past due to our innovation and market recovery. The absolute number? I mean, I don't have the absolute numbers in front of me. But I do know that the dynamics of the market are improving in most cases and we look forward to continuing to take advantage of that.

So no change from historical seasonality? Nothing that would change data at this part in the recovery?

Not this year, no.

Got it. And in the slide deck, you guys called out your bullishness on the oil and gas recovery North America. Can you just give us a little more color there on how you're seeing demand recovering over in the near term? And can you also give us your thoughts on how you think about your competitive positioning in that end market?

When we think about oil and gas coming back from its bottom, we first think about boom trucks. And we've seen a substantial increase over the last 2 quarters with boom trucks. We've talked with our major dealer who handles the Gulf region. And investment there is picking up dramatically. And we're seeing increases in things like truck-mounted cranes and all-terrains. As of this point in time, RTs haven't followed that yet. But at some point in time, they will. Wells have become so much more productive that the long-term need, I think, of RTs will be affected by that. But as we continue to bring innovation, as we continue to bring extended warranties, as we continue to bring lighter cranes that are stronger with lower operating costs, I believe there's a case to be made as this fleet continues to age to buy the Grove brand as opposed to some of the others.

And next from Seaport Global, we have Mike Shlisky.

The back half costs that you are referring to, the $10 million, is that a headwind? Or is that more of a challenge? I mean, is it possible for you to reduce cost elsewhere to offset some of it? Or is this kind of headwind a sort of foregone conclusion at this point?

Well, Mike, it is a headwind. It's a natural headwind based upon where we're seeing pricing of our input cost at this point in time. The second half of that question is what can we -- what do we need to do? Well, obviously, we're looking at alternatives on all these rising costs. And unfortunately, a lot of the increased cost, it takes time to move things to different areas. So the headwind is going to be made up through what I'll say is either efficiencies or lower spending in your SG&A area.

Okay, okay. And then just secondly on Crane Days. You sounded very positively about it. It was a great event. Can you tell us how you are planning on rolling out new products going forward? It sounds like this Crane Days won't be an annual thing, maybe, it'll possibly every third year. Is that the case? Will there be kind of Crane Days and bauma then CONEXPO? Can you also comment on your pipeline of...

That's our plan.

Okay. Perfect. But then, could you also comment on the current pipeline of your products? I mean, do you have just as many products planned for '19 that you kind of put out in 2018?

Yes, we have probably a few more in '19 than we do in '18. And we're not going to allow us to take credit for retowering a crane as a new product. That to me is not a new product. So what we're going to do is when bauma rolls around next year, there will be at least, at least 5 new cranes that we're going to be completely introducing and potentially upwards of 7.

And next from R.W. Baird, we have Mig Dobre.

So on your previous comments on pricing, what I heard was that a price increase is going through this month, is -- did I hear that correct?

That's correct, August 1.

Understood. So is it fair to assume then that at Crane Days, whatever orders you've taken in and whatever you've taken through the second quarter really didn't have much of a change in pricing to reflect just the current conditions?

Correct.

Okay. And I guess, maybe I'm asking a question that others have tried too. I'm wondering to hear your perspective as to how much of some of this demand is essentially customers sort of recognizing that pricing is going to go up on a bunch of this product. As you're rolling out these price increases, are you getting the sense that the customers can handle those and it's not really impacting demand?

The answer to your question is, yes, my assumption is and my knowledge is that they can handle it. It's not an easy discussion of course, it's never an easy discussion. But they can handle it and they are willing to accept it. And I will say that no matter how hard you try to keep a price increase a secret, that it does in fact leak out. But I can honestly say, looking at our orders in July and looking where they were and are, I believe there's been 0 impact on our incoming order rate with the anticipation of a future price increase.

That's helpful. Just also my interpretation looking at your orders and then looking at some of your competitors, domestic and Japanese, it seems to me like you guys are starting to take some share back. Is that fair -- a fair assumption? Can you talk at all about competitive dynamics?

Yes, I mean it's a fair assumption and it is a fact based on our data. But we're so far below where we historically have been with share that I'm not going to pound our chest yet. When we gain back some of the -- get closer to some of our historical levels, then, in fact, we will start talking about that. But just rest assured that in the short term, we are targeting certain areas. You heard me mention the GRT8100 for the Middle East. Our share basically dropped to 0 there. So we are cognizant of it. We've got certain areas where we are targeting. And as we continue to be successful in those areas, our share will rise and we will talk more about it.

Got it. Okay. And last question. On the $10 million of higher material costs. How is this $10 million split between the third and the fourth quarter? And do you foresee yet another round of price increases into 2019 to get fully caught up with material cost?

So Mig, I would say that's a little bit skewed towards the third quarter but not materially different than the fourth quarter. And that covers all of our operations around the globe. As far as our pricing, we typically come out with our 2019 pricing at the latter end of the year, beginning of the year. And I would say that at this point in time, it's a dynamic situation. It just depends on what happens in the market and we will react accordingly.

And ladies and gentlemen, that does conclude our question-and-answer portion of the call. I'd like to turn the floor back to Ion Warner for any additional or closing remarks.

Thank you very much, Greg. And the -- before we conclude today's call, please note that the replay of our second quarter conference call will be available later this morning by accessing the Investor Relations section of our website at manitowoc.com. And thank you, everyone, for joining us today and for your continuing interest in the Manitowoc Company. We look forward to speaking with you again next quarter. Have a good day, everyone.

Once again, ladies and gentlemen, that does conclude our call for today. Thank you for joining us and you may now disconnect.